Plenty of safer ‘options’ to create wealth

This blog is addressed to all those who receive WhatsApp messages and SMS on options trading which gives false promises of making 1% returns weekly, multiplying Rs10,000 ten times or a variant of these.

June 22, 2020 3:09 IST | India Infoline News Service
R Venkataraman, MD, IIFL Group
A WhatsApp forward about a person who apparently lost his life’s savings in options trading brought back memories of a wintry evening in Delhi. I was interacting with some of our clients when a gentleman walked up to me and narrated how much he enjoyed trading futures and options. An engineer by education, this gentleman had retired from a PSU in a senior position and moved to Delhi. I politely advised him to avoid derivatives, even at the cost of our broking business. I remember his words – “Maza ata hai ji, aur paise bhi bante hain.”

A few months later, I met the same gentleman because his account had turned dormant. I sought an appointment and visited him at his residence. He was candid enough to accept his mistakes and not blame anyone else. We are so used to the typical mindset to blame brokers or relationship managers for losses. He said – Aur ab sabak mil gayi hai. This is what bull markets and options trading (any trading for that matter) does to most people. This is also why most people look at stock markets with suspicion.

This blog is addressed to all those who receive WhatsApp messages and SMS on options trading which gives false promises of making 1% returns weekly, multiplying Rs10,000 ten times or a variant of these.

Higher returns come with taking higher risk:  There are no free lunches in the world. You start with SBI FD rate. I have used SBI because SBI FD is known to everyone and that comes closest to risk free return in India and saves you the bother of searching for RBI bonds or G Sec rates. Take SBI FD rate for same time period, and ask yourself one question – how can I get more than this, and if I am getting more then what is the risk I am taking? When you go shopping to the market, you know the price of anything is broadly the same across many shops. If the price in some shop is significantly different, it will raise questions in your mind. The same logic works in financial markets too. If the Indore stock picker is advising you and helping you to make 1% a week, which is 4% a month and 48% pa, why is he being so generous to you? SBI FD rate for 1 year is 5% or thereabouts.

Avoid the comparison trap: Everyone has at least one friend who has made zillions on the latest investment idea. You will read on WhatsApp groups and twitter how one options trader made a killing. Don’t fall for it because most people lie. In my years of experience in stock markets, I have met very few people who share both their hits and misses transparently. I have met so many people whose conversational investment track record would put Warren Buffet to shame, but they still travel in the local trains.

Investments in stock markets is simple but difficult: Making money in stock markets appear simple from outside but is extremely complicated. But making money in stock markets is possible. Warren Buffet is a living example. Even in India there are role models like Rakesh Jhunjhunwala and many others. But they went about investing in stock markets in an organized manner and not on basis on WhatsApp messages or SMS tips. They read a lot, meet a lot of corporates, analysed even more and then bet right.

Most of us don’t have the luxury of making investments a full-time profession. Then what? Simple. Save every month and invest in a portfolio of assets. Review them and be patient. Over time, you will see your portfolio grow and beat the SBI FD returns.

But what about options trading? That is best left to experts. Most options traders I know are super smart and know a lot of greek alphabets like beta gamma theta and so on. They are dedicated to their craft. And they do this for better part of their working day. You will come across many options but trading in options is not meant for everyone.

This article by Mr. R Venkataraman, MD, IIFL Securities Ltd., was published on cnbctv18.com on June 22, 2020

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