Mitesh Patel: The angry young man of options trading tips & tricks

 Mitesh Patel: The angry young man of options trading tips & tricks

-The main lesson that I learned from the book was not to sell short when the market is in an uptrend or to buy when the market is in a downtrend.

-In a rising market, the stop loss was kept below the previous low while in a falling market it was above the previous high.

-My next step was to mix technical analysis with options selling. I used the support and resistance points to initiate a trade. 

-If the market moved higher after testing the support levels, I would sell the puts, and if it fell after testing the resistance levels, I sold calls.

-Only if it lingered between the support and resistance line would I create a short strangle trade.

-Suppose the Bank Nifty reverses from a support level at 26,500, I will sell a 26,200 Put. The strike on which I trade has to be 1 percent away from the support or resistance level. If the Bank Nifty is breaking the previous trend, I will cut my position irrespective of the profit or loss.

-In the above example, the first trade would be selling a Put at 26,200 and the second would be selling a Put of 26,300 as the Bank Nifty moves higher.

-Since I am trading the weekly Bank Nifty, the benefit from time decay is also high apart from benefiting from the directional movement.

-If the market breaks through the support level, I will square off my Puts with a marginal loss as time decay has would have helped in the deterioration of the premium.

-Meanwhile, the remaining 40 percent cash is put to good use by writing calls. As the support is broken the new trend is clear – the Bank Nifty will fall. I then place my trades to benefit from the downward direction.

-If you are sitting in front of the screen and your reaction time is fast, whipsaw moves may not result in you making money, but at the same time, you will not lose either.

-As for exits, I am out of the trade if the option loses 80 percent of its value. If I short an option at 50-60 percent, I will exit when the premium falls between 5-10 percent.

-On account of the increased volatility in the recent past, I have tweaked my strategy a bit. I do not keep too many positions open on Wednesday, one day before the expiry. On average, around 80 percent of my capital is free on Wednesday. Further, only if volatility is high will I initiate a sell position on Tuesday.

-I normally do not take non-directional strategy trades, since the return on capital is lower, though the probability of being profitable may be higher. But since I am a full-time trader and am sitting in front of the screen, I manage my risk aggressively.

-My stop loss is placed at a total capital level. If I am losing 2 percent of my capital on a trade I will exit, no matter what.

-Stock futures can give very high returns, but at the same time so are the losses.

-In stocks I am a breakout trader – I look for stocks that are breaking out of a range on high volume. I trade only in liquid counters and trade the breakout itself rather than catching a retracement. Most of my trades are for intra-day. But to select the stock, I look for those that are near the support or resistance lines on the daily chart.

-The good part about these trades is that they give immediate returns. Even if you are stopped out of the trade for one or two times, the third move generally is a big one that will cover the losses of the first two trades and leave something on the table.

-There are nearly 150 stocks in the derivative segment and we can get one or two breakout trades every day.

-Over the last few months, the expiry day has turned too volatile. Many traders, including new ones, are playing that game. Brokers are designing products especially for expiry day trading, which is adding to the volatility.

-I had made some big profits and big losses trading the expiry day. My strategy for expiry day has changed with changing times. I now trade at half the position I used to earlier.

-Earlier I used to look at the open interest and trade accordingly, but the wild swings on the expiry day over the last few months have not worked well for this strategy. Earlier, the premium decay used to start in the first hour, but now it does in the second half of the day.

-Now on the expiry day, I trade in more or less the same way I take the weekly trades, except my time frame is shorter. I look at the 3 and 10 minutes chart and have support and resistance lines in place. I sell options to take advantage of the direction of the market move.

-I build up my position slowly by allocating 10 percent on the first position and then building it up as the market moves in my direction. I sell an option that is around 200 points away from the market. If I have initiated a trade at 50, I will add the next one as it falls to 45. I will keep on adding to it till the direction changes. Most of my selling is over by 12.30 p.m. and I do not trade after 2.30 p.m.

-If the direction changes my exits will be closer to the average price. The stop-loss rules are the same at 2 percent of the entire capital.

-I have seen losses of 10-11 percent of the capital on expiry day, though there were more gains of 6-8 percent. But these wild swings are not good. I have now kept a strict stop loss of 2 percent.

-Apart from knowledge, what is needed is capital. It would be a long journey to financial freedom if you enter the market with limited capital.

-A trader needs to learn technical analysis and understand market behaviour. Rather than copying others styles, a trader needs to have his strategy and style.

-Also, he should follow 1-2 patterns or indicators rather than jumping around from one to another.