A part-time trader who uses time and risk management successfully at his job and in the market

Risk management is also what he does while trading. Santosh is as good as any full-time trader, if not better. Unlike other traders, Santosh does not look at a technical chart before entering the first leg of his trade. Instead, he looks at volatility to enter option trades.

Son of a Naval officer, Santosh’s story is all about leveraging time. He has multiple certifications needed for his profession, some which very few in the industry have. He has undergone the highest level of training needed to be a trader, he has revived the Option Oracle software by learning the language in which it was built, a package which was lying secluded in the cyberspace. He regularly teaches traders the skills needed to be an options trader. As if this was not enough he makes time to get high-level certifications in ice skating and scuba diving.

In an interview with Moneycontrol, Santosh Kumar Pasi speaks on his approach to options trading, how he uses time in his trading and his software, among other things. Edited excerpt:

How do you manage a full-time job and trade frequently. Also, can you throw some light on your journey to becoming a successful trader?

My trading style does not require too much time to be spent in the market, I am a positional trader so I need not stare at the screen the whole day. Over the years, the process has been streamlined. My software does most of the hard work making my job easier. Also, my trade size per trade is too small to disturb my sleep or rather my work. Further, my office knows what I do and as it is not infringing with my work, so they are okay with it.

As for my background, I am a science graduate with an MBA and MCA. I have taken a number of certification courses pertaining to the software field, especially on risk management and cybersecurity.

My introduction to the market came with my job. When I was employed by this company in 2002, I was given an appointment letter alongwith another piece of paper which said ESOP (Employee Stock Ownership Plan). I had no clue of what an ESOP was and thought of it as another piece of paper that companies generally give while joining. But in 2006, when Fringe Benefits Tax (FBT) was introduced, I was asked to furnish that paper. It was then that I understood what it meant and how much it was worth.

This got me interested in markets, though by then I had opened a broking account and bought some shares on the broker’s recommendation.

But after this event, I started looking at the markets with more interest. I used to trade watching the news and on the recommendation of others.

My broker called me one day to explain something called options. He showed his latest trade where he doubled his money in a day. I was hooked. I immediately bought what he told me and as luck would have it, the stock tanked and so did my Option. Within a day I lost half the money I put on the trade, rather than booking my loss I added more to the position.

So that’s how I traded for a year-and-a-half, thankfully I was not wiped out since a few trades in a month worked very well and kept me afloat and my position size was always small.

But I realised this is not how it should be and I was only lucky to survive this long. I decided to take professional help and enrolled with the Online Trading Academy (OTA). Here, I went up to their highest level of training — Mastermind Community, which I attended in the US. Few traders from India have taken this course.

I was trading global markets then, trading everything from forex, commodities, and equities and all instruments. As I was good at coding, I tried to code my strategies, but I soon realised that there were a lot of whipsaws which was not what I was comfortable with. In those days, I used to take directional trades.

How did you move towards options and what’s the story behind the software you restarted?

The mastermind community had a group where we used to discuss option trades. There were some 100 traders in those days who used to discuss their trades, it is here where I got more intrigued by options and sharpened my skills.

Everyone in this group was discussing numbers and option Greeks based on the output from a software called Options Oracle, which was a company started by 2 programmers from Israel. But by 2012 the promoters could not support it and made it open source.

For the next two years, the software was independently supported but by 2015 it completely broke down. Most of us were at sea because our entire strategy was based on the software. I remember working on excel to arrive at the output for the next two months which was a very tedious task.

Then a friend and fellow trader who knew I was in the software field asked me to look at it and see if I can get it restarted. Though I am not a programmer I looked under the hood and found it was written in a language in which I was not too eloquent. I had to learn the language along with various other stuff to get the package up and running.

In August 2015, we released the first version and have been supporting it since. It has proved to be a very useful tool for options traders.

Has your option trading strategy remained the same since you started trading it?

No. In my earlier days, I used to take directional trades and most were long options trades. Shorting options was not an choice as the margin requirement was huge compared to my trading capital.

In those early days, I used to look at charts of all futures and options stocks in four time frames. It took around 4-5 hours to go through the charts of nearly 250 companies. I used to have a detailed log of all my trades. When I analysed my trades thoroughly, I found out that I was better at taking non-directional trades.

Since 2012, I have had a systematic approach to trading which were mainly on the short side, that takes advantage of non-directional movement. The important criteria for me are that the trades should have reasonable profitability and reasonable probability.

How do you trade presently?

I am a positional option trader, I do not take any intraday trades. My trades are based on volatility. I take no more than five minutes for me to pick up my trades, thanks to the Options Oracle and OpStrater the programs which I use to filter my trades. These days I do not look at the charts to enter a trade, volatility gives me a good entry signal. But if there are adjustments to be made to the trade I would not hesitate to look at the charts before entering the next leg of the trade.

