A Unique Options Selling Strategy #Face2Face with Akshay Bansal

Understanding Options Trading and Success Strategies

Introduction to Alpha in Trading

• The speaker emphasizes that while one can achieve Alpha in the market, it is crucial to focus on personal conduct and strategy.

• A specific example is given with a strike price of Rs.25,200, indicating that no price has been achieved yet in intraday trading.

• A report from SEBI reveals that 93% of traders are losing money, prompting a discussion on how to approach trading differently.

Embracing New Technologies

• The speaker questions what would happen if one were to do the opposite of what the majority does, especially considering advancements like AI and ML.

• An invitation is extended for viewers interested in options trading to watch the video until the end for valuable insights.

Guest Introduction: Akshay's Background

• Akshay, a guest from Delhi known for posting verified profit/loss statements on Twitter, is introduced as an expert in options trading.

• The host expresses excitement about learning from Akshay regarding successful trading strategies and mental preparation during tough times.

Akshay's Journey into Trading

• Akshay shares his background, mentioning he had done his homework before entering the market during COVID but acknowledges being labeled a "COVID trader."

• He reflects positively on COVID as a time when many traders gained valuable knowledge and skills through education provided by others.

Educational Background and Career Path

• Akshay discusses his educational journey starting with schooling in Delhi followed by engineering studies at Penn State University.

• After graduation, he pursued financial planning certification due to challenges finding employment in the US post-graduation.

Entrepreneurial Ventures

• Following his education, Akshay ventured into entrepreneurship by establishing a manufacturing unit for liquid egg products after returning to India.

• His business became successful as it was innovative within India; however, he exited this venture around late 2018 to explore new opportunities.

Transitioning Careers

The Journey from Job to Trading

Initial Job Experience

• The speaker reflects on their brief job experience, lasting only five months, indicating a lack of inclination towards traditional employment.

• Upon receiving their first paycheck, the speaker felt excitement and motivation to invest, marking a pivotal moment in their financial journey.

Early Investment Insights

• Initially investing in high dividend-paying stocks like PSU companies, the speaker anticipated significant long-term gains but soon realized that immediate returns were limited.

• Despite investing amounts like 10,000 to 20,000 INR, the slow growth was discouraging; however, it sparked curiosity about making investments more exciting.

Introduction to Options Trading

• The speaker's introduction to options trading came through a friend who showcased potential profits from buying options.

• After experiencing losses in option buying and recognizing the zero-sum nature of the market, they shifted focus to understanding market dynamics and identifying successful sellers.

Understanding Market Dynamics

• The realization that sellers hold power in the market led the speaker to explore new business opportunities beyond traditional manufacturing sectors.

• With a technology-oriented background, they began conceptualizing how markets operate based on defined movements (upward, downward, or flat).

Transitioning to Algorithmic Trading

• The speaker recognized that markets could be analyzed scientifically and mathematically; this insight laid the groundwork for algorithmic trading development.

• Unlike many traders who transition from discretionary trading to algo trading, the speaker started with algorithms before moving into discretionary methods.

Learning and System Development

• Engaging with educational content on platforms like YouTube helped refine their understanding of selling strategies amidst prevalent noise in financial education.

• Inspired by Tasty Trade's content, they emphasized creating mechanical systems for trading as essential for success. This learning phase occurred around late 2019 into early 2020.

Building an Algorithmic Strategy

Understanding Intraday Trading and Hedging Strategies

The Concept of Short Strangle and Capital Protection

• A short strangle involves selling a far call and a far put simultaneously, emphasizing the importance of capital protection in trading.

• It is crucial to keep investments hedged to avoid significant losses during market fluctuations.

Managing Stress in Trading

• The speaker emphasizes the removal of stress related to gap-up or gap-down scenarios by focusing solely on intraday trading.

• Delegation is highlighted as essential for effective business management, allowing traders to concentrate on fewer tasks.

Delegation and Mastery in Trading

• By delegating responsibilities, traders can focus on mastering 4-5 key areas, leading to expertise in specific niches.

• The speaker notes that their system was designed to eliminate overnight risks, allowing them to capitalize on intraday opportunities.

Lessons from Market Volatility During COVID

• During the volatile market conditions of March and April due to COVID, the strategy of not exiting buy legs proved beneficial as they remained profitable while sell legs were squared up.

• This experience reinforced the necessity of hedging against wild market movements for future trading strategies.

Importance of Options Trading Strategy

• The discussion stresses that options trading should be approached through spread trading rather than single-leg trades to mitigate risk.

• Overconfidence can lead beginners to make large trades that may result in significant losses; thus, maintaining discipline is vital.

