When a trader begins option trading they are bugged by payoff charts and diagrams. They try to know everything possible under the sun and try to make money. This is mainly with highly educated option traders.
By educated I mean traders just passed out from colleges who have access to smart phones etc. No there is nothing wrong in reading about options or futures or payoff graphs, Greeks etc., but having a wrong assumption about it is wrong.
What is a Payoff Diagram?
A Payoff diagram is a graphical representation of the potential outcomes of a option strategy. What can be the profit or loss and sometimes the success percentage of the strategy. It gives a visual representation of the possible outcome of a strategy if played at that time on a stock or indices.
A lot of Option traders rely on these payoff diagrams to plan their trades. It also helps them to evaluate how a strategy may perform over a range of prices, thereby gaining an understanding of potential outcomes.
But is a payoff diagram really helpful? I will discuss in this article.
Here is an email I got from one of site visitors:
I want to deploy more capital and earn consistent income from trading option strategies. And I am under the impression even after a trade is placed, you need constant adjustments to minimize your loss or maximize your profits. And for that you need knowledge of Greeks etc. Otherwise adjustments will be difficult to do.
Am I correct ?
Read this article to see how by just investing Rs.10,000 could have made any of your senior relative, one of the richest man in India. I am sure at that time the payoff graphs for investing in ITC and WIPRO might be same as investing in any other company – one straight line – which is same as buying any stock. But payoff worked wonders for these two stocks only – for the rest payoff charts and diagrams failed.
I know you must be thinking that payoff does not work for investing – it’s for options trading only. You are right but I am trying to give you some logic.
Here is the payoff diagram of the most dangerous trades done intraday/positional everyday by day & positional traders – the ATM Call or Put option buy according to their views:
The Long Option Payoff Diagram/Chart:
The chart says: Limited Loss Unlimited Profit
But what is the FACT? This happens rarely – 80% options expire worthless.
But still a lot people rely on payoff graphs and take a trade. The result is known to them only after the trade is over.
Please remember – once the trade is over the stock takes over. Its now in the hands of the trader to take a profit or loss anywhere he likes. Now a payoff diagram is a trash/worthless.
Let me take another example. Make a payoff diagram or chart for Nifty Future buy and sell.
Both will be same but one payoff diagram will fail.
Don’t go for things that will confuse you. Blindly following anything is a mistake in stock trading.
Does Adjustments Work?
Fact is traders who keep adjusting their trades according to payoff charts or diagrams or any of the Greeks are bound to fail and make their brokers rich.
When automated trading has failed badly in the US how on Earth adjustments manually will work?
Read these articles to see how Automated adjustment trading has destroyed wealth:
That’s $440 million gone.
I have never seen a payoff diagram ever in my life. I have never adjusted a trade. Its either profit or loss for me – but I never panic and do any adjustments to a trade as I know all my trades are properly hedged – so why bother?
Adjustments Will Cost You Brokerage
Option Greeks will change for every 50 points move in Nifty. So for every 50 points move the trade will exit one position and get into another one. This is not free. He has to pay a brokerage for that and is it really an adjustment?
By shifting the trade he either took a profit or loss in the earlier trade. In most cases its a loss.
Basically he took a loss in one trade and entered into another trade. Where is adjustment?
Adjustments Will Give You Stress
As soon as the stock moves away – the trader will check option Greeks ans the stress follows. What to do now? Adjust? Ok done. Stock moves again. Stress for the trader. What to do now? Adjust. 🙁
While the broker will bless him a lot. 🙂
Adjustment is a psychological myth for a trader. Its the most foolish trade in the world.
Adjustments Will Cost You Brokerage
You Can Read More On My Site
Hi, I am Dilip Shaw, owner of this website. I am a trader like you. I have been trading since 2007, but lost a lot of money till 2010. I then stopped trading and studied options like college exams. Started trading again from 2011 and never looked back since. I did a lot of research, read books and did countless paper-trading before being profitable. You can read about me here.
My conservative trading course since 2014 is helping many retail traders just like you who have a job or business make consistent profits like this:
What Traders Say About This Course
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One Of My Client Is Making Rs.25k Per Week
Difference Between Other Courses And Mine
What Others Charge for Courses
You can do this course from your home. Some traders make amazing profits like Rs. 16.26 lakhs profit in 5 days though results may differ for all.
This course helps you learn to trade conservative option strategies for monthly income. Once you finish the course you can start trading immediately. You can start trading from any day. No need to wait for expiry. You will make profits consistently.
This course is good if you have a regular job or business. You DO NOT NEED to monitor your trades every second.
What You Get?
Before reading please understand that for all 5 strategies, strike selection will be taught. Strike selection while trading Options is the most essential part to succeed.
You get two conservative non-directional strategies on options, one conservative stock option strategy and two conservative directional strategies on Future & Option combination.
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Technical knowledge is NOT required. No need to monitor trades every second.
In the course you will learn how to select the strike prices. You learn when to trade, which strikes to sell which to buy, how much profit target you should be looking for, the best place to take stop loss and what to do after taking stop loss – means how to get that money back. The success rate is more than 80%.
Since trades are properly hedged there is no stress in trading my strategies.
I am very confident that you will make money trading my strategies. To help you succeed I offer few months support for FREE.
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1. TA Knowledge NOT required
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9. Scaling Possible
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To know more Call/SMS/WhatsApp me on 9051143004 or email me now. I know English and Hindi.
Read the details of the course here.
If you want to enroll for the course you can do so here.
P.S: So many years of trading has thought me one thing - it is always better to make small profits month after month, rather than lose money month after month trying to make too much money. It never happens. But small money accumulated month after month can become very big in only a few years.
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Dilip Shaw, Founder
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