My first derivatives trade

F&O
21

I have NEVER been negative in the 2+ years I have been into derivatives. I now have a good understanding of options and have the comfort to scale. This is what I did.

  1. Start doing Cash secured puts and covered calls on the stocks you like. I never booked loss; took and gave physical delivery if I had to (which was once I think). Build derivative profits 1-2 lakhs.

  2. While I was doing above I followed price movements and studied index options.

  3. Started Index option selling with small sizes. Later entered option buying with 1 lot. As I found success, I started to scale.

Today I place daily Index Short Option trades and ~15 trades a month Long Options. I use different brokers for short and long options and my size is much much larger than when I started. I hope to reach 100 lots in my short options strategy by early next year after which il stop scaling.

Btw I like programming and everything I do today is systematic.

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22

This looks like a 2-3 years plan for me. Of course I wouldnā€™t be able to do all of this, but this gives a goo idea.

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23

Zerodha is not the best for option sellers nowadays, unless you want to deliberately limit yourself a bit.

24

Regarding what, charges, or features?

25

Regarding hedging limitations. Because of OI limits, you have to place short option trades before long (for margin benefits), which means you have to place multiple trades to utilise margin efficiently. Plus certain spread trades wonā€™t be possible.

26

I guess there is time for me to reach this, although I came across placing multiple trades for margin.

27

Watch Power of Stocks, where he shows PnL in video on YouTube.

He is also option seller and doing positional [now]. Many things you will get to learn.

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28

I think I have heard about this name. I will check it.

29

Well just like the time you give to the markets also give to your health and youā€™ll be fine, knowing when to trade and when not to is just as important as having a good setup.
P.S. I got this knowledge from @ronin_sha

30

You know about your health better than me.:grin:

31

Exactly Vijay Iā€™m also looking to switch but canā€™t find a good alternative. Can you recommend some to me? I heard about Orbit, is it good?

32

These guys will tell you to go for Dhan.

33

Kotak securities these days is pretty good. They are a completely different beast compared to what they were. Kudos to Zerodha and others like em that forced this change on legacy Bank Brokers.

I am still fond of Zerodha though and Iā€™ll tell you a reason to stay. Their limitations force you to diversify your short option trades (if thatā€™s your thing) and do things in multiple passes.

I have not used Dhan, there is a lot of good buzz about them, about how their tech leads actually listen and implement stuff quickly based on their community forum feedback, but they dont yet have MF integration, and thatā€™s important for me.

I am sure he does and you dont.

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34

Aiyooooo. I was just pulling his legs. You actually replied. Nevermind. :rofl::rofl::rofl:

35

When you sell a naked option the broker blocks a margin amount and you get to keep the premium of the option you sold. But if market moves against you you could end up in a situation where you are at a loss and the margin amount needed increases. The extend to which it happens depends on how much the market moves against you. Theoratically max loss is infinite as market can move against you to whatever level it wants to. If you are doing intraday shorting the broker may square you off. But if you are doing overnight even that insurance is lost.

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36

Say If the underlying moves 5% ITM against your sold strikes by the time of expiry, you will be liable to payup 5% of the contract value on expiry (remember the leverage). I prefer to call it ā€˜undefined riskā€™ though, not ā€˜unlimited riskā€™

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37

For 1 or 2 lots I think the damages wonā€™t kill the account most likely . Remember premiums are less there is a better chance while doubling lots and thatā€™s when you are basically playing with fire because tick rate increases by many folds as lot increases. Take below overnight market gap of -200 pips. For simplicity let us discard 20 paise

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For

Capital 5 lakhs :-

1 lot =. - 50 rs for every pip

Loss:- 50 * 200* 1 = 10,000

Loss % = 10,000/ 5,00,000 *100 = -2%

2 lot = 50*2 = -100 rs for every pip

Loss :- 50* 200*2 = 20,000

Loss % = 20,000/ 5,00,000 *100 = -4%

3 lot = 50*3 = -150 rs for every pip

Loss :- 50 * 200 * 3 = 30,000

Loss % = 30,000/ 5,00,000 *100 = -6%

4 lot = 50 *4 = - 200 rs for every pip

Loss :- 50 * 200 *4 = 40,000

Loss % = 40,000/ 5,00,000 *100 = -8%

5 lot = 50* 5 = - 250 rs for every pip

Loss :- 50 * 200 *5 = 50,000

Loss % = 50,000/ 5,00,000 *100 = -10%

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38

@raoawesome Thank you :slight_smile: Our ways of looking at risks are different, you are not wrong ofc.

Anyways, ā€˜undefinedā€™ risk is the better name. Unlimited sounds like infinite :stuck_out_tongue:

39

So theoretically whatever I have with the broker could be lost?

But there are a lot of ifs and buts here, right?

If I buy 1 lot, if I buy a weekly expiry, one week before, how much the market can move in 7 sessions? Also, as I will be observing the loss, so if I will always have the chance of closing the trade at anytime.

Of course, I understand the depth of it, read about leverage, margin calls, but didnā€™t have the idea that those concepts apply at my level too.

So in that sense, which is more risky, naked buying or naked selling?

40

If its just 1 lot, you wont feel the heat that much. To know what the actual premium will be multiply the lot size to the difference in strike & ATM

nifty lot size is 50, you short 1 lot for Rs20 & its ends the week with 500 in the money - what you will lose = 50x1x500 = 25000 minus 1000 = Rs24000

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