How many times we have heard this?:
Option buyers do not or can not make money.
Time decay eats away the premium.
80% of the options expire worthless.
These statements are repeated so often that we start believing them without questioning.
After all for centuries people believed earth to be flat. Same people believed that Sun rotates around the earth. Many people still believe that in spite of all the scientific knowledge available today.
Yes, option buying done indiscriminately will surely end up in a loss.
But so will any other trade.
Why single out option buying?
Facts and the numbers:
In year 2020, NIFTY moved from 12126 to 13981 — ( December 2019 Expiry to December 2020 Expiry )
NIFTY gained 1855 points in these 12 months.
Anyone investing in NIFTY at the beginning of the year will have a profit of 1855 points.
Anyone just buying ATM Call option every month and doing nothing after that, would have cashed a profit of almost 3000 points.
Yes, 2020 was an exceptional year.
But ATM CALL buying done every month from June 2001 onwards would have also given better gains than NIFTY over a period of 20 years.
Profitable Years — 15
Losing Years ——- 05
Success rate — 75% ( annual basis)
Call options that made profit — 114 out of 240 ( 47%)
This number is far better than around 20% chance suggested by the market experts.
More details in tomorrow’s post.
Disclaimer: This post and examples are for teaching purpose only and are not meant as advice/suggestion to trade in these stocks. Trading in Futures and Options can lead to big losses and should be done with appropriate knowledge and advice only. Mentioning the stocks here does not imply that I have a trading position or likely to take a trade in these stocks.