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90% of option traders lose money
Even people who are highly knowledgeable about the financial markets and work in the industry do poorly. There is evidence all over the place that losing money in options is normal and “everyone in the know knows it”.
I never got good at options trading, but I never encountered anyone else who was good at it, either. Some people admitted that they lost money overall, while others, although they spoke readily of their wins, were evasive about losses and totals. This was less surprising when I discovered, to my disappointment, that many of the people who traded options were also gamblers.
Most people who continue trading options lose ALL the money they allocated, if they were smart enough to allocate an amount.
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Trading options was the one activity at which I could not improve by studying or practicing
If I study hard and work at something, I get better at it. Two years of effort and study did not improve my results at trading options. When study and practice bring no payoff at all, it is a red flag indicator that the activity might be one at which it is not possible to improve. The possibility must at least be seriously considered.
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Option purchases are a “limited-risk” speculation… but the limit is 100%!
The same is true of stocks, but you will almost never lose 100% on a stock.
The “limited risk” feature of options only distinguishes them from futures contracts, where you can lose much more than you invest.
Your loss in an option is limited to 100%, but you can lose 100% over and over again. To offset those losses, your gains, when they occur, must be very large. They can be, but they rarely are.
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Options lose time value from the moment you purchase them
Your stock must not only move (assuming the option follows the stock, which it doesn’t always do), but must move in time for your option to overcome its time-value loss since you bought it.
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Options markets lack liquidity
In India,except Nifty most of the Stock Options lacks liquidity and there are wide difference between Bid and Offer Price and Brokerage can make Succesful Option trade less profitable forget about Loss making trades!
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Commissions on option transactions are high
Your options must make a significant move in the right direction just to overcome your commission costs.
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Options are short-term, and they expire
You are forced to trade often. You cannot simply buy and hold. If you want to stay in the market, you must replace expired options with new ones, incurring repeated commission expenses.
You cannot use a long term strategy to wait out setbacks. If a stock makes a big move against you, your chances of it recovering before expiration are small.
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Option prices are not formally related to the price of the underlying stock
From the emphasis that is so often placed on formulas that supposedly calculate the “value” of an option, you would think that there must be a formal relationship between the price of a stock and the price of an option on it, but there is not.
Like everything else, the value of an option is whatever someone is willing to pay for it at a particular point in time. If it’s hot, it’s hot, if it’s not, it’s not, and an underlying stock and the options on it don’t always fall into and out of favor at the same time. Option prices move independently of the price of the underlying stock, and sometimes track the stock surprisingly poorly.
Option prices reflect the expectations of options traders about what the stock is going to do. As soon as a “technical move” looks likely, the options will often move in anticipation of it, to the point that they would be worth after the move has already occurred. If the move doesn’t happen, the options drop. If the move does happen, often the option has already made its move, and won’t budge any further. If you wait for a signal, others (like the specialist or floor traders) will get there first. If you anticipate a signal, you’re going on “nothing”.
The real fair value of an option is probably its market value.
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Trading strategies are arbitrary, contradictory, and only work in retrospect
There are many trading rules such as “Cut your losses, but let your profits run”, or “Sell after any 5% retreat”, “Always use limit orders”, etc. They all sound like good strategies, and they all are good strategies in one situation or another. Unfortunately, you don’t know ahead of time which strategy will look good in hindsight, and they are all so vague and contradictory that they have no use except in hindsight. You might just as well complain, “Oh why didn’t I buy low and sell high like I knew I should?” because most trading rules are of little more use than that one. They are fine for looking back, but they don’t help going forward.
After a bad trade, you can always go back and see where you went wrong, discovering how some particular strategy would have saved you, but the same strategy that would have saved you this time would kill you another time, so what use is it?
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In options, perfection is required, but something always goes wrong
You must correctly predict the stock’s move and the time during which it will make that move. You must buy the option at the price your calculations are based on. Then you must sell at the right time, in the right way, having chosen the right method (stop-loss, limit order, or market order at time of sale), and your order must be executed rapidly and correctly by your broker and the options exchange. In too many option trades, some part of it goes wrong.
Conclusion
I am not saying that you cannot make a killing in options. You can. But it’s extremely unlikely, and if it does happen, it’s not because you are “good at it”.People Made Killing during May 20 2009 in Nifty calls after election results ,but its like once in a time kind of phenomenon.
