Here is one email I got from a novice trader:
Mr. Dilip, I am totally novice into options and while talking to good reputed stock brokers, assessing my risk capacity and capital investment (max 30k), they have informed me to do in derivatives (options) trading, where you pay minimum margin and also will get time to put in your stop-loss gap and other triggers, where you can earn minimum profit of Rs.5,000/- pm or more.
Next, in the cash or equity segment, you have to pay entire margin money and the sale value after brokerage and other taxes parentage will be far less than options trading.
But to me all these terms are very new and not able to practically do the things.
So, persons like me who are very conservative, middle aged and income generation is more priority, what will be your suggestions.
Read the first paragraph carefully. Traditional brokers who have a target to achieve making money from brokerages will tell anything to their clients so that they generate a brokerage.
One of the best ways to make money from brokerage is to sell a dream like in options you can invest 5k and make 10k.
Well technically its true but not many are able to live that kind of dream every day.
Invest 5 and make 10 is 100% return. A new comer will dream something else when he listens to this. He will dream like – invest 10 lakhs and make 20 lakhs (this may be his savings), or invest 20 make 40, now invest that 40 and make 80…the dream goes on and on.
What happens next? The poor trader immediately agrees to their brokers advice and ask them to buy the trade they recommend. Brokerage made. Target Next customer.
Why brokers never suggest Futures? Because 50% of their clients do not have the margin required to trade Futures. What is the point in selling a dream to someone who does not have the cash to buy that dream?
Note: Future trading requires more money as margin than Options buy trading. Option selling requires same margin as Future buy/sell, so options selling is never sold to the clients.
Money getting double is a great dream to sell and it will continue.
Now the real answer:
1. Stock trading is a business and risk is involved.
2. Option buy and sell can double your money but the chances are less than 1%, as either the trader exists at 2-5% profit or takes a stop loss at 50% or let the option expire worthless (all money gone down the drain).
3. Option buyers must always hedge their positions but that still does not guarantee profits. Naked option buying a very risky. Unfortunately this is the most sought after trade by option traders because option buying is very cheap and comes with limited loss.
4. Yes you get more leverage with less money in options, but you should know that it has an expiry time and you should be correct in your trade before the expiry comes.
5. See point no 1. Stock trading is a business but what business you can start with 30K? Even if you make a return of 10% on 30k that is just 3000. What difference does that make?
Change your mindset of investing less and making more. Options are a great tool if you learn to trade them properly.
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Dilip Shaw, Founder
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