Why Retail Traders “Buy Options” and Professional Trader “Write Options”

By | October 31, 2015 2:09 pm
29 Comments

Regular readers of my site must be well aware of the fact, I always ask traders with small capital to stay away from Buying Options, During my trading course Typically 80% of traders have confessed , that they made there big loss when they have bought options.Now with increase in lot size of market Nifty and Bank Nifty many retail traders are considering to trade options.

Retail traders are always looking at buying options because technically you have chances of making unlimited profits with investments of small premiums, very similar to how lottery tickets work. What a retail trader forgets to look at is the fact that the odds of winning are much lower than when you are writing options. Yes when you write/sell options the profit is limited and is probably just a fraction of the margin that is blocked for writing, but the odds of winning go up significantly.

Let me elaborate with an example

Nifty is currently trading at 8100  and Trader A  buys the 8100 CE at Rs. 90  as he is bullish and Trader B who is bearish and expects the Nifty to be lower sells it at Rs. 90.

Since A is buying, so he has to pay Rs. 6750 (75 x 90) per lot to his broker and since B is writing options (around Rs 55000 is blocked as margin). A can make unlimited profits from his Rs 6750, but B can make a maximum of Rs 6750 from the Rs 55000 invested. But check out the odds and see which side you want to be on.

As i always say trading is game of Risk management and probability so lets see what is the Probability of Trader A and Trader B to make money.

For A to win at Expiry:

  • Only if Nifty is over 8190 (8100 + 90 invested into the call option)

For B to win at Expiry:

  • Nifty stays where it is due to time value erosion.
  • Nifty goes below 8100.
  • Nifty goes up but stays below 8190.

So Trader B  can make profits in 3 different scenarios compared to an Trader A  who can in only 1 scenario. 

As you will see the odds of a writer winning are higher.Typically Option Writers have one advantage is they do not try to time the market, During the start of series All options are having huge time value as expiry is quiet far and during the course of time if nearer the expiry comes more rapidly you will start losing the premium in Options. Thats the main reason Options Writers make huge money when Nifty remains in range and is sideways mode.

But also understand that as a writer of options you take unlimited risks and being lax on risk management would mean a severe dent to your trading account. Since you need access to higher capital for making limited returns with increased odds, option writing is what typically professionals/institutions prefer. Historically, it has also been proved that option buyers lose about 90% of the time. If you do not believe me on Check Option table 26 Nov when we have the expiry see the Option Table 90% of Option will be having 0 as value. 

Category: Option Strategies

About Bramesh

Bramesh Bhandari has been actively trading the Indian Stock Markets since over 15+ Years. His primary strategies are his interpretations and applications of Gann And Astro Methodologies developed over the past decade.

29 thoughts on “Why Retail Traders “Buy Options” and Professional Trader “Write Options””

  2. KEDAR

    Sir option buyer loses 90percent times………but if he is buying options only 3 or 4 times a month with 15 pt stoploss….does he have achance to win?

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  5. AMAR SHAH

    Options were invented so that people having long/short portfolio can hedge. But overtime speculators entered the scene trying to make castle in the air with little bricks.
    Options are nothing but just and instrument just like insurance premium so as to hedge as in case if something goes wrong.

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  7. Narasa Raju Mulagapati

    Nice article from Brameshji again. As we know, option writing is one of the best proven trading strategy to make the money on consistence basis, but still retail traders will buy the options as usual. Iam trying to transform my self from a retail trader in to a professional trader. Let see, what will happen.

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  8. Vinit

    As usual … A fine write up again. Options are wasting assets. It is always better to write towards the latter part of the month(than at the beginning) so as to take advantage of time decay or theta whose punch/power is much higher,thereby giving less time to the script(price) to move against you. Also, as a seller of options, IV must be borne in mind. Higher IV always favor the writers.

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  11. sudhakar raju

    excellant article BB ji.historically even chicago options market favours options writer than buyers by a significant extent.i do write calls regularly.even an unsuccessful stock market playerlike me has aphenomenal successful rate while writing calls.in fact without call writing my losses would have been very high. BUT I PREFER WRITING CALLS IN DIVERSIFIED PRODUCT LIKE NIFTY that tooACCOMPANIED BY UNLEVERAGED BUYING IN BEES.THIS IS COVERED CALL STRATEGY.I HAVE BACKUP TO DO SAME AT LOWER LEVELS ALSO.THIS STRATEGY INCREASES SAFETY WHILE REDUCING RISK.

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  13. sachin

    Since A is buying, so he has to pay Rs. 6750 (75 x 90) per lot to his broker and since B is writing options (around Rs 55000 is blocked as margin). how is this margin money calculated for blockage? What is formula for calculating this?

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  14. RAJMOHAN

    IN OPTION TRADING, UNDERSTANDING CHARACTERISTICS (GREEKS) WILL BE MUCH USEFUL.
    THETA VALUE, TIME DECAY IS A MAJOR FACTOR TO HELP US MAKE PROFIT IN OPTION WRITING.

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  15. Aditya

    Small traders always made such mistakes but important is to understand risk management in every trade..writing options can also be risky but probability of success is always high in that rather buying options.

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  17. Rakesh Sharma

    PERFECT ADVICE — I, who lost thousands buying options, can say Brameshji with this write-up you have done great service to new traders such as me. We should always sell options, and always keep a VERY CLOSE watch on it.

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  19. DIPAK CHANDWANI

    Generally trader do not wait till month end. option writer have always plan. lets say at 8100 trader B sell option at 90 for him 8190 is the point till that no loss any monthly close above that is loss so 8225-8190= 35 points so loss of 75×35=2625. + interest rate on his capital + brokerage + time & effort. But Generally option writer have all plan ready for market movement. So if write option & buy future, trader will have profit or 90 points – future premium. so you are always in profit only matter is amount will be not much. when vix is very high writing option is very good but you must have something to protect your loss .

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  21. Pratik

    Sir,
    If on expiry day if nifty is above 8190 just for example say 8225 then what will be position for trader B who had written option , how much loss he has to take?

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    2. JAY

      135 points loss = 135×75 = Rs 10125/-
      Balance capital returned. (55000-10125)
      Profit to option buyer = 35×75 = 3375 plus capital returned.(6750+3375)

      Reply ↓

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