Portfolio Management and Long-Term Goals

• Each trading strategy should align with a fixed portfolio target rather than just individual trade targets for better long-term planning.

• Establishing a 25-year goal helps break down daily targets necessary for achieving larger financial objectives over time.

Compounding Gains Through Retention

• Emphasizing retention of profits is critical; understanding how to lose money effectively contributes significantly towards eventual growth through compounding returns.

Personal Insights: Balancing Life and Trading

• Engaging in activities like trekking helps maintain humility and perspective away from the noise of financial markets.

Trading and Life Philosophy

The Nature of Trading and Personal Connections

• The speaker reflects on a past conversation about availability, highlighting the irony of both being in Mara at the same time despite scheduling conflicts.

• Emphasizes the importance of connecting with nature for a holistic and successful life as a trader, suggesting that true "Alpha" comes from personal conduct rather than market strategies.

Strategy Beyond Trading

• Discusses insights gained from a lengthy conversation with Asit Baran, focusing not on trading strategies but on broader life strategies.

• Introduces the concept that actual trades represent only 20-30% of a trader's responsibilities; the rest involves self-conduct to ensure sustainability in trading.

Challenges of Trading Life

• Acknowledges the loneliness and mental challenges faced by full-time traders, emphasizing how uncertainty permeates both life and trading.

• Shares a poignant story about Deepak Thakkar, an active young trader who passed away unexpectedly, underscoring life's unpredictability and its impact on traders.

Motivation and Freedom in Trading

• The speaker expresses a desire for motivation rooted in achieving time and location freedom through trading rather than being confined to an office environment.

• Highlights how trading offers flexibility compared to traditional jobs, allowing for easy entry and exit while maintaining profitability.

Technology as an Ally

• Discusses using technology to track performance, revealing he can take up to 109 days off based on his financial targets.

• Clarifies his role as a discretionary trader utilizing technology as a co-pilot rather than being registered or commercializing his activities.

Core Principles of Trading

Pillars of Successful Trading

• Outlines three foundational pillars: mental discipline, long-term compounding, and capital preservation—essential for sustainable trading success.

Transitioning from Algorithmic to Discretionary Trading

• Describes his journey from algorithmic trading to discretionary methods due to technological background; emphasizes adaptability in strategy.

Mechanical Systems Development

• Reflects on creating mechanical systems over four years that adapted well across various market conditions while remaining profitable.

Balancing Strategies

Understanding the Role of Algos in Trading

Limitations of Current Algos

• The speaker emphasizes that current algorithms (Algos) are not intelligent and serve merely as execution platforms, highlighting a significant limitation in their capabilities.

• Despite advancements, the speaker notes that they have not been able to develop intelligent Algos, leading to a decline from 80% effectiveness to 0% in terms of execution.

Decision-Making with Algos

• The discussion shifts to how traders might enter positions contrary to Algo exit signals, suggesting a high probability of profitability based on historical performance.

• A decision support system is introduced, indicating that while traditional Algos may be absent, other tools can guide market decisions.

Tools for Market Analysis

Utilizing the Bell Curve

• The speaker mentions using three primary tools for market analysis: option chain data, news updates, and statistical models like the bell curve.

• A bell curve representing Nifty's movements over three years is discussed; it indicates that Nifty typically moves within 1% up or down about 83% of the time.

Implications of Statistical Data

• Understanding these statistics allows traders to make informed decisions; if positioned 1.5% away from expected movement, they have an 83% chance of being correct.

• The speaker clarifies that this bell curve remains consistent over long periods but acknowledges minor fluctuations in percentages.

Analyzing Market Sentiment through Option Chains

Importance of Option Chain Data

• The option chain is described as a "Holy Grail" for understanding market sentiment and forming trading views despite its lagging nature.

• Traders interpret the put-call ratio (PCR), where a PCR around 1 suggests neutrality in market expectations; deviations indicate bullish or bearish sentiments.

Interpreting PCR Values

• A PCR below 0.6 signals strong bearish sentiment; however, such values often reflect either prior market moves or upcoming trends.

• The discussion highlights the importance of considering all options rather than limiting analysis to just a few strikes for accurate market insights.

Strategizing Trades Based on Insights

Probability-Based Trading Decisions

• By analyzing both PCR and historical movement data from the bell curve, traders can achieve high probabilities (upwards of 85%) for successful trades.

Market Analysis and Options Trading Strategies

Market Movement and Probability Insights

• The market has already fallen by 0.5%, with an 83% probability of staying within a 1% range, and a 94% chance it won't fall more than that.

