Option selling is considered a big boys game and it surely is given the margin required to sell one. Retail traders generally do not like to sell options due to the margin requirement but also because of the myth that option selling entails unlimited risk. But risk management is the key to success in any form of trading. No wonder then the option sellers are level headed and successful.
Even in the elite club of option sellers, most traders stick to a limited number of non-directional strategies. They stick to those with a high probability of success. They are happily taking the singles with higher frequency rather than aiming for the fences.
Manish Dewan can be considered the all-rounder of option sellers. He is as comfortable taking directional trades as he is in taking non-directional ones. He is equally at comfort trading a strangle or straddle as he is creating credit and debit spreads or attempting the more exotic ones like a Jade Lizard.
This Delhi-based full-time trader comes from a business family, which is why he is so adept in taking advantage of every opportunity he sees.
In an interview to Moneycontrol, Dewan speaks about the various strategies he deploys and his journey in becoming a full-time trader from a marketing person in a brokerage firm.
Edited excerptsQ: Coming from a business family, how did you choose the tough path of becoming a full-time trader?
A: My introduction to the market was near the peak of the technology boom in 2000. I was studying in a college in Delhi when a family friend met my brother and told him about the opportunities in the market. At that time, my brother was looking after the business, so he asked me to sit with this person and learn the tricks of the trade.
I had no idea of the markets when I entered it. All I knew was the indices that I saw on TV. But as markets were booming, making money was easy for even a rookie like me. However, as is the ways of the market, it takes away money just as easily. When the dust settled after the crash, we had wiped out nearly 98 percent of our capital. It was a reasonably sized capital, which could have bought a decent sized real estate in those days.
After the incident, I stayed away from the markets, focused on my studies and graduated in commerce from Delhi University. I worked on testing the Yahoo messenger and from the money saved I financed my Masters in Business Administration.
In the final semester of my MBA, I was again interested in markets as they had picked up again and people were making money. But now I wanted to be better equipped before I approached the market again. I started studying technical analysis. Though we were taught fundamental analysis during our MBA, I took to technical analysis more easily.
I am a person who is more comfortable with being exposed to the market for the short term, so technical analysis and trading was my comfort zone.
After my MBA and an 18-month stint with a portfolio management services firm --PN Vijay Financials -- I worked for JM Financial as a trader. My job involved acquiring high net-worth clients and making them trade through my trading strategies, which were non-discretionary in nature. A non-discretionary account is one where the client is advised but the final call rests with the client.
In January 2009, I was overlooked for a much-deserved promotion, though I was given a hefty salary hike. I did not take the incident well and decided to quit. Later I joined a start-up founded by a South African investor who wanted to set-up a financial services company in India. I was heading the equity broking part of the business. But the company had to close down in a year’s time as the person had a huge trading position in global agricultural commodity markets which took a big hit.
By this time the markets were in the doldrums and jobs in the broking industry were not sought after. I too was not keen on taking a marketing job anymore. I decided to enrol for a Chartered Market Technician (CMT) course and trade using my savings.Q: How was progress in the initial years?
A: Over the next 3-3.5 years, I managed to trade with a nominal return of 18-20 percent, while honing my skills. As I got better at my craft, I started taking trading seriously, increased my trading size and dabbling with futures and options.
In 2013, I made the trade of my life. Just before the 2014 elections, I took a sizeable call option position. The election result saw the market surge and my account size increased considerably. Though at that time it looked like I had great logic in placing the trade, now when I look back I realise luck was also at play.
But this trade got me more focused on options. I was an option buyer in those days. Having seen two really bad bear markets of 2000 and 2008, I was risk-averse. I did not want to lose my capital. Given the myth about option selling having unlimited risk, I stayed away from the selling part of the business.Q: How did you convert to an option seller then?
A: At that time, the markets were steadily rising. Bull markets are generally gentle and slow. As an option buyer, even though if you are right, you may end up losing money as the option loses its value with time.
I then tried selling options using various strategies like Iron Condor or Butterflies. Iron Condor and Butterfly are a limited risk, non-directional option trading strategies. My experience with these strategies was different. There were times I was making money, but a loss would take away the profit of 2-3 trades.
That’s when I decided to structure my trades and gather more knowledge on the subject. I attended a class on options by Santosh Pasi. Here I gained a much better understanding of volatility as well as using different strategies in different market conditions, how to manage a trade when it moves against your position as well as position sizing.
For the next two months, I observed if the learnings were actually translating into profits. After I gained confidence, I started ramping up my trading size aggressively.
