Actors are generally associated with flamboyance and flippancy, but rarely for their money management skills. But when you do find an artist who is a pro at options trading, it could seem like a fictional character coming out of a storybook.
Nonetheless, we did manage to lay our hands on one such actor who has been trading the options market since 2013 with the same dexterity as any professional. When he is not dancing around trees or beating up villains for the cameras, Shiv Darshan is striving to become a better trader.
A health freak who once weighed 110 kilos, Shiv also exercises his mind through meditation. An avid reader and traveller, Shiv comes from a family that has been in the film business for two decades.
Unlike most options traders, Shiv mostly trades multiple strategies with a set of conditions for picking up the strategies. But, Shiv points out, his uniqueness comes from his management of risk.
In an interview with Moneycontrol, Shiv Darshan talks of his journey from facing a camera to facing a trading screen.
Q: An actor and an options trader, what’s the story here?
A: My family is into films for nearly two decades but we have also been discussing the financial market on our dinner table occasionally. Though I was only a listener in those early days, my baptism with markets happened in New York where I was studying acting at a time when the financial world was collapsing. I had a front-row seat of the turmoil happening at the epicenter of the financial meltdown.
It was during this time that a friend of mine who was trading options told me that I can double or triple my money in a short period of time, even in this market. Since I was fascinated with the financial market, given my educational background in commerce and my time with friends who were brokers, I lent him an ear.
I was sold to the idea of doubling or tripling my money in a few days. This friend gave me a crash course in options, which basically meant I could now differentiate between a call and put. I took my first trade within the next 2-3 days after being introduced to the concepts.
This was buying a put option on a stock – a deep out-of-the-money (OTM) option which doubled in the next few days. This was the worst moment in my trading career. After this, beginners luck hit me. I traded recklessly over the next few months.
My epiphany moment came with a long strangle trade I took on a company just before its results announcement. Even though the stock moved in my direction, I was in a loss. It was then I realised that there is more to options than simple moves.
Q: What about your acting school during this time?
A: Studying acting was on all along. I finished studying acting and film making in New York, but even while I was studying I used to follow markets. After returning to India, I acted in two movies, content of which have done very well in the digital space. I am still into acting but at the same time, I have dug my heels deeper in the financial markets.
Thanks to the extensive learning during my initial years, I now need lesser time for my options trades. I monitor my trade for about five minutes during the day and late in the evening, I spend around the same time to do what-if analysis of my positions and new trade that I might take. I invest less than 15 minutes a day on the markets. But this has been achieved after putting in long hours to learn the craft.
Q: What did you do after realising that you lost money despite being right?
A: What intrigued me to look further was the reason behind my loss despite the stock giving a strong move. I then dug deep and found that the option Greeks were the culprit. I studied extensively, attended lectures and seminars, saw as many videos as I could lay my hand on the subject, spoke to traders in the US to soak myself on the subject.
I have been in touch with trainers like John Locke and Dave Thomas who have helped me clear my doubts.
During the initial years I also studied technical analysis – Elliot Waves to start with and then Neo waves. After I came back to India, I cleared the exchange related certification exams to test my knowledge on the subject.
In the course of my reading, I chanced upon a book – Fooled by Randomness by Nassim Nicholas Taleb. What struck me was that traders were taking high probability trades and winning in the market for years, but all it took was one Black Swan event to wipe out their profits. This was the core of my trading style which is essentially taking high probability trade but with good risk management in place.
Q: Why did you move from technical analysis based trading to Greeks-based option trading?
A: In technical analysis, since they are directional trades, I have only a 33 percent chance of winning. The stock can either go in my trading, which is when I make money; or stay at the same place – here I am better off keeping the money in the bank or if the stock goes down and I can lose money.
While in options trading, especially options writing based trades which I do, I make money if the stock moves in my direction or stays at the same place. It was a no-brainer; I doubled my chances of winning by moving to options.
This, however, is not to demean technical analysis, which on its own has been profitable to many traders. For me, given my passion for movies, options trading suited my personality and my time schedule.