• There is an emphasis on option selling due to time decay, suggesting that even if the market falls, one should consider selling out-of-the-money (OTM) puts as premiums have inflated.

Trading Philosophy: Trend Following vs. Contrarian Approach

• The speaker advocates for selling puts when the market is falling, highlighting that this approach aligns with their trading philosophy of following trends rather than opposing them. They argue that understanding probabilities is crucial in making these decisions.

• Acknowledging inflated put premiums during a market drop allows traders to capitalize on potential gains while managing risk through limited capital deployment (20%).

Entry Points and Risk Management

• Traders should only enter positions when options have increased significantly in value (100-200%) due to initial market movements, ensuring they are not overexposed at entry points.

• The strategy includes monitoring implied volatility (IV) levels; trades should be executed when IV is high or very high to enhance probability of success. This can add up to 2-3% to the trade's probability metrics.

Understanding Implied Volatility and Historical Context

• Current IV being far from historical averages indicates higher chances of successful trades; traders need just one favorable price movement after selling puts for significant profit capture.

• The discussion emphasizes the importance of differentiating oneself in trading strategies since many investors follow conventional methods leading to losses; thus, unique perspectives are necessary for success.

Observing Open Interest Changes

• Monitoring changes in open interest (OI) provides insights into market sentiment; if put sellers remain active despite falling prices, it suggests confidence among larger players which can increase trade probabilities by about 2%.

• If OI shows signs of sellers exiting during a downturn, it may indicate further declines ahead, prompting traders to wait before deploying additional capital into positions.

Real-Time Data Utilization Challenges

• Although OI data updates with a slight delay (3 minutes), this timeframe still allows traders to react effectively as all participants receive information simultaneously; hence it's considered real-time for practical purposes.

Understanding Option Pricing and Trading Strategies

The Basics of Options

• Discussion on the importance of subscribing to tools for trading, emphasizing that presenting data is a key responsibility.

• Explanation of option premiums, intrinsic value, and extrinsic value; highlights the significance of out-of-the-money (OTM) options in trading strategies.

Volatility and Market Insights

• Insight into how VIX (Volatility Index) influences option pricing; understanding safe strike prices based on market volatility.

• Emphasis on developing a trader's intuition through experience rather than relying solely on AI or algorithms.

Learning Through Observation

• Description of training new traders by having them observe option chains continuously to internalize premium movements.

• Comparison between modern technical analysis and traditional tape reading as foundational learning methods for traders.

Simplifying Trading Approaches

• Advocate for simplicity in trading strategies; the speaker claims they do not rely on charts due to their extensive experience.

• Discussion about the necessity of understanding indicators and time frames but emphasizes finding personal comfort levels in strategy execution.

Position Sizing and Risk Management

• Importance of recognizing open interest levels in options as indicators of market sentiment; identifying "gatekeepers" where significant money is involved.

• Assurance that with high probability setups, traders should feel confident taking positions without stress.

Practical Examples and Daily Goals

• Example illustrating how probabilities can guide decision-making in options trading; confidence in achieving profit targets based on gut feelings backed by data.

• Strategy discussion regarding selling options at specific strike prices while considering market dynamics like put-call ratios.

Conclusion: Consistency Over Complexity

• Reinforcement that successful trading does not require daily complexity but rather consistent small gains over time.

Investment Strategies and Realistic Returns

Setting Realistic Expectations for Returns

• The speaker emphasizes the importance of not aiming for unrealistic daily returns like 1200, 2000, or 5000. Instead, they advocate for understanding percentage returns similar to renowned investors like Warren Buffett, who average around 18-20% CAGR.

• The speaker questions what makes individual investors believe they can achieve returns of 40% or 60%, highlighting that even industry giants struggle to exceed a 20% return.

• They suggest keeping expectations lower than the market leaders and express a personal target of achieving a CAGR of 17.5%, acknowledging their limitations compared to top investors.

Stress Management in Trading

• The discussion shifts to intraday trading and its associated stress. The speaker argues that higher returns often come with increased stress levels, which may not be worth it.

• They propose a long-term investment strategy where consistent small gains (7-7.5%) can lead to significant portfolio growth over time without the stress of day-to-day trading.

Data-Driven Decision Making

• The conversation transitions into how data can aid in making informed trading decisions. Understanding metrics such as Nifty's lot size and margin requirements is crucial for effective trading strategies.

• A risk management approach is discussed where hedging positions are taken at least 300 points away from the current market position to minimize potential losses while maintaining capital safety.

Profit Expectations and Trading Days

• The speaker outlines profit expectations based on monthly performance, suggesting that achieving just a small percentage gain (2%) monthly is already better than many well-known investors.

