Having trained under the best in the world, Pran Katariya a businessman-turned-trader applies his learning to successfully trade the options market using an unique strategy.
Very few people in the world are good at almost everything they do. Pran Katariya is one of them. A chemical engineer from IIT Delhi, Katariya is also a chartered accountant. Since he did not like the idea of working on the shop floor he joined his family business and managed it for a number of years.
But this is not something that makes Pran Katariya unique. He was also a national level ranked table tennis player and loves his music, especially old Hindi movies. He organises stage shows across the country under the name Klub Nostalgia which is also a very popular channel on the YouTube. The shows are generally for charity with a recent one done for war widows.
Besides this Katariya is a successful individual trader who trades large position, managing his family money. But like every trader, Katariya also had to go through the tough learning phase in trading. Rather than struggling it out, the table tennis player in him decided to take the best training possible. He went to the US to be trained under the best.
In an interview to Moneycontrol, Pran Katariya talks about the training he received and his unique trading strategy.
Q: How did your trading journey start?
A: I was dabbling in shares even while I was running our family business. By 2005 I decided to go full time into trading. I took some training in technical analysis and started trading. But in those initial years, every time I used to lose Rs 30,000 – 40,000 I would stop trading for the next 2-3 months and recuperate.
Even in those days there was a plan in my trading but the psychology needed to execute was missing. I used to be shaken up by a series of losses. The intermittent win-loss phase continued for a couple of years. I then realized that this was not working for me and I needed professional help.
I went to the US and got trained with the best. I enrolled for a course with SMB Capital founded by Mike Bellafiore author of One Good Trade and The Playbook, for a structured program in trading. I also went through the course offered by the famous Dr. Van Tharp.
SMB has a very intensive and structured training program where they take you through the entire trading process. We worked from 6.00 in the morning to 9.30-10.00 pm every day. Those under training were attached to one of the 6-7 super traders who were all multi-million dollar traders.
Every morning the super traders came up with a list of what was called ‘stock in play’. These were based on analysis and certain setups which picked up stocks that the team felt was likely to see increased activity during the day. The team leader would then discuss it with his team and how they should handle it.
These were generally intraday or swing trades which the traders held for 2-3 days. I was not comfortable with this trading style. One day, during lunch Seth Freudberg who was heading the options desk asked me if I had ever traded options. Since I had not he asked me to try it out.
I took to options more easily and learned many commonly used and proprietary strategies used by traders in SMB Capital under the mentorship of Seth.
Dr. Van Tharp’s training helped me with the psychology aspect. The training session helped in analyzing myself, to understand my strength and weakness. It helped clear up the path in for me in knowing what kind of trades I can do and what I cannot. For me one of the main takeaways was I knew what not to trade. Another important thing I picked up was the importance of position sizing.
These training helped cut down my learning curve by at least 3-4 years.
I traded the US markets for nearly two years and along with it the Indian markets. However, I soon realized that trading options in Indian markets are different than that in the US markets. Strategies that worked very well in the US markets were not giving the desired returns in India.
The main reason for this is the strange margining system we have in India. In a defined risk strategy, say a spread, the margin to be paid in the US was the spread between the strikes, but in India complete margin on both the legs of the trade is needed. This makes a number of strategies like the butterfly or the Iron Condor unattractive.
As trading both the US and Indian markets was stressful I decided to hone my skills in the Indian market.
Q: Coming from a business family and running the business for many years wasn’t investing a natural transition than trading?
A: I look at trading as a business and approached it as such. I put in the hours needed, got the best training in the world and invested in the best systems.
Trading like any other business has a very small success rate. Nearly 98 percent of businesses and traders fail in the first few years. In trading, only about 0.2 percent of the people might be making a good living out of it. If you are true to yourself, within a year or two you would come to know if you will be successful.
Q: After learning from the best, what is the strategy that you mainly trade?
A: I do all kind of trades but my focus is on income trading. This form of trading generates a steady monthly income. The idea is to take the same type of trades every month and earn a steady income.
I mainly trade an income generating strategy called Weirdor, it is also known as the Jeep strategy because of the shape of the payoff diagram that represents a jeep. The trade is taken in tranches.
It would be better understood with an example. If the Nifty is trading at say 10,600 I would sell 10 lots of every out of the money put, say the 9,600 put. For every 10 put I sell, I will buy 1 put that is slightly closer. So in this case I would buy one 10,100 put. Then in order to make the trade delta neutral I would sell 2 call options which can be around 11,100/11,200.