To some this will sound like a sour grapes story, but I know that there is a difference between an activity that I cannot become good at and one that no one can become good at.
Let’s compare forms of gambling as a somewhat appropriate analogy. I do not like gambling, and if I thought that’s all that options trading was, I never would have had any interest in it.
There are games like poker that require skill and that it is possible to become good at. Newcomers usually lose, but their results improve as they gain experience. I would be a bad poker player because I don’t have the skills. However, experienced and consistently successful poker players do exist.
On the other hand, there are slot machines, state lotteries, and roulette. They require no skill, do not reward skill, and are mathematically impossible to become good at. I would be bad at those games not because I am unskilled, but because no one can be good at them. It’s in the nature of the activity.
My conclusion about options is that because of the factors described above, I cannot become good at it, and neither can anyone else. It’s in the nature of the activity.
DEAR BRAMESH,
TOPIC IS VERY GOOD “90% OF OPTION TRADERS LOOSE MONEY” INFACT I AM AN PART TIME OPTION TRADER, I DO ONE OR TWO TRADES IN A MONTH. WITH LIMITED CAPITAL. AS USUAL I LOST MY INITIAL CAPITAL IN OPTIONS, THEN LATER ON I STUDIED HARD WHY AND HOW I LOST MY CAPITAL? I TOOK LONG TIME 1 YR 6 MONTH TO COME TO KNOW THE CONCLUSION.
1. I FOUND THAT HIGH EXPECTION FROM MARKET KILLS RETAIL TRADERS.
2. GREEDINESS.
3. EXPECT 3 TO 10% /MONTH.
4. INVEST 50% OF CAPITAL ONLY.
5. OPTIONS ARE JUST LIKE ICE, AS TIME WILL PASS OPTIONS BECOMES WORTHLESS.
6. THERE ARE SO MANY TOOLS WE NEED TO UTILISE. LIKE CALL, PUT, FUT, EQUITY.
7. KEEP LEARNING NEW TECHNIQUE.
8. OPTION SELECTION AND PREMIUM CALCULATION.
9. ACCEPT MARKET CONDITION, DONT CHESS MARKET.
DURING MY MARKET STUDY TIME I WAS JUST WATCHING MARKET, I FOUND THAT OPTION BUYERS STRUGGLES WITH TIME DECAY AND OPTION WRITERS ENJOY TIME DECAY. AGAIN I STARTED TRADING IN OPTION BUT THIS TIME I AM NOT A BUYER I AM OPTION WRITER. AND I HAVE CHOOSEN NIFTY OPTION TO WRITE BECOUSE NIFTY HAS HIGH VOLUME.
SO I DONT AGREE 100% THAT ONE CAN LOOSE HIS CAPITAL.
Hi Bramesh need your advise regarding this strategy
Strategy:
Investment needed: Rs.10,000
Suitable Trading days: 1st to 20th of every month (Better to avoid last week of expiry)
This strategy will give best returns when you expect Nifty or any stock to move either ways with big move.
Example: Nifty Spot (5700)
Trade: Buy Nifty Call 5800 & Nifty Put 5600.
Say Nifty CE 5800 is 50Rs. & Nifty PE 5600 50Rs. (Just a rough figure)
Buy 2 lots of Put & Call options, so total investment = 50*100+50*100=10,000Rs.
If Nifty breaks resistance and keeps moving higher, Nifty CE 5800 value (Rs.50) will increase.
If Nifty breaks support and keeps moving lower Nifty PE 5600 value (Rs.50) will decrease.
Say if Nifty SPOT is 5500 now, then your investment value will be Nifty CE 5800==Rs.9 & Nifty PE 5600 ==Rs.120
Total value = 9*100+120*100=Rs.12900
Total Profit=Rs.10,000-12,900= Rs.2,900.
Your Returns is 29%.
Please do let me know if anyone already tried this strategy?
The above strategy as per me will never work as you have taken lot many assumptions like Nifty giving big move and you never considered the effect of IV’s and VIX.
Rgds,
Bramesh
Sorry there are some mistaken in my response.I wanted to say that human are not 100% predictable.