• They calculate potential profitable trading days in a year, estimating around 185 days after accounting for holidays and loss days, emphasizing realistic planning based on these figures.

Strategic Entry Points in Options Trading

• A strategy involving partial capital deployment (e.g., only using 20% of available funds for trades) is recommended to manage risk effectively while still targeting achievable premiums per trade.

• Emphasis is placed on capitalizing during expiry days when options prices may yield higher profits; however, this requires patience rather than seeking immediate large gains every day.

Long-Term Career Building in Trading

Investment Strategies and Compounding Insights

Understanding Average Price and Capital Deployment

• The speaker discusses the impact of deploying 20% capital at a 40% price, which increases the average price by 1 rupee. This adjustment also reduces the profit requirement from 5 rupees to 4 rupees, enhancing the probability of achieving profit.

• By increasing capital deployment to between 40% and 60%, traders can create higher probability trades. If market conditions worsen without any favorable movement, having a stop-loss (S&L) strategy is crucial.

Portfolio Goals and Rule of 72

• The importance of setting portfolio goals and timelines is emphasized, referencing the Rule of 72 from the 1500s that helps estimate how long it will take for an investment to double based on its return rate.

• With a risk-free interest rate in India at approximately 7.2%, applying the Rule of 72 indicates that investments in fixed deposits (FD) would double in about ten years.

• If returns increase to around 14.4%, portfolios could double in five years; with a target return of about 17.5%, doubling occurs roughly every four to four-and-a-half years.

Compounding Effects Over Time

• Over a span of twenty-five years, assuming six doubling cycles, an initial investment of ₹1 crore could grow significantly through compounding—reaching ₹64 crores at a consistent return rate.

• The concept of personalized inflation is introduced; as lifestyle improves, personal inflation rates may rise above general economic inflation rates, necessitating adjustments in expected returns.

Evolving Investment Strategies

• As capital grows (e.g., reaching ₹10 crores), opportunities for higher returns also increase; thus, expected returns may shift from an initial target towards more ambitious goals due to improved skills and discipline over time.

• The speaker reflects on their journey from generating modest monthly returns (1%) to achieving up to 4% monthly growth through disciplined trading practices and skill enhancement.

Adapting to Market Changes

• Acknowledging potential plateaus in investment growth encourages proactive strategies for maintaining or improving returns without inflating personal expenses unnecessarily.

• Sharing personal experiences with commodity trading reveals initial high returns (35%-40%) that eventually flattened out but emphasizes ongoing market opportunities for new assets like currencies or high-frequency trading (HFT).

Exploring New Markets

• The discussion highlights the necessity for adaptability within investing; exploring new markets such as crypto can provide additional avenues for growth if approached with caution regarding volatility and loss tolerance.

• Emphasizing disciplined exploration into options trading has led to consistent profitability over one or two years due to understanding market mechanics better than before.

Continuous Learning and Realignment

• As investments evolve into different asset classes like crypto or US markets, maintaining discipline while adapting strategies becomes essential for sustained success across various platforms available throughout different time zones.

Internal Dashboards and Goal Management

Importance of Internal Dashboards

• The speaker emphasizes the role of internal dashboards built over several years to maintain focus on goals, discipline, and market engagement.

• These dashboards help in assessing risk levels and setting long-term financial targets, with a specific goal of achieving 17.5% growth over 25 years.

Financial Expectations and Performance Tracking

• Current profit expectations indicate a need to generate Rs. 1,09,000 daily; however, there is an excess of 148 days available for achieving these goals.

• The speaker notes that while having extra time is beneficial, it does not equate to complacency or lack of effort in trading activities.

Team Dynamics and Technology Integration

Adapting to New Technologies

• Discussion on how the team is preparing for advancements in AI and ML for improved decision-making rather than execution at this stage.

• The team consists of five members: two traders and two developers, along with an internal manager ensuring alignment with their objectives.

Remote Work Structure

• All team members work remotely from different cities across India, demonstrating effective collaboration without a physical office space.

• The speaker believes that discipline comes from within rather than being dependent on a traditional office environment.

Engagement and Future Planning

Networking Opportunities

• The speaker invites connections via Twitter (@OptionsIndiaAB) and LinkedIn for further discussions about trading strategies and insights.

Long-Term Planning Advice

• Emphasizes the importance of creating a personal 25-year plan as a foundational step towards achieving future goals in trading or any profession.

• Highlights that each individual must develop their own framework based on personal insights rather than merely copying others' strategies.

The Artistic Process of Trading

Creativity in Strategy Development

• Concludes by stating that developing trading strategies is an artistic process requiring creativity and personal insight tailored to individual needs.