I am sharing one old post from my Quora answers. It was written on September 19, 2018.
Are all Option Buyers Idiot? :
This is a never ending debate. Let me add my two cents to the discussion.
First let us agree on the universal fact about the stock markets.
At every price there is a buyer and seller. Both think they are smart. Why should one be considered idiot?
I know we are talking about Options Buying.
For the option buyer the price move has to occur within the time limit i.e. before the expiry of the contract. Otherwise the option becomes worthless. Money paid for buying the option becomes zero.
It is conventional market wisdom that about 80% of the options expire worthless. This money goes to Option Writers ( Sellers) who are considered to be the smart guys as opposed to the option buyers who are considered idiots.
For option buyer to make money there are two requirements:
Price move in the right direction.
A big move within the expiry time.
For option seller there is only one requirement.
Price move in the right direction is fine. But even if the stock does not move much it is fine. Option seller still makes money.
Time is something which is always running out. So it is the best friend of option sellers.
But to club one group of traders as idiots would not be appropriate.
Idiot or Smart— The Debate is Always Open :
I write a blog about Options. It is mainly about Options Buying.
The performance in the month of August would qualify for the IDIOT tag.
Whether it was CALLS or PUTS, there were big losses all around. Total loss was Rs. 99589.
Option buyers go for option buying because they do not have large pool of funds required for selling options. For a person with small capital such a loss could be unnerving.
It is another matter that this loss had come after three successive successful months.
July 2018 :
June 2018 :
This is in two parts:
Option Buying in previous 3 months had resulted in a profit of Rs. 196161.
One is not an idiot when making this kind of money with a small risk capital.
Even after a very bad August, there is a profit of Rs. 96572 which is more than the initial capital deployed in the month of May.
Rightly done Option Buying gives decent profits. If we trade wrongly, the results surely will not be good.
Option Selling :
I had once come across a trader who was new to option selling and unfortunately made this trade.
He had sold SBIN 270 CALL on October 24, 2017 just when recapitalization news was out.
Sold for Rs. 0.40.
Lot size is 3000, so the maximum possible profit was Rs. 1200.
We all know what happened next day.
SBI stock moved up by Rs. 70.
CALL 270 went up like a helium filled balloon.
The price of Rs. 3.45 was there for a blink of an eye.
He had to buy back the call for Rs. 50.00.
Paid out Rs. 1,50,000 and booked the loss.
See the risk to reward ratio.
How many times you have to get Rs. 1200 to cover the loss of Rs. 150000?
Option Selling has unlimited loss potential and on this occasion it had hit home.
Poor chap, this trader will never sell options again.
These were two sides of the story.
To Summarize :
Neither the buyers of options nor the sellers are idiots.
No one makes sure profit.
Profit is earned through trade management and at times a little luck helps.
When option buyer loses, he is a small guy who lost.
When option writers lose, 2008 happens.
Make your own judgement what is best for you.
Thanks for reading.
P.S. : The reasoning and timing of the trades shown in the screenshots can be read on OptionsNext
Link to the original post :
The above article was written on September 19, 2018. In last few days of that month our trades made a profit of Rs. 430000.
Since then, we have been reasonably profitable. A profit of Rs. 800000 on a trading capital of Rs. 200000 in 15 months.
The debate is still open.
We do not mind being idiots if we are making money that way,
Enjoy the holiday today.
Back to market and trading tomorrow.