There is a basic flaw in the logic of calculating returns on your capital and both futures traders and options traders make wrong calculations while calculating the returns on trading capital . Illustrations as under :
Futures Traders : Most standard flaw in the calculation of returns by futures traders is that they calculate returns on the margin required to be kept with the broker and not on their total trading capital . Suppose you have Rs 10,00,000 trading capital allocated to a method.....and you decide to risk 1.5 % of your trading capital on a trade. That gives you an amount of Rs 15,000 to be risked on your trade.so if your stoploss is say 40 points away from your entry point, you can take a trade of say 350 Nifty Futures or 7 Lots. Suppose you make 100 points profit on this trade, your profit is Rs 35000 . And here comes the flaw.....the margin required for maitaining 350 Nifty Futures position is say Rs 2,00,000 then calculating the return as (35000 /200000) x100 or 17.5 % is incorrect. The return has to be calculated on total capital of Rs 10,00,000 ( here we can add risk free return on balance Rs 3,00,000 kept with us....but not considering that as it will be a megre amount anyway ) so the return is (35000 /10,00,000) x100 or 7%.......see the difference in calculations....
Options Traders : Considering same example of Rs 10,00,000 account and here even if you decide to put 5 % of your capital on a trade and you buy a call or put of Rs 100 as a premium you can buy 500 Nifty options or 10 lots. Assuming the premium goes to Rs 300 ( every option trader knows that such trades are not too common but still ......) so you make a profit of Rs 1,00,000 from this trade.For calculating returns you have to calculate on Rs 10,00,000 so it becomes 10 % of the capital .Calculating the returns on premium paid of Rs 50,000 and saying we made 200 % returns on the capital is incorrect. I am sure no option trader who wants to survive in the market will put all Rs 10,00,000 in premiums paid and buy calls/puts of the entire amount .
Another flaw is showing that you buy deep out of money options at low price and show high returns percentage. But in practice will we ever put Rs 50,000 on 300 -400 points out of the money options ?
I am not debating what returns are possible but just pointing at the logic flaws which I see most of the times in showing inflated/unrealistic returns calculations. One can certainly make very good money in trading but when I see /hear talk of 200 % returns per month I know that such things are possible only on Excel sheet calculations.
Smart_trade