Q: Can you tell us about the process behind the strategies you trade?
A: As mentioned earlier, the basic premise of my trading is to take high probability trades with good risk management. Actively managing risk is my USP.
All my trades are hedged, my overall position is hedged and my option Greeks are hedged to provide maximum safety.
I have a set of six strategies that I trade every month. Every strategy is chosen based on the implied volatility (IV) and tweaked as and when the Greeks tell me to.
I am basically a positive theta trader (option seller who gains from the deterioration of option value with time). My strategies are resilient to huge market moves in either direction. In fact, one of the six strategies that I take benefits from a huge Black Swan event.
I mainly trade the Nifty though I have a strategy for the weekly Bank Nifty too. I normally take a trade 30-45 days before expiry, but if IV is high I might take a trade 45-60 days before expiry.
My targets for the strategy is anywhere between 1.5-3 percent a month while my losses are pegged at around 1.5-2 percent.
After I enter a trade I continuously monitor my position and tweak or modify them as and when necessary.
Choice of my strategy depends on the IVs. In a high IV scenario, I chose strategies that benefit from short Vega (benefits when volatility shrinks) while during low IV times I am more skewed towards long Vega (benefits from an increase in volatility) strategies.
If India VIX is around 18 I will have 60 percent short Vega strategies in my portfolio and 40 percent long Vega. When it is low, say around 11-12 I am 60 percent long Vega and 40 percent short Vega. In case of around 21-22, I may increase my short Vega trades to a maximum of 65 percent. But I am out of the market if IV goes above 26.
I am always a net seller or always a positive theta trader.
Q: Can you walk us through your strategies
A: My first strategy is the conventional Iron Condor, but I take a low probability, Iron Condor, where the short strikes are at 20 deltas (probability of the strike being hit is around 20 percent). This enables me to get sufficient credit resulting in higher yields. The long side of the Iron Condors will be 2-3 strikes away from the short strike point. These generally depend on my view of the IVs. I generally have two condors on – current month and the next month.
Where my trading style differs is in the adjustments. I am ready to take around half a dozen adjustments if the situation so demands.
Let’s take a case where the market falls and India VIX is around 15 when I initiated the position. Because of the fall, the VIX will rise. As it moves above 15 I will buy debit spreads on the side which is attacked to adjust my position to negate downside risk rather than buy long puts.
I will also reduce my position from say 10 lots to 3 lots, thus reducing my delta exposure.
If the market continues to fall and breaks through a support level I will convert my Condor into a butterfly by squaring off my call side. But if the market reverses I will not shy away to reconvert it to an Iron Condor.
My adjustments start when the deltas of the short strike increase by around 7-10 points. I take three adjustments but if Nifty goes 100 points away from my short strike I will close my position. Instead, I will double the size and take a credit spread.
If the stop is not hit then I am out of the trade either if the expiry is seven days away or my profit target of 3 percent is achieved. With the increase in margins recently the profit margin has come down a bit and so is my risk.
If I take the trade 40 days before expiry, then the holding period on an average is 20 days.
I also make adjustments when the trade is in profits to reduce the risk and protect my profit.
I lean a bit short delta as this is a Short Vega trade to reduce my Vega risk.
The second strategy is a Delta Neutral Butterfly.
It is basically a broken wing butterfly taken behind the market. It is a risk-averse strategy that is resilient to huge market moves on either side.
There are two set-ups depending on where the IVs are. The motive is to maintain a really flat T+0 line without deploying additional capital to the trade. I have pre-defined Delta and Vega guidelines - whenever they are met adjustments are made in the trade.
Drawdowns in the strategy are very less – last year it gave two loss trades of 1-1.3 percent while the winners yielded 2-2.5 percent.
Adjustments typically could be shifting long and short options, buying verticals, rolling the entire spread to be slightly short delta or as close to delta neutral as possible. This strategy is ideal for huge capital.
