A Question to AW10 and other Option Spreads Maestros

#1
I am planning to start trading in option spreads ie Buy Call 5100, Sell call 5200, etc. If anyone cud clear my anxieties, I would be thankful.

1. For every 1 lac invested, I plan to trade in 2 lot s (100 units). ie 100 units call buy, 100 units call sell. That should cover Margin + MTM. Am I right in this? Or do I need to be more conservative.

2. What is the expected return per mont on an average that you folks are getting?

Regards
 

AW10

Well-Known Member
#2
OptionQuant, you might have already seen my thread on spreads (specially the first few posts). IMO, selection of strikes and decision about the direction are important factor for trading spreads. They are directional strategies.

1. For every 1 lac invested, I plan to trade in 2 lot s (100 units). ie 100 units call buy, 100 units call sell. That should cover Margin + MTM. Am I right in this? Or do I need to be more conservative.
Rather than looking at this way, look at what amount is at risk and how much is this as % of your account size. 1% to 2% of account size is recommended as risk amount for each trade. Say if you get the spread at 40 Rs, then for 2 lots, you are risking 40*2*50 = 4k. I.e. you are risking 4% of your account, assuming that you have no other plan of cutting the loss. But if you decide to cut your loss as soon as spread drops to 30rs., then you are taking the risk of (40-30=10)*2*50 = 1000. which is 1%. Maybe you can take 4 contracts and still risk only 2% of your acct.
As I mentioned, you need to have system to help your decision about the direction,and few rules to select the strikes. Test that for historical data to see the win/loss stats.
If you are good in picking up 90% winning trades, then probably you might take even higher risk per trade say 8 to 10%. My thumb rule of max risk is - In any timeframe, don't risk amount that I can't make in 1 unit of same timeframe. i.e. If my average weekly return is 5%, then that is max risk I will take on weekly basis. Most of the time, I take much lesser risk than this.
Hope this gives u few pointers to think about risk and money mgmt aspect.

2. What is the expected return per mont on an average that you folks are getting?
This question is irrelevant. How does it matter to anybody. My returns are byproduct of my knowledge, experience, skills, systems, psychological setup, my money blueprint etc.
And I know, I am unique person in this world on these parameter. We all are different, hence there is no guarantee that 2 people will get same result, even with same system, same effort.

Happy Trading.
 
#3
Rather than looking at this way, look at what amount is at risk and how much is this as % of your account size. 1% to 2% of account size is recommended as risk amount for each trade. Say if you get the spread at 40 Rs, then for 2 lots, you are risking 40*2*50 = 4k. I.e. you are risking 4% of your account, assuming that you have no other plan of cutting the loss. But if you decide to cut your loss as soon as spread drops to 30rs., then you are taking the risk of (40-30=10)*2*50 = 1000. which is 1%. Maybe you can take 4 contracts and still risk only 2% of your acct.
As I mentioned, you need to have system to help your decision about the direction,and few rules to select the strikes. Test that for historical data to see the win/loss stats.
If you are good in picking up 90% winning trades, then probably you might take even higher risk per trade say 8 to 10%. My thumb rule of max risk is - In any timeframe, don't risk amount that I can't make in 1 unit of same timeframe. i.e. If my average weekly return is 5%, then that is max risk I will take on weekly basis. Most of the time, I take much lesser risk than this.
Hope this gives u few pointers to think about risk and money mgmt aspect.


This question is irrelevant. How does it matter to anybody. My returns are byproduct of my knowledge, experience, skills, systems, psychological setup, my money blueprint etc.
And I know, I am unique person in this world on these parameter. We all are different, hence there is no guarantee that 2 people will get same result, even with same system, same effort.

Happy Trading.
Thank you AW10, for your detailed response. Yes, I agree that one should look at risk-reward ratio. I also agree that how much money any person makes is irrelevant - after all, one is only comparing with oneself.

