In an interesting session as a part of the highly popular Face2Face series conducted by Elearnmarkets, Mr Vivek Bajaj, Co-founder of Elearnmarkets, invited Mr Tarun Jain, a CA Options Trader for the last 100 weeks, to decode how consistently traders can create wealth from the stock market.
Mr Tarun Jain was born and brought up in Bangalore and was involved in a Finance Business. He completed Chartered Accountancy in 2002 and has been practising for the last 21 years. His practice primarily focused on direct tax and assurance services. He was introduced to trading during the Covid-19 lockdown and started trading options in May 2020.
In today’s blog, let us decode how one can consistently make money from the stock market through options trading-
Table of Contents
The Power of Compounding
The power of compounding, in terms of finance, is the way interest adds to the principal amount of an investment over time, increasing its value. Investors can leverage the power of compounding by utilizing the compound interest principle.
Compound interest allows you to earn interest on your principal amount, which is then added back to the original main amount, increasing the amount of interest that could be earned in the subsequent cycle.
The Fixed Deposit Rate in India is around 6%. If we invest our money in Fixed Deposits for 10 years, then our capital will only grow to 1.77 times. You cannot remain in 6%, if you want to beat the inflation.
At 24%, if you keep investing for 10 years, then the capital will grow 7.5 times which is an exceptional rate. This is the power of consistency and compounding.
Let us discuss Mr Tarun Jain’s strategy to achieve the target return of capital-
Options Trading Strategy by an Options Trader
Mr Tarun Jain’s current allocation of capital is 85% in debt and 15% in Equity. He mainly invests in the blue-chip companies and uses the equities as collateral. The return on collateral will also increase due to equity participation in it.
In this strategy, we are selling a pair of put and call contracts. In this options strategy, Options Traders need to consider how much premium to generate from calls and puts. Traders usually consider the ratio to be equal, but it should not be.
Traders need to compute the trading capital as well. One should not employ the whole capital in one go. According to this strategy, the lots should be divided into 3-6 based on the capital.
The lots should be deployed slowly and steadily as the stock market moves.
After computing the premium and capital, now one needs to consider the Average expected weekly price for the CE / PE contract.
For call options, one should select a premium of around Rs. 6-7, and for put options, one should select a premium of around Rs. 12-13. Remember that one should not trade all the lots in one go.
In the nut-shell below are the following pointers of his strategy-
- Simple short strangle strategy of weekly penny option contracts.
- To sell the CE gradually and deploy the entire selling over the 5 days of the week
- Position & size management.
- Constantly reposition & resize to garner additional premiums on a daily basis.
- To use all the weekly options contracts of Fin Nifty, Bank Nifty, Nifty & Sensex.
- Constantly monitor the premiums collected during the week vs target premium collection
You can watch the full Face2Face Video here
Options Traders should not expect unreasonable returns from markets, and such returns cannot be made consistently. Keep a check on high/unreasonable return on your capital, this will keep a check on your greed. Try to focus on strategies that are consistent in profit-making. This will keep traders motivated and contain their fear. The absolute figure of profit is not relevant, and return on capital (%) is an important parameter to be used to analyze your trading performance and assessment of risk undertaken. The options traders also need to keep a check on transaction charges.