Options selling is a big boys game and Mitesh Patel is among the bigger ones in the market. Coming from a humble background Mitesh Patel uses basic technical analysis and options knowledge to consistently take money from the market.
Mitesh Patel is one of the most visible twitter handle in the options trading in India. Not one to shy away from a confrontation, he is as aggressive on social media as he is with his trading.
A man with humble roots, Patel is by-and-large a self-trained trader who does not mince words to protect his territory. Having paid the market a part of his salary as tuition fees for nearly a decade before he could find his mojo, it is no surprise that Patel is possessive about his achievement.
Behind the aggressive mask is a shrewd and calculative trader who has discovered the secrets of making money. Patel is among those traders who post and discusses his trades, wins and losses with much fervour.
A soft-spoken person in real life, Mitesh Patel, in an interview with Moneycontrol, takes us through his struggles and strategy.
Q: Can you take us through your journey from a village to one of the most visible traders in the twitter world.
A: I was born and brought up in a village in Mahisagar District in Gujarat, some 120 km from Vadodara, which is where I completed my schooling. After completing my degree Chemical Engineering, I joined GSFC, Vadodara, and later Saurashtra Chemicals in Surat.
From here onwards, my professional career and journey as a trader moved hand in hand. It was in Surat, in 2005, that I was first introduced to the stock markets. Some of my colleagues were dabbling in the markets and being around them, I started developing an interest in it. My initial trades were all delivery trades. The first stock that I ever bought was ITC, based on a friend’s recommendation.
Like any first-timer, I had no idea about fundamentals or technical analysis, no clue of what the indices Sensex or Nifty represented. But still, there was something about the market that kept me trading on it and providence kept opening bigger doors for me.
I later got a job in Reliance Industries' Vadodara unit, erstwhile the public sector undertaking IPCL. Here, the old employees of the company were even bigger and more proficient players in the market. They traded in derivatives such as futures and options. I had no clue of what these instruments were back then, but still, I tried my hand in the futures market.
In those days, the contract size would be between Rs 1.5-2 lakh and the margin money was Rs 30,000. I would take two-three months to save enough money to pay the margin for one lot, and managed to blow my account in the next 2-3 months.
We were in the midst of the 2007 bull market, and all I used to do was buy any stock in the morning and wait for it to turn profitable. If the trade did not make money by the end of the day, I would carry forward the position.
Since my initiation in the market, I had only witnessed a bull market. The year 2008 introduced me to a bear market. But I continued to trade in the same way – by buying in the morning and waiting for the stock to close in profit or carry it forward. Thankfully I was trading with an online broker who would automatically cut my position if there was a margin shortfall.
This saved me from the carnage in the market, though I lost nearly 50 percent of my capital. I saw some fellow traders who had to borrow money or request their family to bail them out.
In 2009, I was still trading as though we were in a bear phase when the market turned and my loss-making days continued. I remember shorting Reliance at Rs 1,200 and covering it at Rs 1,600. Jindal Steel was the other stock where I incurred huge losses by trading on the opposite side of the move.
It was during this period that I started pondering over my trades and why I was always on the losing side. Apart from a bit of soul searching, I also searched the internet and came across an e-book titled New Day-Trading Tips. This book and reading some blogs helped build my foundation of how to read the markets.
The main lesson that I learnt from the book was not to sell short when the market is in an uptrend or to buy when the market is in a downtrend.
The e-book had a link to yahoo charts, which in those days were operating with a lag of 15 minutes. Using the charts and the learnings from the book I understood where stop losses are to be kept. In a rising market, the stop loss was kept below the previous low while in a falling market it was above the previous high.
Along with the improvement in my understanding of the market, my career was also progressing. I got a job in SABIC, Saudi Arabia. For me, this meant more money at the end of the month to put in the market. To this date, I have never traded on borrowed money.
The market then entered a choppy phase where I understood consolidation and how stocks correct and move in a range. By now, Google Finance charts, which were almost live, were available. That helped me in learning and sharpening my skills in making the correct support and resistance levels.