Vikramaditya
Sir,
First, of all i want to say that trading is not for common retailers. cash market trading is very difficult so i suggest that common or unskilled trader should not be in future and option trading.I am professional nifty index option trader for 5 years and i made losses in first two years but i was reading, practicing and improved my self.I would say why do you go to option market, straight answer to make money i shortest time.It’s greed and that’s why you loose.I don’t write option and i trade till end of second week. That all 25% to 30% profit.I am good. First Know that market,How does it work and Try to get the trend First.Sir, kindly i want to say that Share market is not a slot machine Because it is operated by humans and they are 100% predictable.
Vikramaditya
FIrst of all thanx to the participants who made live this topic.
Secondly option become zero if we try to keep these whole during the month and if we keep stop loss matching with nifty then surely we can ear reasonable return.
Thanx
mahendra
sir thank you for keeping the comments live for the whole year its nice to know so many people’s view regarding options trading
hi,
I am full time Nifty option trader,
please note full time.
I am only 6 month old in market,
and I have never write a option.
I am option buyer first.
and my success rate is fairly good.
Now I have some simple rules,
1) Never try to catch high and low with options. which means always play in between mid range.Totally emotion control and with trailing stop loss.
2)Option trading from buyer perspective is a intra day affair,
so never carry your position,because if u r carrying your position you are fighting with time value.
3)decide a single side approach for a day,it depends upon trend,
either devote your day for call option or put option.
never try to become super cool.
i am not a regular writer,so excuse me for my language,
and there r many other rule set for me.
I will surely explain them at some other time.
Thanks Rahul for your perspective..
Rgds,
Bramesh
Author is very right, when he says maximum people loose money in option trades. I have few friends who lost huge money in options.
i would like to know if for writing options is margin required ? do brokers now allow option writing on good faith ? can stocks be used for margin requirement ?
Nothing can be far from truth. It’s really disappointing to see people advising novice traders against options. I have been trading in options for last 3 years and have made around 3-4% returns per month on an average.
Remember, there are no short-cuts to making money. Same applies with options. You need to understand the basics well.
However, I would like to rectify the statement –
“90% of Option buyers are losing money”
Dear Sir,
Let me congratualte you for making money consistently in trading Options. My post is more related for traders who “BUY” options.
I can assume you must be mostly using stratergies like butterfly or Iron condor or basically writitng options which is safest way to make money.
But how many people in retail segment have knowledge of such stratergies also how many have margin to apply such stratergies.
Learning the concepts and applying them defintaley helps in making in long term.
Rgds,
Bramesh
Sir ,
Are u still making money 3-4% every month consistently like your previous years ? Pls dnt be offended. It is just a small research am doing because even i have lost Huge Money in options. I feel 2014 was a bad year for all the writers no matter what strategy they followed. Awaiting your reply.
Regards,
Abhinand
This was the best year for Option writers may month was the month every option writer would have made bagful of money..
what if we one buys equal lots of OTM calls and puts with strict stop losses in high beta stocks like IDFC , Sbi, Hindalco, ICICI. I think it’s a wonderful strategy.No dependence on news. Let the company go to hell.You will still make money. All you need is movement/ fluctuation.
Dear sir I use in 100000voliem bar chart in nifty optiontrading and risalt is two good last manth my call your in your page 5000 ce 32 sl 20 and target 80 achive til expiry 160 but ap page pe option call nahi dena karke bola so avide
Dear Sir,
My heartiest congratulation for successful trade. In trending market if you are on right side of trade you can make good money but on an avg there are jst 3-4 months in which nifty go one sided remaining months its volatile sideways move. This are the month where Option buyers loose money. Hence i avoid to give Option calls. Consistency of profits can never come trading in Options ie. By Buying Options… Option writers make money consistently but very few people write options
Rgds,
Bramesh
Guys
Just imagine BHEL lost nearly 10% in a single session after the results are out. If we had a clue, we would have made a killing. Certainly, short selling in such huge quantities is risky. I guess Bramesh is right in the sense that the broker gets benefit of our trading usually. But those who are keen followers of results, news and macro-economics tend to make huge gains, though not with that frequency.
Bally, did you have any idea of FIIs on SBI? If you did, then you are the master of the game. Else, as Bramesh put it, the Great Gambler.
