The Power of ‘Researched Options Trading’
Billionaire founder of Softbank Masayoshi Son suffered huge losses of $17.7 billion in fiscal year ended in March after writing down the value of holdings, including WeWork and Uber Technologies Inc. He started a new unit to trade public securities, pushing beyond its traditional investment psychology. They invested more than $4 billion buying call options on stocks, while also selling call options at higher prices making huge profits focused on tech stocks over that time to recoup the past losses. SoftBank now has large but unrealized profits, and the trades have been deeply controversial even within SoftBank.
SoftBank got the tag of “Nasdaq whale” after massive recent boom of Tech Stocks. Indeed it’s a perfect example of ‘Researched Option Trading’.
Let’s see the process of building big fortune via Options Trading.
Live Example:
[Date: 30 Sept 2020]
Suppose you have 50,000 Rs. to invest and you are bullish on the stock named Cadila Health (394 Rs.) because they have got approval for some most demanded drugs and they are also in process to launch more drugs in the upcoming days. which may boost the sales & bottom line and ultimately the stock price. Stock is mildly bullish on daily charts.
Here is the catch, you don’t want to take much risk here but you are very confident that the stock price will skyrocket from here.
You have two choices here:
1) Choice 1: Buy 126 shares of Cadila Health stocks at 394 Rs.
Your total investment: 49,644 Rs. (126*394).
[Date: 16 Oct 2020]
You analysis worked and on Oct 16 (16 days after your investment) stock price climbed to 430 Rs.
Your Profit: (430–394)*126 = 4,536 Rs. You are happy!
2) Choice 2: Buy Cadila Health CALL OPTION of 400 strike price at 14.50 Rs. In Options Trading you can only buy in lots and one lot has 2200. (Lot size is different for all stocks).
Total investment: 31,900 Rs. (36% lesser investment than Choice 1)
You analysis worked and on Oct 16 (16 days after your investment) stock price climbed to 430 Rs. and..
Your Profit: 41,360 Rs. or 129% and you are the happiest person on earth now!
Example 2: If you were bullish on SBI.
Have you seen the difference?
In both the cases I have taken limited risk because buying options comes with limited risk. Be aware, I am not talking about selling the options here because that is very risky. I would suggest to not to go for selling options unless you have at least 2 years of experience in ‘Researched Option Trading’.
The Recipe of a good Option trading is simply Learn Option Trading and practice:
Steps and ingredients:
1) Basics of Option Trading.
2) Moneyness (OTM, ATM, ITM)
3) Option Geeks
4) Options Strategies
5) Technical Analysis
If you skip any step, I bet, you won’t be able to make profitable trades. One more thing, even if you learn all of them then also there is no assurance that we you will be making all trades profitable.
The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you’re wrong.
-William J. O’Neil
The Reason why I have used ‘Research Option Trading’ instead of just ‘Option Trading’ is that unless you have in depth understanding of Basics concepts, Option strategies and Technical Analysis, there are lessor chances that you are going to make even a single profitable trade unless you are very lucky.
Buying Options comes with limited risk
If you are buying options (Call or Put) there is only 33.33% chance that your trade will be profitable because the stock price must cross a threshold level to make trade profitable. Your winning trades will be dependent on the research you have done.
Yes! In Option buying, your loss is limited to the premium you have paid ( 31,900 Rs. in example 1) which can be further reduced with help of stop loss and OCO (One-Cancels-the-Other Order) order.
If you are motivated now and going to make your first trade-in options without learning it, I would suggest you to go for a donation.
Thanks!
Akshay Seth
Business Analyst
