60,000 loss to 3.5 lakh gain in 27 seconds! Derivatives trader shares his experience

Miracles can happen after all, as Kapilan was to learn in another 27 seconds

September 8, Friday | 11:02:08 AM

Kapilan Thirumavalavan is staring at a loss of around Rs 60,000 on a straddle position in Sensex weekly options early on in the day. As a hedge against that trade, Kapilan had bought 2000 Sensex call options of strike 67,000 for Rs 4.35. He decides to add another 1000 call options of the same strike, taking his total position to 3000, at an average price of Rs 4.45.

The 25-year-old derivatives trader is not very hopeful. His algo is programmed such that the entire trade (straddle + hedge) will automatically square off as soon as he makes a profit of Rs 1.5 lakh. One way for that to happen is if the price of the 67000 strike calls were to cross Rs 75. There are still around four-and-a-half hours left in the session, but it is expiry day and it will take a miracle for Kapilan to breakeven on the trade let alone make a profit.

But miracles can happen after all, as Kapilan was to learn in another 27 seconds.

11:02:35 AM

Kapilan can’t believe his eyes; 2000 calls have been sold at Rs 209.25, netting him a profit of a little over Rs 4 lakh. There are still 1000 calls left, which are to be sold at Rs 194.60 according to the order fired by his algorithm. But prices have begun to slide equally rapidly. Kapilan promptly decides to sell the last 1000 at whatever price he can.

11:02:50 AM

He manages to sell them at an average price of Rs 9.35. In a matter of 42 seconds, Kapilan went from being Rs 60,000 down to around Rs 3.5 lakh rupees in credit. But he is shocked by the turn of events and thinks it is too good to be true. Who said tops and bottoms and bottoms were caught only liars? Even if it were never to happen in his career again, Kapilan can perhaps tell his grandchildren someday that he managed to unwind two-thirds of his position at the unimaginably highest price of the day.

“My first thought was that this was some ghost trade which would have happened because of some error in my broker’s software,” Kapilan told Moneycontrol over the phone. “It was like……some unknown person placing a suitcase full of cash at your doorstep and disappearing. You are happy at seeing the money, but are worried about what could follow,” he said.

Kapilan immediately switched off his laptop and decided not to put in any more trades for the day. “I sat there, waiting for a message or call from my broker’s back-end team saying there was an error and that the trades would be reversed.

Unknown to Kapilan, his windfall was the result of another trader mistakenly punching in a ‘stop loss market order’ for around 2,85,000 calls of Sensex 67000 strike. Consequently, that order picked up any and every sell order that was either already available in the system or surfaced in response to the demand, fired by the rival algorithms.

BLIND LUCK

“It was nothing but blind luck,” admits Kapilan, “…it had nothing to do with my strategy or my skill as some people would like to believe.” Kapilan has been a full-time derivatives trader over the last two years.

Kapilan said his algo was conditioned to fire a sell order if the position was showing a profit of Rs 1.5 lakh, but only if the subsequent four ticks after the trigger price were positive. There was another condition that the final order had to be placed at a 12 percent premium to the fourth tick. This was on the assumption that if the trigger price had been crossed and the next four ticks were positive, the momentum was strong, and the price would likely continue to move in that direction.

Had it been a liquid options contract instead of an out-of-the-money contract like the 67,000 strike, Kapilan’s orders would have been executed not much away from the trigger price. That is because there would be plenty of offers at a small price differential. But since it was an illiquid contract, the offers were far and wide. Think of it this way: If you were to place a buy order in a liquid stock at say Rs 100, the sellers would quote something Rs 100.10, Rs 100.20, Rs 100.30 etc. But if it were an illiquid stock, the sell orders would be available at say Rs 103, Rs 107, Rs 115.

Kapilan had reached out to Moneycontrol to share his experience and even mailed us a copy of his contract note showing all the trades of that day. Why? We asked him.

His response was that he was not the only trader who had benefitted from that freak trade on September 8.

“The erroneous buy order was for around 2.85 lakh calls, my order was only for 3000 calls. So there would have been many traders like me who got lucky that day when their orders got triggered. Many of them are going around flaunting their contract notes, highlighting the trades and claiming superior strategies to lure gullible traders into their paid telegram group,” he said.

“Most of the people who see the contract note will have no way of knowing that it was a one-off case. I want to caution new traders against falling prey to such claims,” he said.

Kapilan’s experience also underscores the potency of algorithms, that have the power to both burn a hole in the pockets of bystanders (by triggering stop losses) and shower out-of-turn profits for another section of players.

The hope of making a fast buck by putting up minimum capital is drawing retail investors—a vast majority of them newcomers—to the derivatives market, in particular options. The average daily turnover in the derivatives has now climbed to around Rs 1.7 trillion. In August, the NSE’s derivative segment logged record participation by 4 million traders. This is despite SEBI’s repeated cautioning that over 80 percent of retail derivatives traders lose money and of the rest, only a handful make meaningful returns.

Kapilan is of the view that many traders taste success once in a while, but without proper risk management rules and trading strategies, end up eroding their capital over time.

“Only traders with sufficient capital should enter the derivatives market, because money once gone is gone forever, unlike in stocks where you could hold on to bad bets in the hope of them turning profitable someday.,” he said.

He admits that coming from an affluent family was a big factor in his turning a full-time trader two years back.

His advice to recent entrants:

• Keep expectations low. Consider yourself lucky if you make 1.5-2.0 percent a month. That seems a small number but works out to 24 percent annually.
• Understand software and use algorithms. It makes risk management easier
• Don’t blindly trust back-testing data, or those who peddle them. Some back-tested strategies may look good because the market has not been volatile for almost three years now. That could change in the run-up to elections.
• Always use hedges
• Be mindful of three kinds of risks

Exchange risks—There are times when the exchange price feeds don’t update, or there could be a temporary suspension of trading

Broker risks—There could be a problem with the broker’s software, which may not allow you to place your order at a crucial time