Another Name of Freedom: Option Trading

“Freedom to Be; Aazadi Dil Ki” was the tagline of one of the most successful ad campaigns of Pepsi during my teens. I never understood the real meaning of it then, but now I can relate to it really well. So much so that it feels like not just me but so many people around me share the same sentiment.

The feeling to be “free”, “choose”, “decide” and “live” is what one yearns for.

While in the past this seemed to be a characteristic of midlife or post retirement sentiment; but now a days it is something which is common across age groups and genders. Freedom from the routine 9 to 5 working, freedom from the rat race, freedom from the petty office politics, freedom from the glass ceilings which restricts the growth, freedom to do something different or new, freedom to allocate time as per one’s wish. Net – net we all want to be get back the ownership of our lives.

Lure for Low Hanging Fruits

In the process of getting this freedom, people resort to short cuts trying to catch hold of easy options. One such easy and potentially high risk option is stock markets. Again, this is a feature of bull markets. During such a market scenario money making becomes easy. This gives people a pseudo feeling about the ease with they can make money in the stock market. The problem here is the returns for a short time, (like one year, one month and at times one trade) is presumed to be perpetual returns.

This is generally the start of the biggest blunder. Things slowly build up from here as people start deploying money in stocks which they don’t understand, depend on tips, invest all the money in single stock, start using leverage: via futures and so on. The end target is not clear to people whether they investors or traders. They lack understanding of markets, don’t have any system or method, lack research, unaware of market dynamics and much more. The only sentiment which rules their decision is greed and not freedom. Till the music (bull market) is on, all this works and works really well, but when the bull market ends the pain is extreme.

Take Small but Firm Steps

A question that I am asked time and again by amateur traders is whether trading can actually be taught or is it a God gift. According to me it is a science and not an art, so it “Can Be Taught”. But like any learnings this needs serious patience and perseverance. Many traders gave up mid-way, cursing the markets to be manipulative or unhappy with their own skills. But clearly they needed more hand holding. It’s like if one wants to rise up the order in any field professional mentoring is needed. Even best of the companies have an advisory board with experts in relevant fields. So, when it comes one’s own money why refrain from taking professional mentoring before diving in. The cost of such mentoring is a very small part of the money you are risking.

To be a successful trader one needs to develop three things:

• Content
• Mechanics
• Discipline

Content is developing a system of trading. This consists of various models through which you can analyze the markets and base your trades on it. Trading in such a way can be scientific and unbiased because they are based on certain back tested rules and systems. That’s the primary thing one needs to develop. Not having a system is like driving a car with a blind fold. You never know where you are going.
A rule based system creates a method to decide, when you would trade, how much you would trade, what can go wrong in your trade, when to exit, how much risk you are carrying in a single trade and the portfolio as a whole. It creates system which gets smarter by the day and based on the market structure is able to initiate trades. To build such a system one needs professional mentoring.

Mechanics tells you about the market mechanics. How the market functions? The rules and regulations governing it. It helps you understand if there are any lacunas and what one needs to be careful about. For instance, you bought an option which ends ITM and you have not sold it, the STT would be cash STT on the exposure amount. This amount can possibly be more than your gains. Not knowing market mechanics can seriously hurt your trades. Also, one needs to understand the different types of market participants and their strategies. This gives a clearer understanding about how the marker functions. Again such things have to be taught or relevant information has to be shared which needs professional help.

Discipline is following all the steps and methods meticulously. You must attain discipline if you ever hope to achieve any level of trading success. Trading discipline is practiced 100% of the time, every trade& every day. Probably this is one thing which cannot be mentored. It can be stated and then onus is on the individual to follow it diligently. You must condition yourself to behave with discipline over and over again. There are some rules which we can share and you can have it as your standard operating procedure. If necessary, read through the rules every day before the trading session begins. It doesn’t take more than three minutes to read through them. Think of the exercise as praying – reminding you how to conduct yourself throughout the trading session.

• Market pays you to be disciplined.
• Be honest, if you are not 100% disciplined, don’t claim to be so.
• Lower your trade size, when you are trading poorly.
• Never turn a winner into a loser.
• Your biggest loser can’t exceed your biggest winner.
• Develop a methodology and stick to it. Don’t change it day to day.
• Be yourself, don’t try to be someone else.
• You always want to be able to come back and play the next day.
• Earn the right to trade bigger.
• Get out of your losers.
• The first loss is the best loss.
• Don’t hope and pray.
• Don’t worry about the news, its history.
• Don’t speculate.
• Love to lose money.
• If your trade is not going anywhere in a given timeframe. Exit.
• Never take a big loss.
• Make a bit each day.
• Hit singles; not necessarily boundaries.
• Consistency builds confidence and control.
• Sweat out your winners.
• Make the same type of trades over and over again.
• Don’t overanalyze. Don’t procrastinate. Don’t hesitate.
• All traders are created equal in the eyes of the market.
• Market is always right.

Happy Trading.

Cheers!!!