Buying Options is a losing trade, so says everyone :
This is a generic statement.
But is it really true?
There is no definite answer. Statistically about 80% options expire worthless.
That is unimportant.
What is important is the money made by successful options.
I have said it many times in my answer that stock markets are not different from any other sphere of activity of life. Those who work hard and work with a plan are successful in any profession whether that person is a lawyer, doctor, accountant or whatever.
Everyone dies.
But insurance companies insure life. They work on percentages and probabilities.
Selling Options has UNLIMITED risk.
Professional Option writers make money in spite of the risk potential. ( Not always, but most of time)
Buying Options is a losing trade.
But with patience and grabbing the opportunity when it comes, there are traders who make money from this also.
Is there any sure method of making profit from Options Trading ? :
No.
If there was one, I would be just doing that and not writing this lengthy answer.
All the so called strategies with fancy names are just glorified ways of loss prevention.
They tie you up in a manner that number of trades get increased, profit gets reduced and some possibility of loss still remains.
One has to balance the risk reward ratio whether in any strategy or naked PUT or CALL buying.
Naked Option buying may be derided by the experts because it does not give profits on regular basis, but is actually not bad if traded with a plan.
In any other strategy the stop loss is already built in. While selling Options, one has to work with a stop loss to avoid the UNLIMITED RISK.
By applying same logic to Option Buying, it can also be made profitable.
Every trader has own risk profile and profit psychology.
With right selection of strike price, volatility and premium paid, one can make profits from buying options exactly in a manner similar to any other strategy or option writing.
I am reproducing the content from one of my earlier answers:
JET AIRWAYS:
January to December 2016 ( By buying PUTS ) :
Had you bought the PUTS for strike price about 8% away from the current market price on the first day of the expiry month ( all monthly expiry contracts ) and held the position till expiry ( exit just before close on expiry day ), the following results would have been obtained.
January 2016:
Buy Date: 01.01.2016 Close Date : 28.01.16
PUT 700 Buy Price : 11.50 Close Price : 75.00
Profit: 63.50
February 2016:
Buy Date: 29.01.16 Close Date: 25.02.2016
PUT 560 Buy Price: 21.80 Close Price: 56.00
Profit: 34.20
March 2016:
Buy Date: 26.02.2016 Close Date: 31.03.2016
PUT 460 Buy Price: 16.00 Close Price; 0.00
Loss: (-) 16.00
April 2016:
Buy Date: 01.04.2016 Close Date: 28.04.2016
PUT 520 Buy Price: 10.10 Close Price: 0.00
Loss: (-) 10.10
May 2016:
Buy Date: 29.04.2016 Close Date: 26.05.2016
PUT 580 Buy Price : 12.60 Close Price: 0.00
Loss: (-) 12.60
June 2016:
Buy Date: 27.05.2016 Close Date: 30.06.2016
PUT 560 Buy Price: 13.65 Close Price: 4.90
Loss: (-) 8.75
July 2016:
Buy Date: 01.07.2016 Close Date: 28.07.2016
PUT 500 Buy Price: 7.40 Close Price: 0.00
Loss: (-) 7.40
August 2016:
Buy Date: 29.07.2016 Close Date: 25.08.2016
PUT 580 Buy Price: 12.30 Close Price: 47.50
Profit: 35.20
September 2016:
Buy Date: 26.08.2016 Close Date: 29.09.2016
PUT 480 Buy Price: 5.15 Close Price: 3.80
Loss: (-) 1.35
October 2016:
Buy Date: 30.09.2016 Close Date: 27.10.2016
PUT 440 Buy Price: 9.50 Close Price: 0.00
Loss: (-) 9.50
November 2016:
Buy Date: 28.10.2016 Close Date: 24.11.2016
PUT 420 Buy Price: 4.60 Close Price: 65.00
Profit: 60.40
December 2016:
Buy Date: 25.11.16 Close Date: 29.12.2016
PUT 340 Buy Price: 9.35 Close Price: 0.00
Loss: (-) 9.35
Summary of 12 Trades in 12 Months:
There were 8 losses and 4 profits. Those 4 profitable trades take care of all the losses and result into a net profit of 118.95 points.
The current lot size of Jet Airways is 1000, earlier it was 900. With present lot size, it represents a profit of Rs. 118950. Not bad for an initial investment of Rs. 11500 in January contract.
Will It Happen Again?:
This is the question often asked.
If you work out the CALL side of these same trades, probably those were also profitable.
Why?
The key is VOLATILITY.
If the price makes abrupt moves in either direction, there is money to be made or lost.
You can select any of the stocks from the list given below and find profitable trades.
Small Investments, High Profits are possible only with volatile stocks.
Is Writing Options Always Profitable ? :
Everyone says, it is.
I suffered my all time big loss when I sold options.
Purely my fault. I kept waiting in wrong trades.
No strategy gives profit automatically. Loss management is essential.
Then why blame option buying only?
Just because it does not give regular profits.
Keep in mind that option writing can give regular profits, but when it causes loss , the entire year’s profits can be wiped out.
I had earlier given an example of NIFTY Option writing ( Selling PUTS )
Reproducing the same here:
NIFTY Movement During Last 12 Months:
India’s most traded Index is NIFTY. There are real good volumes in NIFTY Options. I am putting up a Table showing what would have happened on Selling the NIFTY PUT for the Nearest Strike Price ( Whether ITM or OTM ) by taking Position on each Expiry Date for the Next Month Contracts.
The similar trade to be repeated every month and to wait till monthly expiration.
Nifty was 7883 on 26–11–2015 and 7965 on 24–11–2016 gaining only 1.04% in one year. It had touched a high of about 8960 in September 2016 but came down thereafter.
Selling the PUT and waiting till expiry was profitable 9 times out of 12.
But the 3 losing months took away all the profits.
At the end of 11 months there was a profit of 356 points but the last month decline in NIFTY took away all the gains and resulted in a loss of 175 points.
Corrections in the Image: The first date is 26–11–2015. The last two dates are 27–10–2016 and 24–11–2016 respectively.
Who Keeps Buying Options ? :
Most people buy Options just with the HOPE that it will give the proverbial UNLIMITED PROFIT.
Some people buy options to hedge their portfolios.
This is the actual purpose of Options.
Most of the traders buy the Options because of the limited downside potential promised by buying the Option. Upside is for the trader to manage, downside can not extend more than the premium paid.
And some people are buying to close out their SOLD Options.
If there were no buyers, to whom will you sell ?
And if the buyers were always losing, trading will just not happen.
It is the hope and the volatility of market which keeps the Option Buyers interested.
Conclusion:
Option buying is always losing is not true.
Probability of success is low, but profits can be very high.
How to utilize this probability to the maximum benefit is the job of a good trader.
Option writing can also lose money and in a big way when things go wrong.
There is no formula which makes money. It is prudent trading which leads to profits.
We all make mistakes. Key point is to learn from them and include the lessons learnt into our trading plan.
Keep learning.
Thanks for reading.
Image Source: Google Images
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