I prefer this strategy over the strangle because the breakeven in Weirdor is wider and a small move or day-to-day volatility in the market does not impact the trade. Its T+0 line (the movement of the underlying on the same day that can impact the value of the trade based on Option Greeks) is flatter than that of a strangle. However, the return on investment is slightly lower, but so is the risk in the trade. In the case of Nifty, a 200-250 points move will not impact the Weirdor trade.
Furthermore, adjustments in the Weirdor is simpler and more cost effective. In case the Nifty falls by say 100 points all I have to do is buy one more put which would bring my breakeven point lower by 100 points. I do such adjustments 2-3 times. I trade the Weirdor on the Nifty where each tranche has a potential of generating Rs 25,000 – 30,000. If the delta is not getting adjusted or if the loss is double of the reward then I would take the loss. You have to be clinical in taking naked strategies.
In case the market moves higher, I would simply move the put side higher and come out of the call options that were written earlier.
Q: What about other income strategies that you take?
A: I also trade strangles as part of the income strategy, but not on the weekly Bank Nifty. What kills you in a naked strategy are the gap openings. In the case of Bank Nifty, a move of one standard deviation would mean a move of 500-600 points. This kind of move happens very frequently these days.
When I used to trade Bank Nifty strangle, even on low volatility I was trading a 2,000 point widespread and getting Rs 180 on it, which was roughly 5-6 percent return on investment. In the high volatility environment as seen in September and October, the same spread of 12-13 deltas wide was 3,000 points wide.
In the case of Nifty, I ensure that I am at least 400 points away. What I look for is time to be on my side before I place a trade. I normally place my trade 40 days before expiry.
It is said that there are two certainties – death and taxes. But when it comes to options there is only one certainty – time decay. Volatility and price cannot be predicted so you need time and distance to make adjustments to your trade. Wide distance between the call and put options helps you keep your losses small even if there is a fast move.
Take the case of demonetisation which saw a 1,200 points move on the Nifty in a single day. My strangle trade was 1,600 point wide. I had sold the put at 130 which I covered at 390 and the call option which was sold at 90 went to zero. I booked a small loss and was comfortable in taking the loss.
In such situations, it is better to book your loss and stay out for a few days before taking the next trade. A recent incident where a hedge fund that was trading options got wiped because natural gas prices shot up could have been prevented by taking quick action.
For me, the sharp move in Bank Nifty a few months back was a testing time. The index moved 1,800 points from the point where I entered the trade. Adjusting almost on a daily basis by moving my put side forward I could save 200-300 points. But I had to go long on futures to save the overall position. I still managed to earn 3 percent in that trade.
The strangles that I trade is good for all implied volatility (IV) scenario. Many traders do not take strangle trades in low IV scenario but I have found out and confirmed it from traders in the US that low IV environment is more profitable.
Q: When do you book your profits, do you wait till the end of the expiry
A: I never wait till the end. I book my profit when I am getting 50-60 percent of the maximum profit potential. I also get out of my position seven days before the expiry irrespective of the fact that the trade is in profit or loss.
Q: What about your money management plan and how has been your win-loss rate?
A: I trade multiple strategies but I see to it that the pain point is not concentrated at one point. I spread my entries as well as trade on multiple underlying. Normally, I do not take more than a 4 percent risk on a Nifty trade but in case of a Bank Nifty trade, I would not exceed my risk by more than 2 percent.
At any point in time I have not more than 7-8 trades in the market and take about 15-16 trades in a month. Out of this, the win rate is generally 12-13 trades. I normally take a trade with an 80% probability of winning.
Q: You have been transparent in discussing your trade on Twitter (@katariyapran) but now you intend to start training, what prompted you to get into it?
A: There is a different level of satisfaction in training someone to become a consistently profitable trader. Making someone earn a living from trading. There are a handful of trainers in India who teach the income strategies that I do. Most are around speculative trading.
The aim is to teach traders not to trade for short-term. You need time and distance to be on your side to have a consistent income. If you have these two there is less chance of losing. One of the first thing that is needed to be learned by a trader is how not to lose or lose small. This can be done more efficiently in options by adjusting.Using income strategies it is possible to earn around 2-3 percent a month, but most people think this is small returns. The beauty about options is that I can put my cash in a liquid fund and use the fund as a margin. So the 3 percent per month return and a 6 percent annual return would mean a roughly 42 percent return per annum. This is enough to double your money every two years. What more does one need?