19% fall in stock price results in 6500% gain in Put Options
Eddie Choi, a punter who hangs out at a reddit forum named wallstreetbets with the user name TheTriviaTribe, has raked in a massive fortune by buying put options of a company named ‘Roku‘.
Roku, a company listed on NASDAQ, is notorious for wild fluctuations in its stock price.
It is common for its stock price to surge and plunge a few percentage points in the course of a day.
Eddie Choi exploited this characteristic of the stock to his advantage.
He bought a truckload of Put Options of Roku by investing a sum of $766 (Rs. 57,000).
Because the puts were “Out of Money” and expiry was just a few days later, the options were available at a throwaway price.
To Eddie’s good luck, Roku slumped 19% on 20th September.
This slump caused the value of the put options to balloon.
Eddie’s puts were now worth $50,553 (Rs. 35.89 lakh), translating into a mind-boggling gain of 6,500% overnight.
A guy on Reddit turned $766 into $107,758 on *two* options trades https://t.co/zHWk0W7jhC
— Bloomberg (@business) October 19, 2019
Winnings invested in buying Puts of S&P 500 ETF
Eddie proved that his success with Roku in not a flash-in-the-pan.
He invested the proceeds in buying Puts in the S&P 500 ETF of the strike price $297.
When the ETF slipped from $297 to $295.87 on 24th September, the Puts doubled in value.
“I’m naturally a risk-loving person,” Eddie admitted candidly.
Don’t be Bull or Bear, follow the trend
Eddie was grilled by his followers as to how he achieved the enormous success and to reveal the secret formula.
He was quite humble and credited his success to “luck“.
“You could be the best trader in the world, but a win like this involves a lot of luck,” he said.
“Long term trading involves a lot less luck than short term trading,” he added.
He also explained that he bought options expiring the next day that were almost worthless when he bought it, and the price dropped 20%.
“It doesn’t mean that I didn’t have a reason for buying it, but there’s a lot of luck involved with it,” he said.
He also advised his followers not to be defiant about being a “Bull” or a “Bear” but to flow with the trend.
“I’m not bull or bear. I follow the overall market and some stocks, and decide if I’ll be bear or bull for the next day to week for the overall market or a specific stock,” he said, displaying immense sagacity.
When to buy options
It appears that the best time to buy options (whether Call or Put) is when a big event is expected.
If the Indices surge, the Call Options will surge in value.
On the other hand, if the Indices plunge, the Put Options surge in value.
So, traders should load up on Call or Put Options, on the eve of a big announcement, depending on whether their view is Bullish or Bearish.
For instance, on 20th September, when Nirmala Sitharaman announced the epoch tax reforms, the value of Nifty and Bank Nifty options surged up to 40x in just an hour.
A paltry sum of Rs. 50,000 would have surged to a fortune of Rs. 1 crore.
Today is the day of option porn . How some Bank Nifty and Nofty calls went 10X to 40X in 1 hour . #NirmalaSitharaman
— Rajiv Mehta (@rajivmehta19) September 20, 2019
Rs.50K in Banknifty Call options would have fetched you 1Crore plus today.
— E. (@EngineeRoholic) September 20, 2019
Similarly, on 26th September, the Bank Nifty Call Options surged 10x, giving mind-boggling gains to its holders.
Nifty Bank Call options up more than 10x today
30600 up 14x
30400 up 13.6x
30500 up 13.4x
30700 up 12.1x
30300 up 12x— Jayesh Khilnani (@jayeshkhilnani) September 26, 2019
It goes without saying that option traders should have nerves of steel and lightning fast reflexes.
On 26th September, a 30500CE Bank Nifty Call Option surged from Rs. 3 to Rs. 680 in the course of just a few minutes before plunging back to Rs. 178.
Even at the price of Rs. 178, a massive gain of 1180% was on the table, waiting to be harvested.
Obviously, fortunes can be made or lost in such moves.
That's brutal 3 RS to 680 ?#BankNifty #OptionsTrading pic.twitter.com/bQVsHKmxpn
— Vishvesh (@Vishvesh03) September 26, 2019
Precautions to be taken when buying options
Options suffer from a serious affliction known as “time decay“.
So, buying options when the Indices are sluggish or on the eve of a weekend or holiday can be disastrous because they lose value every day.
So far theta decay as expected. Today is not a day for option buyers ?
— Subhadip Nandy (@SubhadipNandy) June 4, 2019
Also, IV or ‘Implied Volatility’ plays an important part in the pricing of options.
Options should be bought when the IV is low because the options will be cheaper.
Their value will increase if the IV increases.
Options traders are always looking at the IV and IVR/IVP. For option
buyers, a low IV environment is best to initiate positions as the
subsequent rise in IV actually helps their positions . Even if the IV
remains flat, the position is not hurt by volatility (4/n)— Subhadip Nandy (@SubhadipNandy) September 20, 2018
We should also ensure that we have a trading plan and that we respect risk and position size.
Traders are blaming #Banknifty for their capital losses, where as the main reason behind most of these losses are overtrading and big position size.
Traders are addicted to trade when they see big moves and they forget their trading strategy.#Trading #Banknifty #Nifty
— Vikash Shrivastava?? (@VikashS28) October 13, 2019
Trade carefully.. This market is trading like a Mad Elephant.
Don't do anything foolish, protect your capital or will regret later..#Nifty
— Vikash Shrivastava?? (@VikashS28) October 11, 2019
Don't trade just because market is open to trade. Wait for a proper trading setup.#Nifty
— Vikash Shrivastava?? (@VikashS28) October 9, 2019
Why 80% option buyers lose money?
According to some experts, buying options is akin to a “lottery” or a “hero ya zero” gain.
This happens because most traders buy options in a random manner and without a game plan in place.
Nitin Bhatia, an expert in the subject, has highlighted the seven major mistakes that option traders commit.
These mistakes are the following:
1. The key to success for option buyers is to track the activities of the option writers i.e. how they are taking a position in the derivatives segment. The reason being, the loss of option buyers is limited whereas the losses of option writers are unlimited.
2. Option buyers think that if they buy deep OTM or out of the money option then their loss will be less because it is cheap. However, the option premium is directly proportional to the probability of hitting the strike price.
3. Option buy can be profitable in the highly volatile market that can be checked with the help of India VIX.
4. The best time to trade derivatives or options is between 1st and 3rd week i.e. before the expiry week. By doing this, an investor can avoid the loss due to time value decay.
5. Option buyers should put stop loss to minimize the loss.
6. With the help of technical analysis, you can find out whether the option is overpriced or underpriced.
7. There is no alternative to learning. Option buyers should gain knowledge of how derivatives segment work then only they can do perfect option chain analysis.
Sunil Minglani, also an expert, has explained the ‘ABCD’ of options trading in which he has highlighted the nuances of the subject.
Conclusion
It appears that if we can master these elementary but essential techniques, we can also become option traders and be on the road to riches and prosperity!
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