The stock market can be the hardest place in the world to make easy money, especially in trading options strategies. On whether writing options has the potential to make a higher profit, zerodha Founder and CEO Nitin Kamath said in a tweet that it is possible, but only when the risk is compared to buying options.
“Since the maximum profits are limited and the losses are unlimited, if the risk is not managed properly, the substitutes can be writing, eating like an ant and hunting like an elephant,” Kamath explained in a tweet.
For most naked option writers, losses in one volatile month can equal profits made over a longer period. If one is writing naked options, the risk has to be limited either in terms of allocated capital or as a fixed stop loss of 1 to 5% of the capital, the lower, the better. Kamat advised.
“Naked put writing, especially in stocks, is by far the riskiest type of trading. Every day, there are a billion things that can go wrong for a company—macro and micro. Given the limited rewards and unlimited losses. Well, the writing put doesn’t add up in the long run,” he added.
The only way to significantly improve the odds of making money by trading options is with the trading options strategy with maximum loss. Profit and chances of survival are high. And living longer, the experience gained can help one become a better trader, said Kamath, who is known for educating investors on social media platforms.
Bengaluru-based brokerage Zerodha commenced operations in August 2010. The startup was launched by brothers Nithin and Nikhil Kamath with their own funds and has zero debt. The retail brokerage firm has more than 8 million clients who trade in stocks, currencies, commodities, mutual funds, bonds through the Zerodha app. Meanwhile, Varsity Zerodha has an in-depth collection of stock market and financial lessons.
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