Level of understanding required: Intermediate
Disclaimer: these are completely my personal opinion. Please trade / invest at your own risk.
I started selling options for a regular income. The initial journey did not start with selling but with buying of options - which came to a rude halt within a month into the journey.
The Early Mistakes
Option buying is not a sustainable instrument by itself. The instrument is used mainly for hedging. Due to the very low entry costs, it attracts hordes of people initially. >90% people fail to make profits, and leave the trading journey within 1 year. My mentor warned me about the instrument early on. However, I still tried to trade in it and burnt my fingers. It is actually quite natural to do so. What is not good is to keep persisting with options buying despite facing losses.
Option premiums fluctuate randomly - that too mostly in favour of options sellers. The premium 'decays' when the price doesn't move in the right direction and chances of hitting the stop loss is very high. Randomly, it gives super normal profits on one trade and then typically we face losses for say 5 trades. This is not a sustainable and stable strategy.
When I started, it went on somewhat like this in a nutshell:
First day - Profit = Jubilation
A week thereafter - Losses, resolve to recover
Next week - more losses in revenge trading = over-trading (mess)
Then - one major profit and recovery
Finally - another major loss
I was somewhat lucky and matured - I stopped chasing this route once and for all after a discussion with my mentor. I read everywhere for some tips and it was the same repetitive advise of avoiding options buying.
The Change in Strategy
I had come into options to make sustained profits over the long term. In fact, I was looking at it as an income source which should be regular. I could not afford to do something random. Instead had to do something more stable.
I explored trading in futures. However, figured out that the charges (brokerage and taxes) were much higher vs options selling so I kept that for sometime later on.
I chose options selling as the probability of win in options selling was higher. Look at the scenarios in options selling:
1. The market goes in the right direction strongly: Profit
2. The market goes in the right direction mildly: Profit
3. The market stays in the same place: Profit (from Theta decay)
4. The market goes mildly in the wrong direction: Likely profit from Theta decay
5. The market goes strongly in the wrong direction: Loss (with SL)
Next: I had to find a process to win (regularly)
Set a Goal: I started with an ROI in mind. If I look at this as a business, I should at least make a return of ~25%+ per year. Ball park, the requirement was to make 2% a month.
Focus on a particular script: I chose Bank Nifty (the index for Banks in India). The reason for choosing this was 1. It is a popular index with great volumes everyday 2. It has the banks included but mainly driven by 4-5 of them, 60% by only 2 banks (therefore chart analysis becomes easier) 3. It has decent volatility which is good for trading.
Unit Economics: It is always my endeavour to learn something with small bits and pieces, learn to chew and then go all in. I started working with just 1 lot of Bank Nifty and set a process. On one lot, I traded for a month and understood that it would be easy to have a 55% kind of win rate (winning trades to losing). In month 1, I would keep the win-loss ratio as 1:1. I would try to take 10 points of premium in wins (Rs. 10 x 25 quantity) and make Rs. 250 for every winning trade. I would keep my stop loss at Rs. 250 - same as the win. However, month 2 onwards, I kept the stop loss at Rs. 125 to make the win:loss at 2:1. This had to be done by keeping the winning % intact at 55+.
Just check below what happens
Costs and Charges reduce for more lots: With one lot, brokerage and taxes are about Rs. 50. However, with my broker, brokerage remains Rs. 40 for any number of quantities. Therefore, if I trade in 10 lots, brokerage per lot comes to Rs. 4 / lot. My trade is profitable even if I take 1 point on the options premium after 2 lots.
Now, my only job is to stick to the process and win 55% trades with the above strategy.
Generating 27% annual would not only mean a regular income, but a constant growth in capital too.
You can set your own process:
Choose your goal
Choose the script (s) for trading
Find the unit economics
Increase the quantity gradually
This is how one can achieve the goal of selling options for a living.
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