SRV Media
New Delhi [India], March 11: It's no secret that the options market has seen a tremendous spike in trading activity and volume in recent years. SEBI's analysis revealed that between FY19 and FY22, the number of individuals trading in the F&O segment increased by 500%. This increased trading traffic can be attributed to various reasons like easier access to online trading platforms, more liquid capital and the allure of quick potential profits in the options market.
However, increased participation rarely translates to increased success. A study conducted by the Securities and Exchange Board of India revealed that 90% of F&O traders lose money in the market. The average loss? Around 1.1 lakhs!
This is a startling development, and we looked to Ajay Dusane, Chief Growth Officer at Samco Securities, for the reasons behind such mounting losses among options traders in the country. Dusane picks out poor risk management as the key driving factor contributing to low trading success in the F&O segment.
"Many traders gravitate to the options market lured by the possibility of making quick profits. While this is certainly possible, it's also crucial to remember that options trading is a double-edged sword. It can result in significant profits or steep losses. The trick to treading the fine line between these two sides is to hedge every trade sufficiently. Unfortunately, not many traders have adequate hedging mechanisms in place. Instead, they trade in naked options, which could lead to potentially unlimited losses. Poor risk management is perhaps the single most common reason F&O traders find it challenging to carry out profitable trades in the market. At Samco Securities, we are on a mission to change this state of affairs and make options trading potentially more rewarding for users with the Samco trading app."
Data from the markets corroborates Ajay Dusane's view of how traders perceive the options market. Instead of focusing on the necessary hedging strategies, most traders are merely interested in quick turnovers. Alarmingly, the average Indian trader only holds an option for less than 30 minutes before exiting their position. Not a lot of thought goes into such ultra-short-term transactions.
To combat this issue and to allow traders to move beyond the trap of perceiving options trading merely as gambling, Samco Securities has created Options BRO -- a one-of-a-kind, industry-first options strategy builder that is transforming the way retail participants trade call and put options in the markets.
What's Stopping Indian Options Traders from Hedging Their Strategies?
Samco Securities has performed an in-depth analysis of the options market, the traders in this segment, their behaviours and the reasons driving them. In its most recent evaluation of around 30,000 options traders using the Samco trading app, the technology-first broking partner discovered some eye-opening insights, as outlined here:
- 97.8% of options traders do not hedge their strategies and only trade in naked options. The average loss among these traders was Rs66,768.
- 2.2% of traders use hedging strategies. The average profit among these traders was Rs196,300.
If the use of hedging strategies while trading in call and put options can be so profitable, why don't most traders choose this technique? The reasons are multifold, as explained below.
* Difficulty in Creating Strategies
Options traders often find themselves overwhelmed by the plethora of strategies available. The abundance of tools that offer countless strategy options does more to confuse than to clarify. Determining which strategy to choose based on specific needs is also a significant hurdle. The primary issue lies in the generic nature of these tools; they fail to offer personalised guidance that aligns with individual trading objectives and risk profiles.
This lack of customisation and direction makes the process of crafting effective hedging strategies not only daunting but also time-consuming. As a result, many traders consider the effort required to sift through and tailor these strategies as too formidable and choose to bypass hedging entirely.
* The Impossibility of Strategy Analysis
The complexity of analysing curated strategies further deters traders from hedging. In options trading, it is crucial to accurately interpret a multitude of data points -- like the strike prices, the prices of the underlying asset, implied volatility, open interest and options Greeks like delta, gamma, theta and vega. The task of calculating these data points for each strategy is overwhelmingly complex, and the market lacks specialised tools to aid in this analysis.
Existing tools often fall short of providing the nuanced analysis necessary for making informed decisions. This leaves traders ill-equipped to assess how effective different hedging strategies are. So, they are left with no alternative but to enter the market blind, without any protective net or counter-position to set off potential losses.
* The Challenge of Strategy Selection
Selecting the right strategy from numerous available alternatives is yet another challenge. The ideal strategy is one that not only aligns with the trader's financial goals and risk appetite but also considers the required margin and potential returns. However, the lack of tools to facilitate a comparison of strategies based on personalised criteria such as optimal risk and margin requirements leaves traders guessing.
This lack of assistance in the strategy selection process also forces traders to rely on their intuition or generic advice -- which often leads to potentially unsuitable choices. The effort and uncertainty involved in selecting the most appropriate hedging strategy, coupled with the absence of supportive tools, deter many traders from pursuing hedging as a viable option.
Introducing Options BRO: The New Flagship Feature in the Samco Trading App
To counter all the reasons that are holding options traders back from leveraging the full potential offered by the markets, Samco Securities has developed Options BRO -- an advanced options strategy builder that selects the top three strategies that align with every trader's preferences and market outlook.
Options BRO is a unique name that conveys many things. At first glance, it resembles the common term for the word 'brother.' This is a conscious choice because Samco Securities intended the options strategy builder to be a guiding tool for every options trader -- almost like a brother who is present at every step along the way.
But beyond this apparent connection to the brotherly guidance the options strategy builder offers, the 'BRO' in its name is also an acronym for the three key functions it performs: Build, Research and Optimise.
Ajay Dusane explains how each of these three aspects revolutionises strategy selection and execution for options traders using the Samco trading app.
"Options BRO breaks down options trading and hedging strategies into three key steps. Firstly, to build suitable strategies for any trade, our options strategy builder requires three details: the trader's preferred contract, its expiry and their view on the market trend. Based on the answers, Options BRO picks the top 3 strategies from over 1,000 options -- suited for aggressive, moderate, or conservative traders.
Then, to support further research, Options BRO offers a deep dive into each strategy. It shows traders how much they might gain or lose over different periods and prices and offers important insights about the delta, theta, gamma and vega. It also provides data about the chances of making a profit, the risk versus reward and the maximum profit and loss possible.
Lastly, traders need to optimise their strategy before executing it. To this end, our options strategy builder offers 7 advanced filters to sort through strategies based on the level of risk, the probability of profit, the maximum profit/loss, the margin required and more."
With such extensive analytical tools, Options BRO is truly the software equivalent of a brother and a guide -- available 24/7, always helping traders find suitable hedging strategies and making sure the strategy is the right fit. The best part is that Options BRO is available free of cost for all traders using the Samco trading app.
Samco's Refer and Earn program further sweetens the deal for new and existing traders. To leverage the benefits of Options BRO, Samco's advanced options strategy builder, traders only need to join the Samco community today.
SAMCO Securities was incorporated by Jimeet Modi, Founder & CEO of SAMCO Group in 2015. As the country's leading flat-fee brokerage and wealth-tech platform, SAMCO Securities provides retail investors access to sophisticated financial technology and makes their wealth-creation journey simple, informed, and cost-effective. SAMCO Securities' mission is to eliminate the existing challenges faced by traders and investors and democratise access to the wealth management process for every Indian. With customer centricity at SAMCO's core, we implement a quantitative approach to provide differentiated solutions that empower our customers in acing the capital markets.
SAMCO Securities is pioneering the stock market trading by introducing industry-first features like My Trade Story, Personal Index and Trade Spread Sheet to name a few under its CRP strategy.
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