However, I think I did not address my query clearly. I am looking at FNO, as a
means to make steady profits. I also do not want to put shares as margin, and would rather put cash as margin. Now, suppose I invest Rs 1 lac (say) as CASH. This is for margin, MTM as well as Purchasing options (full value). Can I expect 5% return per month, or am I being too ambitious? I would like to state that I am essentially a positional player, nod not a day trader.

Thanks
 

AW10

Well-Known Member
#4
Thank you AW10, for your detailed response. Yes, I agree that one should look at risk-reward ratio. I also agree that how much money any person makes is irrelevant - after all, one is only comparing with oneself.

However, I think I did not address my query clearly. I am looking at FNO, as a
means to make steady profits. I also do not want to put shares as margin, and would rather put cash as margin. Now, suppose I invest Rs 1 lac (say) as CASH. This is for margin, MTM as well as Purchasing options (full value). Can I expect 5% return per month, or am I being too ambitious? I would like to state that I am essentially a positional player, nod not a day trader.

Thanks
optionsquant, Monthly Return depends on your trading system (option strategy like spread is small part of trading system, they are not complete system) and your ability to execute it consistently.
Whatever is your system, do the backtesting and the results will give you more insight into what those sets of rules will be able to return on min/max/average basis, what will be your freq of trades etc.
5% is reasonable target and it is achievable, infact you maybe able to beat this target. But there is lot more work required to be done for it. And first step is to develop a system and backtest it. That is painful part of it. Quite possible that backtest result may not show the expected outcome as per your objective. In that case, you might have to go back to drawing ground and start again, improve the system, and test it again. If a system can't make money on historical data, where no emotions, uncertaintly involved, how can u expect it to make money in real time.

Not sure, if you have read/know about trading system development or not, else will suggest to spend some time with it.

Happy Trading.
 

veluri1967

Well-Known Member
#6
In my openion, the question "How much return can be expected from stock trading/investing" is a bit matured compared to fantasizing about the exorbitant returns from stock trading.

The idea of the question is not to make it as a benchmark. Probably, it is also meant to gather some genuine information from successful traders of this profession in order to embark on trading or not.

I have been in Traderji.com for more than 2 years now. I have seen committed answers from loosers than winners. Threads like "I have lost...so much in the last 2 years", "Loosers game" etc. send false signals to those who otherwise may turn successful traders but for. I would like to see some threads from consistent winners as well like the ones from "SavantGarde" that keeps the motivation of upsprings intact in adverse situations.

It is unfortunate that unlike other professions, it is very rare to find real worthy mentors in this trading profession.

As far as my little experience in the field is concerned expected returns can be as follows :-

For beginners to Intermediate levels

Atleast 5% per month to 20% per month. (Averaged for a year's period).
(provided the system is robust, and the trader has some reasonable screen experience)(Without any gambling tendencies)

Professional Traders.

Greater than 20% per month.

PS:- I feel sorry, if I stepped in.
 
#7
AW10,

Thanks a lot. I'll certainly read up on this.

Velluri,

Your indication was very encouraging. If I can get 5%-10% pm, I am happy at that return.

Yes folks, I'll think of a system based on breakouts, and backtest it.
 
#8
I know a couple of guys who were making quite a sum of money CONSISTENTLY over 10-12 months. Then they lost their shirts.

Really, they were eating premiums (premium khayenge) for large, out of the money options. But the markets moved rapidly (once), and there was huge (gap up opening), and they lost a whole lot.

I think "maximum Theoretical risk" is a critical factor in the game. One calamity somewhere and you could really be exposed if you have not covered up your position.
 
#9
AW10,

I have been trying to develop a trading strategy for a large part of today. I am trying to test 20 day breakout rule. Man it is difficult and tedious. Will keep everyone posted on my progress
 
#10
I also started option trading in this month itself. My advise is that first you sellect a broker who charge minimum brokrage. because brokrage is very important in option spreads trading. if you are paying 50-75 Rs per lot in nifty trade, than you have to pay around Rs. 6.00 per lot completed trade.
 

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