During the first phase of my trading career, my losses were on account of my ignorance. Till 2011, I lost consistently. But after that, I had developed some skills and entered the phase where I was breaking even. Nearly 50 percent of my trades were working well during the 2011-14 period. Since the day I took the first ITC trade to 2015, I lost around Rs 30 lakh in the market. That was the fees I paid to the market. I managed to survive because I had a well-paying job and the obstinacy of being a successful trader.
On analyzing my trades, I found that my loss-making trades were mostly those that I bought near the resistance level. Simply by avoiding these trades did my overall performance started improving.
During my SABIC days, I also learnt to trade options. A friend, who after looking at my trading efforts, said that if I was so sure of my trades, I should start trading options. Most of the losses that I incurred during my formative years was on account of buying options. I made money in one trade and lost them and some more in the next three trades.
The broker through whom I traded told me that his boss always said that money is made by selling options, that got me looking for opportunities in options selling.
This was also the time I quit SABIC and came back to India, where I worked for a short tenure before moving on to Samsung, South Korea with a a salary that was keeping pace with the increasing margin requirement in the market.
Since I was exploring selling options, I started looking at the Nifty option chain. In one particular month in 2013-14, I noticed that the Nifty moved in a range of 100 points and that the options around the strike price all lost value slowly and came to zero.
I thought of trying it out in the next series and started shorting out-of-the-money (OTM) call and put options, essentially creating a Short Strangle. But as luck would have it this expiry was when the market decided to trend. While one leg of my short strangles was profitable the other one incurred big losses.
My next step was to mix technical analysis with options selling. I used the support and resistance points to initiate a trade. If the market moved higher after testing the support levels, I would sell the puts, and if it fell after testing the resistance levels, I sold calls. Only if it lingered between the support and resistance line would I create a short strangle trade.
I started trading this way on a very small quantity. I sold options in both the indices – Nifty and Bank Nifty in those days. I do not like selling stock options since premium deterioration is very slow.
I also do not watch the option greeks. My call is based on technical analysis. It’s the movement of the underlying that will decide the greek’s value and I prefer tracking the underlying instrument.
It was option selling that helped me become a full-time trader from December 2016 onwards. Between November 2016 to August 2017, I converted my Rs 20,000 account to Rs 26 lakh, but then greed got the better of me and I bought options. My account came all the way down to Rs 1 lakh.
From that day I decided to stay away from option buying as much as possible. However, there are times when the urge to buy options is too much based on the setup. During these times I keep my exposure at a maximum of 5 percent of my capital.
This was also the time when I sold a house that I had bought as an investment and raised Rs 55 lakh from it, which added to my trading capital.
By now I was confident of my strategy and ability to make money, so I decided to quit my job in November 2017 and become a full-time trader.
Q: How do you trade presently?
A: Since the time I have been a full-time trader, I have earned 90 percent of my profits by selling options. Most of my trades are in the weekly Bank Nifty options.
The strategy of entry and exits are more or less the same that I was trading earlier. I identify support and resistance levels and closely observe intra-day movements of the Bank Nifty.
I sell options to benefit from the direction of the market. Thus if the market moves higher after testing the support, I will sell Put options and the reverse is true when the market falls after testing resistance level, I sell Call options.
Suppose the Bank Nifty reverses from a support level at 26,500, I will sell a 26,200 Put. The strike on which I trade has to be 1 percent away from the support or resistance level.
If the Bank Nifty is breaking the previous trend, I will cut my position irrespective of the profit or loss.
Along with the strategy what has helped my trading is position sizing.
One the first day of trading a new expiry, I will only trade with 30 percent of my capital. If the trade is in my favour, I will add to the position on the second day.
In the above example, the first trade would be selling a Put at 26,200 and the second would be selling a Put of 26,300 as the Bank Nifty moves higher.
Even while deploying 30 percent of the capital on the first day, I will not be taking the position at one go. My first entry will be of 10 percent, which will be scaled up to 30 percent. After allocating 60 percent of my capital, I will keep 40 percent for contingencies.
Since I am trading the weekly Bank Nifty, the benefit from time decay is also high apart from benefiting from the directional movement.
If the market breaks through the support level, I will square off my Puts with a marginal loss as time decay has would have helped in deterioration of the premium.
