From a person who managed to lay hands on his first pair of slippers when he reached the 10th grade to be one of the largest individual option sellers in the country is an inspiring journey. The fact that the person was a teacher for the most part of his life makes one wonder about the hidden potential of this individual.
PR Sundar, a math teacher, learned about options from the most basic source - the stock exchange booklet - that every dealer working in a broker’s office reads. He still maintains that the book is his primary source of knowledge. While the source of information was the same, the knowledge that Sundar could extract from that source was much higher than what most are capable of.
Born in a poor family, Sundar, a post graduate in mathematics, took to teaching as there were few job opportunities back then. A teaching assignment in Singapore helped him save capital to think about returning back to India and starting a business. A strange happenstance brought Sundar to the market and he has never looked back.
A successful trader who earned his spurs in the options market, Sundar continues to teach, only this time the subject has changed to options. But like every good teacher he is more interested in clearing the cobwebs and imparting knowledge, which can remain lifelong, than spoon-feeding strategies.
Edited excerpts from his interview with Moneycontrol, where he speaks about his journey and what it takes to be an option seller.Q: How did a math teacher end up trading options?
A: After my post-graduation in mathematics from Chennai, I bagged a job as a maths teacher in a school in Gujarat as there were few jobs in south India then. Among the many good things that Gujarat has to offer, one is the interest in share markets and investing, which stuck with me. Since markets are about numbers, I was naturally attracted towards it.
I received an opportunity to work as a maths teacher in Singapore and moved there in 1993. After a 12 year stint in Singapore, I returned back to India with some capital to start a business. I was looking out for an alternate career other than teaching.
By a fortunate coincidence a relative, who was a sub-broker asked me to appear for the NSE Academy Certification in Financial Management (NCFM) exam so that he could use the certificate to operate his terminal. It was while studying for this exam that I really got interested in options.
What also made me opt for trading was that everyone used to say that 95 percent of all traders lose money. This was a big opportunity to me as few other businesses offer such a skewed playing field. All one needed to know was what the other 5 percent was doing and follow it religiously.
But like most others, my entry into the market was through the cash market. I found the cash market offered very low trading returns, so I moved to the futures market. The problem here was that the risk was high. I wanted an instrument where the risk was low and the reward high. Options offered me the perfect playground.
The good thing about options was that it gave one the option to choose the perfect mix between risk and reward according to one’s liking. Option selling is like sitting in front of a bonfire. If you are too close, you can get burnt. If you are sitting too far, then you will not enjoy the warmth. You need to sit at the right distance from the fire.
Similarly, in options, if you are trading a strike price which is too far away from the current price, the reward will be low as will the risk. If you are trading close to the market price, then the risk will be higher. It is this flexibility that options offer and the probability of success is what attracted me to them.Q: While trading options were you always a seller?
A: I have been an option seller from the beginning. Option selling is like running an insurance company. An insurance company sells protection to many people, but only in a few cases does it have to pay claims as fewer people die. It provides for a catastrophe by taking a re-insurance cover. I buy an option only in case the strategy needs to be insured or what in market parlance is known as hedged.
Coincidentally, my journey in options started with some important market reforms. Prior to 2007, it was very costly to sell options. Brokerages were high and Security Transaction Tax (STT) was calculated on the entire contract amount. Only when the STT calculation was based on premium value and brokerage cost was reduced with the advent of online brokerages did option selling become remunerative.
I write options aggressively even if they are priced at Rs 1 and make Rs 4-5 lakh a week. This opportunity was not there in 2007-08 as the cost of doing business was high.Q: Did having a maths background make it easier for you to get through the math involved in option pricing?
A: The only book I read in options was that provided by the National Stock Exchange to clear NCFM. I have a clear idea of what the option Greeks stand for, but I rarely use it in my decision making. The market price of the option determines the Greeks value and not the other way round.Q: Do you use technical charts or fundamental inputs in your trading?
A: In order to be successful trader you need two things: edge and hedge. Edge is your market view and hedge comes into play when your edge is not working out. I am a jack of all and master of none. I look at everything, technical charts and all kind of data before taking a view on the market.
Based on these inputs, I take a view on the market and my position. At most times, the view goes wrong and that’s where hedging comes into play.Q: How is your teaching background helping you in trading?
A: In trading as well as in any business or profession what is needed to succeed is logical thinking. Being a student and teacher of math, logical thinking comes with the job. In trading, education has little role. Even a highly educated person fails to be a trader, while a barely educated person can be very successful.Q: What option selling strategies do you deploy?
A: I mainly trade in index options. Around 95 percent of my trades are in the Nifty and Bank Nifty. I start out by looking at all data points pertaining to the market like institution flows, call-put data and open interest. I then form a view after glancing at the charts. It is only after that do I decide on the strategy to choose.