Dear Sir,
What trading requires is consistency and that can never come on news based trading. For it you need to develop a system stick to it, Speculation will never lead in long term profits.
Just to site an example. How many traders made a killing in Election gap of may 09 but they were never able to preserve those profits coz of speculative mindset.
So Stick with system follow rules with discipline will only lead to long term success in trading.
Rgds,
Bramesh
boss i don’t know what u people are saying but i have always profited from calls and puts. infact so much that i had totally stopped buying shares long time back. i have made huge profits. i bought sbi 2000 calls at 1.65 per call i.e. 1 lakh=800 lots quantity and sold at rs 70 per call. thanks to FIIs for making me a millionare(atleast in rupee terms)
Brmesh sir,
Most of time in business channel or on so many blogs also. We time and time hear that thats many lakhs share added or outstanding in puts side or call side.
so they will have thier effect on the market. And put writers will not allow market to go dwn or call writeres up. Do option writers buy or sell shares in equity?? How they effect market???? even in llango sirs blog some says that many shares added in open iterest so this level is protected for some tome. so sir i want to know how option writers have their effect on EQUITY market??? Sir hope u are getting my question what i want to ask???
Dear Sir,
One of the main rule of trading is Stop trading on news and never business on news channel.
Sir for understanding the concept of Option are getting written or bought you need to understand the concept of Open Interest in which you would be able to to analysis
buying and selling of options.
Rgds,
Bramesh
Hi Brahmesh,
I have been reading your blog for some time now and it is very professional, very informative and educational.
Thanks for taking the efforts to help people understand the market.
I have not traded options rarely but know that it is sure shot strategy to loose money unless you are in it with your skin. The article and subsequent conversation highlights many nuances of options trading.
Thanks again.
This is a very poor analysis.The author forgot that for the indisciplined trader entry in the stock market is a sure sign for loss.There are traders who are still holding JP associates at 250 and Rcom at 600…..And actually options are the only profitable method of making quick gains in the market….
Hope u are enjoying the profit from options sir. All the Best.
Most Important thing you need to start working on is when not to trade.
Yes,
To my experience, on most of the times , while in 1st half of the month some times trading in Option
have shown profit, but, generally if lingering to 2nd half of the month, it starts gradually depreciating and , to
hope against hope, it leads to losses ultimately. I am one of the lot, who failed to make money in Options.
Dear Sir,
In second half of month time value erosion eats premium as expiry is approaching near,reason being an exponential decrease in price of Options.
Rgds,
Bramesh
Hi All,
its time share something about costing in option this costing is too less it is just Rs. 25 per lot in market i.e. too less than future lot brokerage.
I agree 90 % people lose money but as in above conversion Bingo said “this is full time business not for part timer.” because in every volatility you should take actions otherwise you lose money. As it is future market and cash market.
No you can improve your Strategies by practice or suggestions with some body who already in market who already doing option trading.
Option have limited risk you can use stop losses in this.
If Option lose time value then you can use covered strategies or write the options.
Definitely there is option to trade in Stock option. even they have lack liquidity you can book profit by booking in futures.
Option premium expires , lets say if i am paying 100% in cash market
and 20 % in future market and i am only paying 3% in option market then there is no problem i am saving whole 97% money.
Even every company providing a calculator to calculate underlying value of option undoubtedly due to volatility there some difference in option prices.
when we buy any stock future or nifty we pay always because at that time it too high when we purchase, we hold as per our capacity and one all in loss. but in option we lose 100% i.e. only 3% of total value.
Conclusion
You Can invest in options with proper guidance and strategies there are lot of good strategies where you can invest.
one of the best strategies Butterfly…..
Dear Purva,
Brokerage for Options and Futures is same for most of cost effective brokers. It depends on how you negotiate with your broker.
Let me add here i have written this article keeping traders who are prone towards “BUYING OPTIONS”.
Options Writers earn 6 out of 10 trades and as a matter of fact just have a look at Option table during expity 90% Options are trading at Rs 0.
A normal retailer will never go and implement strategies like Butterfly Iron Condor or even writing Options as these requires lots of margin.
What make me say the above statement I conduce trading course most of clients have lost money and reason being they “BOUGHT OPTIONS”.
If you want to share strategy for Butterfly you can write a guest post on the site.
Again i will reiterate Option trading should be avoided by retailers.
Rgds,
Bramesh
HI BRAMESJI — i must congratulate you for your candid confession — yes it realy takes lots of guts and honesty too — to admit your shortcomings/ pitfalls — as you ve rightly stated — 90 percent of traders loose money — irrespective of all parameters — its true that rest 5 pc are in status quo — jaise the — and only 5 percent — mostly – HNIs OR fiiDESKS ARE MAKING A KILLING — IE the money lost by loosers are earned by the winners –remember its a ZERO SUM GAME — very truely
secondly i always feel that writing nifty options –is the best possible strategy in this market –e g — if i m short say sell 100 NF @ CMP — i will always sell 200 — 300 qty puts — OTM — PREFERABLY –SAY 4900 pe @ 32 ( 300 qty ) — or say sell 5000 PE FEB series — 200 qty @ 45 ( cmp )– to protect my NF 100 short position– then you can modify the position accordingly — say if NF drops down by 100 points in 4-5 days — then book profits –100*1000 in NF and cover sold puts +/ – roll down the short put position — sell 4800 PE — my personel study – i ve reached this conclusion — selling OTM puts against short NF// SELLING OTM calls against long NF position –ie RATIO CALL // PUT WRITING is the best and safe strategy so far — awaiting for your expert comment– regards– dr vaibhav
Hi Sir,
Thanks for your appreciation. Trading is a negative SUM game reason being you will always pay to your broker.
Your strategy is really nice. The Problem with hedging is you will have a limited profits only.I believe more on sticking to SL.
Again i would add it depends on persons risk profile and expectation of return from market.
Bottom line:Profits should be made.
Rgds,
Bramesh
Bramesh sir
very true. Me to loss lots of money by trading in option. I think nifty future is best option to trade. Even nifty future can hedge by minifty future to take advantage of gap ups and down
I disagree with u because option is a full time business , part timers will loose money for sure.
i have seen people make huge money only by trading options,infact futures mkts is much more riskier the option mkts.
for understanding option one need to have clear view nd vision about mkts.
It is best tool available in mkts for trading and making money.
BinGo !!
Dear Sir,
As i have mentioned 90% of traders Loose money so there are always 10% who take money from other 90%.
Rgds,
Bramesh
Hi
Went through the conversation really interesting and every word is true
I know it from the past experience, yet I have made a strategy and would like very much to hear on the comments about that if you please.
Your site is very brilliant but am surprised it never came up to me on google search in general and I came across it only when i specifically searched blog only, I think you should be up there, have you thought about it.
If 90% people are loosing the money then another set of 90% people must be gaining.
I feel, this article is targeted for the people like us, small / amateur / novice traders (‘players’ will be the suitable term with literal meaning)
Unless you have big surplus cash in hand or lot of shares to cover the contract, do dive.
I generally purchase options for fun (and to try luck). See following scenario.
Lats say Nifty is at 5000
Buy call: 5400
But put: 4600
you will have to pay peanuts for buy these contracts (generally 2, 3 rupees per lot). If your luck is good and nifty raises / dips by 400 points, you will get a good returns. 🙂
—
Mahesh
Nothing can be far from truth as mentioned in this article.
The one who says that it’s impossible to master the options , probably doesn’t understand options at all.
Hi Anshul,
There is nothing call impossible and this article is for 90% of lossers to show them harsh reality of trading options.
People make a fortune trading options and there are techniques avilable which applied can yield good returns on options.
Rgds,
Bramesh
Very well Written and summarized bramesh
As some one from the markets , i know where you are coming from
I have also made my fair share of option trades and made money in some of them .
But when i look back and question the rationale on how i made money
it is more of luck
I like the comparison you make with poker and the other gambling games.
A skill which can be mastered or improved by gaining experience is something worth spending time on
I am of the belief markets are the place where money can be made with proper logical thinking
Thanks a lot sir for your kind words.
Money can be made but you need to think ahead of crowd and not to be swayed by your emotions 🙂
Rgds,
Bramesh
I was not sure about market movements but definitely i was in mandi.
Last Thursday i had bought 2 lots 5500(PE) at 40 and shorted 3 lots 5400(PE) at 18.75.Friday markets fell and 5500(PE) closed at 74 and 5400(PE) at 31 and i was quite successful in my strategy. If Nifty expires around 5400 i will benefit from both option trades. Lets hope for the best 😀 and if it expires above 5500 then my loss will be limited around 13 Rs. Use strategy and always hedge your positions. Naked shorting Puts and calls can remove ur underwear anyday. We are now in an uncertain Market conditions and our Volatility VIX is hovering around 21.5 to 25 which is actually bad sign. Beware of naked writing
Best thing in market is to remain as long term investor. Buy good quality stock with proven track records and do not look at it for day to day price fluctuations.
In bad market if you have funds to invest add same stocks in which you have good faith and good knowledge about working and business model of the group.
Never think or dream to become a millionaire in stock market and do not walk in AIR if you have made good gains in market.
Control your grid .
Select stocks from different sectors so that even out of 10 stocks which you hold and you can good realistion in 4 stocks you can stay with relax mind.
Keep good reading habits and do not buy blindly everything based on friends /well-wishers advise.
And in the end remain away from OPTION/FUTURE trades and enjoy good family life.
I forgot to add about stock options in my previous post. For example, i had gut feeling that tatasteel will slide today, i entered in put option but could not make money. Instead i should have shorted tatasteel in the first two hours of trading and comfortably closed position end of day which should have been a profitable trade. May be i have entered a wrong strike price but nevertheless it was a bad trade. Of course there are many other stock options fetched good profits but it is always a million dollar question which stock at which strike price of put/call is a good to trade. Please excuse me for such lengthy remarks. Just i wanted to share my experience.
Hi Ravi,
Options consists of Intrinsic value coupled with Time Value with Implied Voalitilty coupled with Historical Voaltility.
We need to use all this in sync to get the right strike price and Stock trend should be know.
Always trade in Liquid Options only and i would suggest NIFTY OPTIONS should only be traded.
Your comments are always welcome.
Rgds,
Bramesh
Hello Bramesh,
You are very correct. I can boldly say that options are 100% looser’s game because since last few years i am only trading Options. I lost a fortune in buying calls & puts and even though i made good money sometimes but it is like `earning a penny and losing a pound’ type. Thanks for the timely post.
-Ravi
Hi Ravi,
Money can be made in Options but it requires proper planning and expetise.
We can be in 10% of traders which make money all you need is understanding of options and experience.
Rgds,
Bramesh
Brahmesh
As rightly pointed by Naveen, its the options writers who make profit 80% of time on back of hapless option buyers. Like you have pointed out in your article, option buyers are most of the time on the wrong side of things. The way i see it, Option writing is like a montlhly rent. You buy a lot in equity and then keep writing calls with high volatility during the first half of the trading month. Most likely you will get to keep your premium. In the rare case of a reversal, since its a covered call there are no losses. Another strategy is to write OTM calls or Puts at the end. These are like freebies. So in short covered calls,especially over stocks that dont move much(albeit stable) are a source of monthly rent
Hi Sir,
I agree with you on covered calls startergy and OTM Writing.Maximun money can always be made in writing Options.
But just have a look at Risk/Reward Ratio.
if you are writing OTM Calls at EOD than most probably u will get 20 points in them and margin required will be of 1 Nifty Lot
for so 900-1000 rs you need to pay 30k.
Well the ones who are having surplus cash can surely adopt to this strtergy but what about normal retail invetors.
This article is for people who have limited capital.
FII and HNI can defintaley make use of Option Spreads to make Money.
Please share few startergies with us.
Rgds,
Bramesh
Buddy I know many people who always en-cash the profit financed by the common option traders.
They had made fortune of unimaginable size writing options.
approximately out of 10 option buyers 8 Lose money.
and out of 10 option writers 2 lose money.
options are not like shares,so strategies applicable on shares do not work on options.
99% retail traders consider buying options as a cheap alternate to participate in Market movement.
they fail to understand that it is not an asset as share but an instrument to hedge your assets (shares).
As compare to fundamentals and technical used for trading of shares similarly one need to have sound knowledge of GREEKs, probability calculations, and other financial engineering concepts for trading in options .It is altogether a different school of thought.
Hi Naveen,
It would be highly appreciated if you can share such experiences with us.
Thanks for your comment to show other side of story
Rgds