Having said that, I still use technical analysis in my trading decisions. I do not take decisions looking at Option Greeks. Greeks determine the value of an option. I imbibe learnings from technical analysis in my options trading decisions. My decision depends on how I expect the stock to behave going forward, whether it will be rangebound or directional.
I am also taking more directional trades rather than non-direction ones, which option writers generally do. Directional trading is based on predicting the direction of a underlying security and taking an option strategy based on that. Even in a neutral trade, if I spot an opportunity I include a directional bias. In a recent trade in Reliance Industries, I entered a Ratio Strangle where I wrote more calls than puts. My view was that though RIL will move in a range, it would do so near the lower part of the range.Q: Take us through the way you trade?
A: I trade using multiple strategies, but deploy a Bank Nifty strangle every week. Traders deploy a Strangle strategy when they think there will be a large price movement, but within a range, in the near future but are unsure of which way prices will move.
These I exit when the price reaches 80-85 percent of my profit target. I prefer to exit these trades a day before expiry, so that I have room left (margin) to trade on expiry day.
In the case of stocks, I compulsorily look at charts and employ an options strategy depending on what the charts tell me. In technical analysis, I mainly use Relative Strength Index (RSI), moving averages, Fibonacci and Elliot Waves to arrive at a conclusion.
This week, I employed a Jade Lizard strategy (a premium collection strategy deployed by selling options while limiting risk on one side of the trade) in a Tata Motors trade. This trade would not yield any profit or loss between Rs 150-190. I will only start to earn in case the price goes below Rs 150 and incur a small defined loss if the price moves above Rs 190. Technically speaking, I don’t think a bottom has been made in Tata Motors, but if my premise is wrong I will exit the trade.
Expiry day is the most important trading day for me. On other days, I am a seller of out-of-money (OTM) options, but on expiry day I trade at-the-money contracts (ATM). On expiry day, I deploy capital more in directional trades rather than non-directional ones (most traders deploy non-directional strategies on expiry day).
On this day, volatility is generally high and the bulk of premium is in ATM contracts, so I shift from strangles to straddles. In straddles, a trader initiates two transactions of the same security at the same strike price with positions that offset one another. After establishing a straddle I wait for the market to make a move on either side, off-late it is on the lower side.
I move my position in sync with the market move. If it is trending lower, I will aggressively sell call options and cut my put position that was initiated when a straddle was established. So, from a non-directional position, I have now moved to a directional trade.
I am nibble in my position till around 1 pm and then I aggressively start to build my position. Around 2.30 pm I start taking a position on the opposite side. I am now looking at the 3 min and 15 min charts. In the last 30 minutes, I take signals from a 1-minute chart.
At 2.30 pm, I look for probable areas where the market will not be breached. Say if the Bank Nifty has fallen by 350 points, then I sell puts of say 100 points lower. But if it still continues to fall, then I employ a stop-loss of 50 percent of the max profit of the option price while simultaneously selling more call options.
On expiry day, I am trading entirely based on charts rather than option Greeks.
Though it is a busy day, expiry days account for nearly 40 percent of my weekly profit.Q: With so many strategies at play does the market still surprise you?
A: October has been a learning experience since I began selling options. The month surprised everyone with volatility shooting up sharply. In the first week of the month, I was sitting on a profit of around Rs 7 lakh, but had to struggle to stay in the black by the end of the month. Though the month ended profitably, the amount of effort and emotional capital needed was very high. But at the end of it, there were important lessons to learn.
Technical analysis relies too much on indicators. If an indicator shows that the market is oversold, it does not mean that the market will rebound from this area, the market can go down further. One needs to learn to manage risks under such circumstances as well as how to stay more hedged.Q: How do you manage your risk?
A: I always have a target with respect to the stop-loss. I will book a loss if my position has moved against me by 50 percent of the maximum profit potential. I will not try to firefight in this situation.
Traders generally get emotionally attached to their trade. If a trade goes against them, then the focus shifts from earning a profit to protecting capital, but that was not the initial premise for entering the trade. The trade has now changed your priorities. You end up spending a lot of emotional energy to protect your capital.
I prefer to get out of the trade and think clearly. I generally do not get bothered if I am losing money, the key to me is to take the learnings from these losses home.Q: Can you give us a peep into your track record?
A: Over the last two years, I have managed a 65 percent return on my capital. I initiate trades with a risk-reward anywhere between 1:1 and 1:3. Credit spreads account for 80 percent of my trades. A credit spread involves selling a near-the-money option and buying an out-of-the-money option.
The last two years have been profitable with nearly 82 percent of my trades working in my favour.Disclaimer:
Reliance Industries Ltd is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd