Comment on Trading India VIX - Simplified

P R Sundar commented on 15 Nov 2014, 08:52 AM

Hi,

You actually do not require reply as you understand things.

Anyway since you wanted example, I will give you.

You want to get married. You have two girls. One, beautiful, well educated and has lot of money. The other girl is ugly, not educated and very poor. Which girl will you choose? A common sense will tell you that every one will choose the first one and nobody will choose the second one.

Come to option buying and option selling. Option buyer has limited risk, unlimited profit and low margin money (like beauty, education and money) all three working in buyers side. Then logically everybody should be on the buy side and no one should be on the sell side.

But the fact is that for every contract buyer there is one contract seller. (This equality is in amount not the number of people) 100 people may buy options but one person will sell the equivalent options.

So the trick here is that the option seller winning has high probability.

Option buyers should understand one thing.

There is no such thing called “Low Risk and High Reward”, there is one more to add in reality.

1. “Low investment high reward” is possible if you take high risk.
Let us rob a bank, investment is very low, reward is very high, but corresponding risk is very high, if you are caught you will be spending rest of your life in Jail.

2. “Low risk, High Reward” is possible but probability of winning is very low.

You buy a lottery ticket, risk is limited to Rs 10. Reward can be as high as Rs 1 crore. But what is the probability?

It is very low. But people are aware of that. This is why most people do not buy lottery tickets.
But buying of options is the same.
But people do not realise this.

Against lottery ticket awareness is created, some states like Tamil Nadu even has banned the sale of lottery ticket.

But in stock market, there is no one to create awareness.

On the other hand brokers make big money out of these people and make sure that these innocent people do not get any awareness.

Options are introduced for the purpose of hedging (for that matter even futures are also introduced for the purpose of hedging), but being used by people for gambling.

In Gambling no one wins except the Gambling den owner.

Thanks

P R Sundar

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