The third strategy I call it Long Vega 1. This is basically a calendar spread with my risk management principal. Here I initiate a calendar spread which is little OTM. In this strategy, I hedge the Greeks by taking a long Delta position against long Vega.
If the market moves a lot in any direction I follow it like a centipede. If Nifty moves by 150 points either up or down I will make an adjustment and shift few of my original calendar spreads to a new strike price OTM. The great thing about this trade is that you are in an out really fast. So if you have taken a trade 30 days to the expiry of the short strikes you are going to be out within 12 days.
The fourth strategy is Long Vega 2 which can be traded in all IV environments. It is the most adaptable strategy in my kitty. It can be traded as a standalone strategy and as a hedge for a low IV Iron Condor.
Here the structure is a short strangle near month and a long strangle for the next month. This could be a debit or credit spread depending on the IVs and selection of the long strikes.
The next strategy is known as Triplets.
I scale into the trade by initiating an OTM Put Butterfly and follow the market by creating a new position every time the market goes up by 150 points. I do this till there are three Put Butterflies in place. Now if the market again goes ahead I will take the first one out and create the fourth one.
This way there is a maximum of three Butterfly positions. This trade is taken 30-40 days before the expiry and works well in bearish, neutral and moderate bull markets. The only time this doesn’t perform at par is in an out and out a bull run without any pullbacks.
The great thing about this trade is am not worried about my risk on the downside and only focusing on the upside risk. It gives me a huge range on the upside skewing the probabilities in my favour of emerging a winner.
Finally, the last strategy is a Ratio Condor with a Delta Neutral Structure. This strategy, as discussed earlier, benefits from a Black Swan event or a huge gap down opening. In case the market goes up by say around 3-5 percent my maximum loss would be 0.5 percent or lesser.
Of course, black swan events are rare and such anomalies don’t happen on a daily basis- so we have a Delta Neutral Structure where we make money within a range.
I scale into my position. The good part of this strategy is that 15 days into the trade if the market is in the range, I am sitting in a position with no loss, I am basically playing with market’s money. This condition lasts until seven days before expiry by when I close my position.
Q: What about the Weekly Bank Nifty strategy you mentioned earlier
A: I allocate a small capital for this strategy. Here I initiate a trade on the Bank Nifty on Friday afternoon. It is a Ratio Butterfly trade but requires me to have a view on the market.
If I have a bearish view and I create a position, I will be collecting theta for Saturday and Sunday. If the market opens on Monday around Friday closing levels I will be up by less than one percent. But if it opens lower as per my expectation I will be up by 1.2 percent. Only in case if the market gaps up on Monday by say 3.5 percent I would be losing 1 percent.
I can then decide to either square off my position or make risk management adjustments, which would be rolling out my position to new strikes of the same expiry.
I square of this trade latest by Tuesday afternoon. My sweet spot in trade is when on Tuesday the market is 1.5 to 2 percent against the spot price at which the trade was initiated. At my sweet spot, I would be at least 2-2.5 percent up.
Q: How did movies help you in trading or how did trading help you in your movie career.
A: Both fields are completely different but there is a tinge of similarity.
With both trading and acting there is a certain kind of risk that keeps you on the edge. We put our heart and soul into a project, anticipating the outcome and hoping for fruitful results.
Although I must say, with time I’ve come to realise that if we understand the economics of the business in which we are engaged, there is no “real” risk. Because ultimately it’s how you tackle the situation and make the most of it.
I think options trading has made me more fearless and confident as an individual. It has taught me to be more patient in this fast-paced world where we look for instant results. But like they say if you want to learn anything great, patience is key. We need time to achieve our goals, especially big goals. So the key here with my strategies is the right skills and patience.
Gaining knowledge and educating yourself in the field of interest is essential, which is why I came up with this one of a kind mentoring session to guide other people to trade options in the most risk-averse way.
It is an initiative that I have recently started through powertechfunds.com where I mentor future traders. It is a one-on-one personalise mentoring program where I share my strategies in the live market and teach my risk management approach.