His humble background shows up on his trading style where he goes after a trade even if there is a very small profit potential
Trader Mark Weinstein during his interview with Jack Schwager for the book Market Wizards made an interesting observation. When I trade at home, he says, I often watch the sparrows in my garden. When I feed them bread, they take just a little piece at a time and fly away. They keep on flying back and forth, taking small bits of bread. They may have to make a hundred stabs at a piece of bread to get what a pigeon gets at one time, but that is why a pigeon is a pigeon. You will never be able to shoot a sparrow, it is just too fast.
That is how Weinstein trades and so do a number of scalpers who are not only risk-averse but are happy by taking a number of small profits and concede only a small part of their capital if they are wrong.
Yet there is a method to the madness that the scalpers do. They, like Weinstein’s sparrow, make a healthy living by trading small but trading often.
Jegathesan Durairaj (known as Jegan on social media) is one such scalper, who punches over 100 trades a day, especially on derivative settlement day.
Successful traders trade their personality, so does Jegan who says he is a hyperactive person. Also his humble background (his parents were masons in a village close to Madurai) shows up on his trading style where he goes after a trade even if there is a very small profit potential, not leaving any money on the table.
Jegan studied his way out of poverty by getting a (Masters of Computer Applications (MCA) and worked as a senior technical lead in one of the top IT company. He has recently resigned from his job and will be a fulltime trader. Jegan’s confidence comes from the fact that he has won a popular trading competition for 10 consecutive times and amassed enough capital and experience to venture on his own.
In an interview with Moneycontrol’s Shishir Asthana, Jegan speaks about his prolific trading style and explains how he trades.
Q: Can you give us a little background about yourself?
A: I was inspired by the book Rich Dad Poor Dad by Robert Kiyosaki. I looked for various business avenues to accumulate wealth with small capital. One such avenue was trading in equity markets which requires small capital to start with.
One thing that struck me from the book was to imitate what the rich men do. In my reading on the markets, I found out that the big institutions and rich investors traded in options, that too in selling options or writing options.
So I went through many workshops, read books and articles to learn about option selling and ever since I have been an option writer.
I have been writing a blog on my analysis of the market and from it I used to arrive at the strategy I have to adapt to trade next day.
As for my background, I have been in the software field for the last 15 years after completing my MCA. Till four years back I was not even aware of what a demat account is. Only recently my parents have opened a bank account. So for me exposure of financial markets is new.
Q: You mentioned institutions do a lot of option writing but they also invest in equity, why did you not follow that route.
A; I do respect investing, but by nature, I am not an investor. I am a very hyperactive person so I do not have the patience to be an investor, short-term trading suits me better. But what I have done is I invest through the mutual fund. Nearly 90 percent of the money I have is in the balanced fund. I use this investment as a margin with the broker to do my option writing.
Q: In options selling do you only do intraday.
A: No I do both position and intraday, but nearly 50 percent of my profits come through intraday, that too by trading on the expiry day only.
Most of my trading is in index-related options. Within indices, I prefer to trade in Bank Nifty because it offers a weekly expiry. In weekly options, the time decay is very fast, so if you sell options and get the direction right the returns are faster. In case of Nifty, I hold it for a longer period of 10-12 days provided the view remains the same.
Q: In positional option writing what kind of strategies you follow. Are you taking naked short positions (without any hedge or having the underlying investments)
A: I no longer trade a naked position, I always a protected position. My main strategies are calendar, butterfly, iron condor and expiry related trading. I do short straddles for positional trades and short strangles for intraday trades.
In some of these strategies, like the iron condor, the returns are less at around 18 percent per annum. But for me, the 18 percent is over and above the return I get from the investment in the balanced fund which I am using as a leverage.
Q: Let’s assume that your view of the market is that it is going to be flattish or bullish, what strategies will you use?
A: If the view is flat I will use a double butterfly using both the call and the put options. If the view is of a bullish market I will use a put calendar. I will hold on to the position till expiry if my view of the market does not changes. In case it changes or if there is a shortfall of margin only then I will square off my position.
Q: How do you form a view of the market, is it technical analysis or are there other data points you look out for.
A: I primarily look at futures and options data to arrive at a view. Open interest analysis, put-call ratio (PCR) analysis, delivery volume and Max Pain point. I do look at technical charts but I am more comfortable and have trust in the data points.
Q: Expiry day trading accounts for half of your profit and is a day when you take more than 100 trades, can you walk us through how you trade on the expiry day.
A: First of all I never plan to take 100 trades or whatever the number of trades comes during the day. The number of trades is decided by the market condition.
What I do is I split my day’s trading or exposure limit that the broker gives me into 20 units of 5 percent each. Which means I am taking a position of only 5 percent of my day’s limit in every trade I take. Now as the market moves I form a view and take a position. I trade looking at various time frames. So if the market is falling I will keep on selling call options looking at different time frame charts. And if it is moving higher I will sell put options.
Now on expiry day, the market is very volatile and the premium of the options fluctuates from say, Rs 1 to Rs 12 in a matter of minutes. In order to save my position, I hedge by buying a lower strike price option, but only a small part of my exposure.
As the market moves option price changes, I start booking profit on options where it has overshot the theoretical price but it is in my favour. I keep on doing this adjustment and all the time chipping away profit from the market. The more volatile the market the more trades I take. The higher number of trade is to defend my position.
I only trade out-of-the-money options and in those strike prices which are least sensitive to market movement. I have a mental map of what premium I am looking for, which has been created by experience. I know the premium I am looking for at each time.
So at 10 a.m. I will be looking to sell an option with a price of Rs 5, at 12 p.m. I am searching for options at Rs 3, by 3 p.m. I am selling options that are trading at Rs 1. On expiry day these prices might be available on strike prices that are 700 points away from where the market is trading. On a normal day, these prices may be 300 points away, but high volatility results in a higher premium.
Q: How do you manage to trade with your job?
A: I have an arrangement with my office where I get a day off on every Thursday (the expiry day for Bank Nifty). But now I have already put down my papers and will be trading fulltime. I wanted to turn in to a full-time trader by 2020 but the markets have been rewarding so I decided to prepone it.
Q: You also train traders, what type of students do you take.
A: I only take traders who are already trading in options and know the basics. I do not have to teach them what is call and put option. The second criteria are that they should have at least Rs 10 lakh as trading capital. Since my trading style requires one to take multiple positions there has to be enough capital to take the positions.I have trained around 90 people till date, some continue to trade while others find it difficult to take 100 trades in a day.