Zerodha founder on odds of making money in options trading

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The stock market can be the toughest place in the world to make easy money, especially in trading options strategies. On whether option writing has odds of making higher profit, Zerodha founder and CEO Nithin Kamath in a tweet said that it is possible, but only when risk is compared to option buying.

“Since max profits are limited & losses are unlimited, if the risk is not managed properly, option writing can be, eating like an ant & pooping like an elephant,” Kamath explained in a tweet.

For most naked option writers, the losses in a volatile month may equal profits made over a long time period. If one is writing options naked, risk has to be capped either in terms of capital allocated or a fixed stop loss of 1 to 5% of capital, the lower, the better. Kamath advised.

“Writing naked puts, especially in stocks, is by far the riskiest type of trade out there. Every day, there are a zillion things that could go wrong for a company—Macro & Micro. Given the limited rewards & unlimited losses, writing puts doesn’t add up in the long run,” he further explained.

The only way to significantly improve the odds of making money by trading options is by trading options strategies with a max loss. The odds of profiting & surviving are higher. And longer the survival, the experience gained can help become a better trader, added Kamath who is known for educating investors on the social media platforms.

Zerodha, the Bengaluru-based brokerage, began 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 over 8 million customers that trade in stocks, currencies, commodities, mutual funds, bonds through the Zerodha app. Meanwhile, Varsity is Zerodha’s in-depth collection of stock market and financial lessons.

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