Thursday, 25 August 2016

Trading Index Options Can Make You Profitable

I recently received a trade log from a trader friend, asking me to analyze what is going wrong with his trading.  He day traded one lot of Nifty Future the whole month.














This is how I analyzed.  He took around 20 trades in a month, so no over trading or under trading.  He applied proper risk management and adhered to the stop losses.  That is perfectly fine and right way to trade.  Only thing missing was the big profit. Okay, that is fine too because we can always work on that.

Now apart from these, the one thing that stood out was the cost involved in trading. He made the profit of around 30 points at the end of the month but after deducting different taxes per trade the net result was loss.  Then I added another column of taxes involved in option trading and to the pleasant surprise the ultimate result was net profit, imagining he traded the same way Index Options too. I excluded brokerage cost because I felt it is negligible nowadays.

So this is how the day trading Index Options makes the difference in overall profitability. Now multiply it with number of lots that you wish to trade.  I trade 10 lots of Index Options and if the same kind of profit I multiply with 10 lots, this little profit of 30 points can turn into Rs. 18K. In India, it is a big amount as most of young college grads strive for it as a monthly income.

Think about it if you are still trading Futures.  Switching to Option trading might make you profitable if you trade it correct way.

9 comments:

  1. This is a very compelling argument Uday. Will shift from tomorrow.

    ReplyDelete
    Replies
    1. Don't be in hurry. Read the charts for at least few weeks or months and spend some time understanding the dynamics of options.

      This is just an example you can think about working on and improving on it.

      URD

      Delete
  2. Uday one question for limit order what is the Gap between Trigger and SL price ?
    Looking at the volume of ITM I think you should be getting much better fills than futures.

    ReplyDelete
    Replies
    1. I keep usually 0.1 to 0.2 of difference and it works most of the time.
      URD

      Delete
  3. I should give a serious thought ....

    ReplyDelete
  4. URD,

    As you mentioned in one of your earlier post that for every 2 points movement in index future , options move one point. So, that should also be taken into account while calculating the profits, Isn't it so?

    Sourish

    ReplyDelete
    Replies
    1. Yes, that is correct and applies to majority of the trading days in a month.

      Here it is just an example, assuming the trader earned 30 points. If he makes it on Futures, he will come out as a loser whereas if he makes the same on Option, he will come out as a winner.

      If you see your account green at the end of the month, even if it is just 500 Rupees, it will boost your confidence and give lot of courage to continue working hard. Confidence is very important in trading. It gives you a belief that you too can succeed here, espeically once you start seeing your account in green instead of red.
      URD

      Delete
  5. nice analysis urd

    ReplyDelete