Meanwhile, the remaining 40 percent cash is put to good use by writing calls. As the support is broken the new trend is clear – the Bank Nifty will fall. I then place my trades to benefit from the downward direction.
If you are sitting in front of the screen and your reaction time is fast, whipsaw moves may not result in you making money, but at the same time, you will not lose either.
As for exits, I am out of the trade if the option loses 80 percent of its value. If I short an option at 50-60 premium, I will exit when premium falls between 5-10.
On account of the increased volatility in the recent past, I have tweaked my strategy a bit. I do not keep too many positions open on Wednesday, one day before the expiry. On an average, around 80 percent of my capital is free on Wednesday. Further, only if volatility is high will I initiate a sell position on Tuesday.
I enter my trades with the intention of making 1 percent a week, which is why I sell options with high premiums. However, on account of adjustments, I generally end up making higher. As a full-time trader, I can now confidently say that it is possible to earn around 5 percent in a month. Consistency in return is only possible by selling options.
I normally do not take a non-directional strategy trades, since the return on capital is lower, though the probability of being profitable may be higher. But since I am a full-time trader and am sitting in front of the screen, I manage my risk aggressively.
My stop loss is placed at a total capital level. If I am losing 2 percent of my capital on a trade I will exit, no matter what.
Q: You also trade the stock futures, how do you do that?
A: Stock futures can give very high returns, but at the same time so are the losses.
In stocks I am a breakout trader – I look for stocks that are breaking out of a range on high volume. I trade only in liquid counters and trade the breakout itself rather than catching a retracement. Most of my trades are for intra-day. But to select the stock, I look for those that are near the support or resistance lines on the daily chart.
The good part about these trades is that they give immediate returns. Even if you are stopped out of the trade for one or two times, the third move generally is a big one which will cover the losses of the first two trades and leave something on the table.
There are nearly 150 stocks in the derivative segment and we can get a one or two breakout trades every day.
One trade that has left a big impression on me and helped my journey as a trader was JSPL, which I had taken in 2015.
I had shorted the futures when it broke multi-year support levels of 140. I managed to sell it at 131 and the next day the stock fell to 122.
I got greedy and converted my overnight position to an intra-day MIS (margin intra-day square-off orders) which allowed me to take a bigger position.
I sold more quantity at 126, but rather than going down the stock moved up slowly to 130 where I was stopped out. In the next three months, the stock fell to 70 levels. I had an initial position of 30,000 shares.
By converting a positional trade to intra-day I ended up converting a winning position into a losing one. But like every wrong trade, this one taught me a big lesson. I learnt to control my greed and more importantly, I learnt position sizing and money management, which has helped me become a consistent trader.
Q: You are one of the most talked-about expiry day traders in social media, can you take us through your expiry day trades.
A: Over the last few months, the expiry day has turned too volatile. Many traders, including new ones, are playing that game. Brokers are designing products especially for expiry day trading, which is adding to the volatility.
I had made some big profits and big losses trading the expiry day. My strategy for expiry day has changed with changing times. I now trade at half the position I used to earlier.
Earlier I used to look at the open interest and traded accordingly, but the wild swings on the expiry day over the last few months have not worked well for this strategy. Earlier, the premium decay used to start in the first hour, but now it does in the second half of the day.
Now on the expiry day, I trade in more or less the same way I take the weekly trades, except my time frame is shorter. I look at the 3 and 10 minutes chart and have support and resistance lines in place. I sell options to take advantage of the direction of the market move.
I build up my position slowly by allocating 10 percent on the first position and then building it up as the market moves in my direction. I sell an option which is around 200 points away from the market. If I have initiated a trade at 50, I will add the next one as it falls to 45. I will keep on adding to it till the direction changes. Most of my selling is over by 12.30 p.m. and I do not trade after 2.30 p.m.
If the direction changes my exits will be closer to the average price. The stop-loss rules are the same at 2 percent of the entire capital.
I have seen losses of 10-11 percent of the capital in expiry day, though there were more gains of 6-8 percent. But these wild swings are not good. I have now kept a strict stop loss of 2 percent.
Q: What advice would you like to give to a new trader?
A: Apart from knowledge, what is needed is capital. It would be a long journey to financial freedom if you enter the market with limited capital.
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