There is an old saying in the markets: “There are old traders and there are bold traders, but there are very few old, bold traders.”

Expecting 2% a week or about 96% per annum in my experience will fall in the category of bold trading. It is possible to pull it off occasionally, but with that great a return, an adversary lurks in the darkness: great risk. If spiderman was a trader, he’d say ‘With great return comes great risk’.

So let’s look at a hypothetical strategy which could make you a 2% per week on your investment. Let’s say we do NIFTY weekly expiry short strangles, where the premium collected is 2% of your total margin blocked. Let's assume you took the trades each Thursday, and you squared off at expiry the subsequent Thursday on the day of weekly expiry. This is how the trade looks like this for expiry as on 26th Dec 2019:

As you can see, your net premium received is approximately 2625 on a margin paid of 1.7 lakhs. That is about a 1.6% return. 12400 call short and 12100 put short are each at 150 points away from the NIFTY spot as on 19th December 2019 of 12250. Plus, it’s a weekly expiry so you have the added benefit of option quickly losing time value. So as long as NIFTY expires on 26th December between the range of 12100 and 12400, you make your 1.6% with this short strangle strategy.

So what happens when the NIFTY does move beyond those levels? As you are aware, shorting options can lead to unlimited losses if they turn deep in the money. So the question you have to ask is whether the NIFTY can actually move by so much in just a week? The answer is yes. I am tabulating these probabilities below:

As you can see from the table above, this strategy is successful 6.8 out of 10 times. About 3 out of 10 times, the loss is between 0 and 12000. But about 1 in 150 times, the market will make unprecedented extreme moves. In these cases, your losses can be staggering. On the 2 days after the corporate tax rate deductions were announced in September, NIFTY moved from 10,845 to 11,694. Had you made such a short strangle trade then, you would stand to lose about 50,000 bucks, per lot! Such an event is called a black swan.

The above example is a one of a fairly uncomplicated short strangle. Many traders out there deploy this, and risk exposing themselves to an extreme event. Such events will wipe off profits made over years!

So, can complex strategies make you 2% per month? Well, we at Tequity Investing have 4 proprietary strategies, which are black swan proof. In fact, one of our strategies takes advantage of events like a black swan. Over a long period, we are able to make about 30–35% per annum. That’s about 3% per month. We constantly work on improving our methods, and hope to up our incomes.

In summary,

• It is better to target long term profits, not weekly ones.
• There are no guaranteed trades, but there are strategies where the probability of victory or magnitude of loss can be greatly controlled.
• If you want to be a successful trader, it is imperative that you do a course that will enable you to understand derivatives better.
• Learning plus experience is the key to cracking the market.

I would be glad to discuss our learning courses with you if you are interested. Good luck!

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