From IIT to intraday options on Nifty

Traders,

Find following an interaction with Rajesh, who’s very nifty trading options on the Nifty. He was not only the winner in the first challenge but is also presently up over 100%, 20 days into the second challenge. What makes him special is also the fact that he was up over 150% in the last financial year trading markets actively.

Education: MTech(Computer Science), IIT

Profession: Active day trader and a software engineer

Hobbies: Table tennis and meditation

Find following the interaction on Aug 2, 2013

How did it all start?

I have 2 brothers and both dabble in the stock markets and was lucky that one of my brothers mainly invests and the other trades options actively. I started my stock market career day trading in stocks with margin and also small bits of short-term trades. So I would have to thank my brothers for introducing me to the markets.

How did you perform initially?

Had a few lucky trades to begin with, but was never successful trading equity, blowing up my account a few times in the process. Most of the trades were based on guts and some on tips given on TV.

How did you manage to continue trading when you made these losses and for how long?

I was having a good job and that allowed me to stay active in the markets, adding trading capital from my salary at the end of every month, it was a blessing in disguise.

I started trading in early 2005 and this method of trading continued till May 2006 when there was a sudden fall in the market which was a big setback not only for my day trades but also on my delivery trades, which I exited in panic.

This incident was an eye opener on how trading based on news, watching TV or on a hunch can never really be profitable unless I had the news before everyone else did. This is when I got introduced to Technical Analysis and it started off with learning candlesticks.

As and when I learnt more about technical analysis, I suddenly felt that it is possible to have systems based on strategies which can run like a money making machine removing all human emotions. It also helped that I was good at shell scripting and the automation background helped me put up a few systems. You could say that I have tested over 1000 strategies from then to now.

So did these systems actually make money?

The backtested results made money in theory but when applied to real markets it didn’t. Most of the results were based on open price, but the open price that you see to what you can actually get while trading the markets has a huge variance. What also adds to this are the slippages, brokerage costs and other taxes. So personally for me just systems based on technical didn’t really work well and that is when I also started studying on the psychological side of trading.

What I had started noticing was because people follow similar technical/fundamental analysis strategies, there are traps that gets set (bull or bear traps) around important technical/fundamental points in the market. Typically scenarios where market suddenly looks bullish/bearish based on popular indicators and reverse just to trap the traders.

So what kind of strategies did you follow?

Around the same time I also got introduced to Futures and Options and found out that I was better at intraday trading and hence most of my positions were never carried overnight. I initially started looking for breakout setups but as and when I started giving more importance to the psychological side, it moved towards spotting bull/bear traps, spotting divergences and I also have a proprietary indicator based on the volume of bulls/bears on a candlestick chart. This is what I have been following for the last couple of years and it has been doing well for me.

Most of my trades are option trades and hence along with looking at technical charts, I also started mixing it with a strategy based on open interest, implied volatility and option prices. Basically the strategy using the data predicts which side of the option is skewed to move up, either calls or puts and also the strike price best positioned for this.

Since the strategy revolves around spotting traps or option skews as mentioned above, typically most of the trades would be counter trend trades. I personally find that being long options really works well for such a counter trend system.

There are some gut based trades, but I mostly stick with trades given by the system that I follow. But the critical thing is to accept that we as humans can make mistakes and can get carried away, so it is best to keep only that much money in your trading account that you can afford to lose, especially when trading in options.

But they say option buyers never make money; it is only the sellers who do?

Two things that I don’t do while trading options is hold it overnight or trade in-the-money options. When you hold options overnight, the time decay happens faster and if you trade in-the-money options, the absolute return when you are right on your trades is not much.

Also one of the things that I avoid as an option buyer is to pyramid, that is add to existing open option positions as and when it goes in my favor. When you buy options you are fighting time, volatility and price moves, so I personally never liked pyramiding and always lost when I did.

So you never carry option positions overnight?

There are times when I do carryover options, but I reduce the size significantly. Also the option position carry forwarded is not because it has made a loss, so let us hold it to the next day hoping that it recovers. It is mainly because the gut sometime says that there is more in the trade left to play out.

Out of the money options only? That is very high leverage, are there any money management rules?

Leverage is a double edged sword, but a very important part of the business. One book which was an eye opener for me was on Position Sizing by Van Tharp.

In terms of how much trading capital, I follow a unique strategy. I come up with an assumptive trading size for my account based on my risk appetite, assume this is 10 lakhs. But what I actually bring into my trading account is just 15% of this, which is Rs 1.5 lakhs and my maximum risk per trade is 3% of my assumptive trading size (10 lakhs) which is 30,000. But as and when there is profit added to this Rs 1.5 lakhs, per trade size keeps going higher than the 3%. Usually I will withdraw profits from the trading account if the account size reaches between 2 to 3lks to bring it back to 1.5lks.

The idea behind increasing the trade size with profits is to give possibility of an exponential return and is also Van Tharp’s influence. I can’t say that I have perfected this, because the strategy sometimes causes huge amounts of volatility to the trading account especially where it has gone from being positive by quite a bit to being flat. Today I can afford to take this risk having a cushion of a full time job; I might change this strategy by a small bit if I were trading full time.

This way of managing money has worked well for me because I trade mainly out of the money options which can go up/down very fast. My trading activity picks up quite a bit as and when the market approaches expiry and is mostly in Nifty options because of the higher liquidity.

What do you do with the profits, go spend it?

It is very important to not treat this as lottery money and spend it. I look at it as a normal income and use it to supplement my financial goals. Also since it is a secondary income for me, I make it a point to allocate 20% of all my trading income for a social cause.

Your Favorite books?

Trading to Win by Ari Kiev and most of the books by Van Tharp, especially the one on position size.

What advice would you give others?

There is no system that can guarantee you return, in the last 1.5 years being profitable my ratio of winners to losers is at the best 62 to 38. It is important to understand this and hence manage your risk accordingly.

Trading is about building odds in your favor, one of the biggest reasons for my strategies to work is having Zerodha as the brokerage where I don’t have to worry about break even points while trading, especially huge quantities in out of the money options.

Trading is like a profession, people take it lightly especially because of the low entry barrier. It just takes a day’s time to open a trading account and transfer funds into it, but unless you are committed, focused, disciplined and ready to spend time learning, you should give it a thought before entering or continuing trading if you have already started

Future plans?

To be able to reach that assumptive trading size where I can quit my job and become a full time trader.

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Thanks, Rajesh, for the insights and hopefully your good run in the current 60-day challenge continues and be able to trade full time soon.

Happy Learning,

Do check out the other Winners