I normally take low-risk trades, so I like to opt for a short strangle, iron condor, short straddle or butterfly strategy. My success is not based on my view or strategy, it is how I manage the trade even when the view is wrong. Everyone has the knowhow of risk management strategies, but not everybody is successful. What separates us is the way in which I handle the trade, especially a losing position.
I divide our trade into 5-6 components and invest in 5-6 strategies. Around 60 percent of my capital is deployed this way and the remaining 40 percent is for fire-fighting.
In Nifty alone, I may have multiple strategies at play at any time. Apart from the strategies, I also trade various expiry contracts. I may have a Nifty position in the current month, next month, far month, six months contract and even a one-year contract. In the case of Bank Nifty, it will be weekly and then monthly contracts.
Each expiry contract will be taken to capitalise the opportunity at that particular time series. The longer-term contract like the yearly or six-month contract do not need too much management, it’s the smaller period where we manage very aggressively.Q: Since the key to your success is managing the trade, how do you salvage a position that is against your initial assumption?
A: There are four ways in which one can manage a position.
First, if we have a short straddle trade and the market has moved violently against my position after a few days of initiating the trade, then the chances are that I may be in profit on account of time decay. I can simply square of this trade and build a new position. But if the volatility has increased in a very short time, then one can adjust the trade by shifting the contract around where the market is trading.
The second way is to average the position by adding a new position around the market price. The third way is to add a futures position in line with the market direction. The fourth way is to exit by taking a loss.
In my case, most of the time the trade management and hedging works. Only occasionally do I get a trade like a black swan event which hits me badly. Like the November 8, demonetisation trade, where the market opened with a big gap down and started recovering immediately. Our assumption was that it would keep on going lower. Such days give us a loss which takes away 2-3 months of profits, but we are okay with it and factor in such days in our trading. Such trades are rare but one needs to be mentally prepared for it.Q: You have a very aggressive expiry day strategy, can you walk us through an expiry day?
A: I do trade intra-day, but on every Thursday, which is the expiry day for Bank Nifty contracts, I trade very aggressively. On a good day, I end up trading one lakh lots. Every Thursday, I trade in the Bank Nifty and on the last Thursday of the month, I trade in both the Bank Nifty as well as Nifty.
At the start of the day, I study the market and start deploying money. At the start, I deploy around 10 percent of the pre-decided limit and then progressively keep on adding to that position. Based on the ground condition, I keep on adjusting my trade. I keep on hedging or shifting my position based on the market’s movement.
I deploy all my capital by 2:00 pm. By 2:30-2:45 pm, I either book a profit/loss or keep a stop-loss on trades. This is because between 3 and 3:30 pm on expiry day there is a lot of volatility.Q: Since around 95 percent of your trades are in index options, where do you trade with the remaining five percent?
A: I use profits from the trade to buy shares in frontline index-based stocks. Occasionally, the price movement between shares and options offers a good trading opportunity. Also, frontline stocks can be used as limit with the broker. At the same time, one can enjoy the benefit of price rise and dividends.
There are, however, opportunities in other stock options also. Recently, I purchased Rural Electrification Corporation, which was trading over Rs 90 per share and pays a dividend of around Rs 10 per year. I bought the share with the assumption that even if I earn one percent by selling call options per month, I would end up earning nearly 20 percent on the position. This return does not take into account the share price appreciation in REC.Q: How are the returns in your strategy?
A: That depends on how you define returns. I do not bring in capital. Around 90 percent of my capital is invested in mutual funds and 10 percent in index constituents. These investments continue to earn and would continue to do so even if they were not used as margin collateral. I use these investments as margin to trade options. Thus, one way of looking at it is that the return is infinity even if it is small as there is no real money involved. But if I were to use a constant base, my annual returns are over 50 percent.Q: You have continued with your profession of teaching, only now you teach traders. What exactly can a trader learn from your trading classes?
A: My main aim through these classes is to create awareness of option selling and remove the myth surrounding option selling. The general talk is that option selling has unlimited risk, but if a trader is buying a future contract at Rs 100 he has that much risk, but a put option seller with a strike price of Rs 80 has lower risk.
The option buyer is said to operate with limited risk and an opportunity to gain unlimited reward. But no one talks of the probability of winning as an option buyer. Option seller, on the other hand, is operating with a very high probability of winning.
While an option buyer has to bring in capital to buy, an option seller can use collateral and need not bring in funds. Further, the seller has the flexibility of hedge his position using the same collateral, but the buyer will have to bring in additional capital.
But option selling is not for a small investor, it requires capital. Anyone can gamble, but few can run a casino. Moreover, it is the casino that always has the slight edge.
I teach traders how option selling can be a good business, provided it is managed like a business. It is the management of trade that I focus on. I try to drill in the fact that having a view is fine but one needs to be prepared for any eventuality, just as one does in any business.