The logic behind the trades is simple — it is to pick up stocks or indices where the volatility is high. Let's take the example of India VIX, the volatility index that is traded on the market. Say, it trades between the values of 24 and 9 during the year. So, we will divide this range of 15 points into 5 smaller brackets.

The VIX may be in the very expensive range if it is trading between 21 and 24, expensive range if it is in 18-21, neutral if it is in the 15-18 range, cheap for 12-18 and very cheap if VIX is available in the 9-12 range. We then have a strategy ready for each range. My hunting ground is stocks or indices in the very expensive and expensive range.

Our next filter is on probability. For us, it is important to identify strike prices which have the lowest probability of being hit. Probability can be measured in various ways. One of the tools we that we consider for arriving at a probability is using the average true range (ATR) for the underlying and the number of weeks to expiry.

If we are trading Nifty options and say the ATR of Nifty is 100 and there are five weeks to expiry, in that case, we would look to sell options at strikes which are 500 points away as they will have a low probability of being hit. There are other ways of arriving at probability like the conventional route of standard deviation or through the implied and historic volatility.

There are other filters a trade has to go through before it becomes actionable like they have to be giving a risk reward of 3 is to 1 and certain Greeks criteria have to be met.

In case of strategies where the risk is unlimited say in the case of a short straddle or a short strangle, in such cases, we would book our profit if the prices fall by one-third from our entry position. In case of strategies where the risk is capped say in Butterfly strategy or Iron Condor I would book my profits if prices fall to 66 percent of our initial entry price.

A unique feature of our trading is that we use time in our favour both in each trade by allowing theta or time value to help us as well as in taking a position in a stock or index.

Say if we have to take a position in Nifty we do so progressively. When all the signals are satisfied we take the first position, say on a Monday. If all the conditions are satisfied we take another trade on the next Monday based on the data for this week. We continue this way to build our position. This method helps us to ride the trade as well as the latter position helps in cushioning the earlier ones.

I need to mention here that each position is handled independently and adjustments made to them irrespective of other positions in the same underlying.

With adjustments and option morphing, we try to convert a losing position into a profitable one or one where the losses are limited.

My favourite example of how to prevent a losing trade, which I showcase in my classes is of a PSU bank trade which I entered after a sharp fall in the recent past. The stock price dropped another 30 percent from my first position against my expectation of a consolidation. Through these adjustments, I was able to salvage the position and come out with a 4-5 percent gain.

Can you elaborate on the adjustments. Say, if you have a short strangle, meaning you are expecting the stock to move within your range, but the stock moves higher or lower how will you adjust your trade?

If we have a short strangle and the price moves in either direction sharply, we have various conditions under which we would make adjustments. We can either wait if the spot price crosses one leg of the strangle or if the option moves from being in the money to out of the money. Another way is to check on the Greek called delta.

If delta (which is a measure of how much the option would move for every rupee of movement in the underlying) moves from our comfort zone of 0.15 to 0.3 or 0.4 we would make an adjustment. We would not like the option to move 30 or 40 paise for every rupee movement in the underlying.

Our adjustments would be on the side which is losing value. If the price goes up the put will lose value so we would move the leg closer till the delta is less than 0.3, ideally closer to or below 0.15.

However, adjustments are like a visit to a doctor. Every time you make an adjustment it is going to cost you though it may give you relief. In order to overcome this problem, we came out with our strategy of taking positions periodically. This acts as an automatic adjustment as well as creates a new position for us.

But we would not make any adjustments in case the expiry is in two weeks, in that case, we generally take a loss and move on.

Since I am a non-directional trader the biggest risk in my strategy is a non-directional trade becoming a directional one. One way we found of overcoming this risk is by splitting the trade as explained earlier.

Since you trade volatility, do you take trades ahead of a result or an event?

Yes, in fact, these days being results season we get a lot of such trades. We do not have to search for them they show up on the volatility scanner. We wait until the very last moment before the entering the trade. It could be a day before the event or even on the same day.

However, we take positions in options whose expiry are 5-6 weeks away. This gives us enough premium in the options as well as it also gives us room to make adjustments if needed.

How does your trading performance look like in terms of risk-reward and win-to-loss ratio?

We do not take a trade with a risk-reward below 3:1. Our success ratio is between 60-70 percent depending on the market. Our aim is to make at least 5-6 percent on each trade.

Coming back to Options Oracle, how can one use it?

First of all, the software is free for all, it's an open source product as we would like to keep it that way in line with the wishes of the people who designed it originally. The download is available from my site www.pasitechnologies.com. We have an advanced version which has a nominal cost.

I would like to add that trading options is complex and one should learn the basics before working on them. There are enough videos on the youtube that can help you learn fast.

What about your training program?

It’s a two-day program where we give some study material the moment you enrol, we expect the participant to have a basic idea of options and the commonly used terms before they come for the program.

It is a very interactive program which promotes self-learning along with inputs from us. We look at the various scenario and how to react to it. We have trained around 250 participants out of which around 10 percent are now fulltime successful traders.