How Options Trading became the 8th Wonder of World?

The list of seven wonders of the world has seen changes over so many years that they existed. The original list consisted of Colossus of Rhodes, the Great Pyramid of Giza, the Hanging Garden of Babylon, the lighthouse of Alexandria, the Mausoleum at Halicarnassus, the Statue of Zeus at Olympia, and the Temple of Artemis at Ephesus. All these were located around Mediterranean region, as they were not able to travel

But as modes of transport came buy and travel increased, people found new wonders and during the medieval period the list changed. The modern day transport made a paradigm shift and then now we have a new list of wonders of the world. This includes Great Wall of China, Petra, Christ: The Redeemer, Machu Picchu, Chicken Itza, Colosseum, Taj Mahal and the Great Pyramid of Giza.

One such tremendous find is the power of compounding. The annualized or the compounded returns. This is very crucial and important to understand. The fact that returns are made on the profits already generated is compounding. When you invest Inr 100/- and at the end of the year it becomes Inr 110/-, it means next year onwards it is Inr 110/- which is working for you and not Inr 100/-. So, returns need to be calculated accordingly.

There are times when I am shocked when people casually tell that a 2% – 3% difference in returns on an investment hardly matters. Just to give a simple perspective of that. If one invests a crore and generates 12% on it over 10 years while someone else generates 15% on the same amount for the same duration. The wealth of former would be near 3 crores and latter would be 4 crores. So, the absolute returns made by former is 2 crores and latter is 3 crores. There is a difference of 50% in the returns. As the absolute percentage number keeps moving higher, the difference will be greater.

Similar is the case when you calculate the returns on your stock or mutual fund investment. For instance, one invests 1 crore, at the end of Year 1 it became 1.3 cr, at the end of Year 2 it became 0.9cr and at the end of Year 3 it became 1.25cr. Back of the envelope calculation is tells us 20% returns in 3 years, which is 8.3%. Average returns come to 12.7% and finally compounded returns would be 7.7%.

So, why am I talking about this today. The reason being, in all my communications with you, I have always focused on RoI, Return on Investments. So, when you take a trade always focus on the RoI and not the absolute gain.

Also, it is important to know that risk management should be extremely in place. Every losing trade puts that much additional pressure on the winning trades. For instance, if you lose 10% from your trades you need to generate 11% to reinstate those losses. So, a proper methodology, system and good analysis is extremely needed. Coupled with that when you use the correct strategy and instruments you can reach your goals. Thus, consistency of returns is extremely necessary.

Hope all of you get a good close the eighth wonder of the world.

Happy Trading.

Cheers!!!