Options Trading Explained Under 15 Minutes

[00:00] It's super easy to make money out of Options trading. With just Rs.5000, I have made lakhs.

[00:13] I am also gonna put in three months of my saving into this. This is interesting.

[00:29] Something was definitely wrong with the expectations of that guy. Do you know, option trading is so popular, and people think they can make a lot of money.

[00:41] Nine out of ten traders in the F&O segment actually made losses in FY 22. And these are not some random stats.

[00:53] And if you remove the profitable outliers, just 6% of all F&O traders individually made money. And the average profit was just Rs. 3400.

[01:07] Rs. 3400 was the average profit. So, basically, very few people actually make money in options. We'll talk about the good.

[01:20] Because certainly the Internet isn't telling you the truth. So let's get started. So, before we understand why people lose money in option trading,

[01:35] If you already understand this, you can skip ahead. If you don't know what it is, we'll do a quick understanding of what and how they work. you can also trade in the derivatives market with futures and options.

[01:52] A derivative is exactly how the name sounds. You derive the prices from something else, like the prices of curd and butter can be derived from the prices of milk. So if the prices of milk go up, of course, the prices of curd and butter will also go up,

[02:08] because that's the raw material needed to build this up item. Similarly, the derivative market is derived from an underlying, usually stocks and shares. An options contract is a financial agreement that grants the buyer the right,

[02:26] The underlying could be a stock or a share or something else at a preset price within a given period. So Infosys option contract derives its value from Infosys shares.

[02:40] And like that famous movie dialogue, So let's imagine you want to buy a cycle. You go into a shop and he says, if you want to buy it, please pay me cash right now.

[02:56] You say, look sir, I don't have the money right now. But what I can do, I can give you Rs.1000 upfront to block this particular cycle because I like this design.

[03:08] And in ten days time, I will come and I will pay the rest. By paying the Rs. 1,000, let's call it the premium, you were able to block and say that I have the right to buy this cycle for Rs. 10,000 within the next ten days.

[03:25] Now notice, the cycle is the underlying Rs. 10,000 is the strike price or the price that you want to buy. And ten days is the time limit or the expiry date within which you can complete your obligation. Now, the reason that he paid Rs.1000 upfront and not the entire Rs. 10,000 is because he's a little unsure.

[03:44] He wants to think about it. In fact, he's speculating that the price of this cycle may go up or down for multiple reasons.

[03:56] You can either come before the ten days, pay the rest and take the cycle, or you come back after ten days. Do you think that the owner is going to sell you the cycle after deducting that Rs. 1000 advance you gave to him?

[04:12] You've lost that Rs. 1000 because you did not complete the contract. You said you'll come back in ten days and buy the cycle, but you didn't. Now, can someone force you to buy the cycle?

[04:27] If you don't want to buy it, don't. But if you don't, then at Rs. 1000, it's gone. There are other aspects to this as well.

[04:41] This particular example is a call option where you're saying that you want to buy this stock or in this case the cycle within a particular time in the stock market, you can do the opposite too. You can also buy a put option where you think the price of the underlying of the stock is going to fall.

[04:59] You have a bunch of variables here. Whether you think the price of the underlying is going to go up or down. This moves as well.

[05:14] This entire contract expires at a certain time in the future. By adding all these variables, the prediction of the prices becomes really tough,

[05:26] This makes option trading really, really complicated and difficult. But despite this, option trading is on a rise.

[05:38] People love trading options because money can seem like it will come quickly, and it's just. And that's the root of the entire problem.

[05:50] In fact, people love options so much, 400 times more option contracts are traded than actual cash market. And if you look at this, you'll see people are trading options way more v/s any other country.

[06:02] Let me show you one thing which will blow your mind. And I can see that Asian Paints has risen in this time by about 3%. This is how a normal investor would think about 3% as a return.

[06:21] If someone had taken a call option, it would have gone up by 137%. Now, you tell me someone who's never traded in the market, who has no idea how the stock market works,

[06:36] has never invested, finds out that one stock went up 3% and the same stock in the derivatives market went up 137% in the same time period, which is what one day.

[06:48] Let me make this example a little more exciting. This 137% and all sounds interesting, but in real cash. So, in derivatives market, you can't just buy one share.

[07:03] That minimum number of shares is called a lot. Now, I can see that Asian Paints is a minimum of 200 shares. But, you know, in the derivatives market, it's not trading at thousands of rupees like the cash market.

[07:18] It's actually trading at Rs. 29 for this example. So 29 multiplied by 200, you would have paid Rs. 5800 to make this one trade,

[07:31] and this Rs. 5800 would have given you a 137 profit. It's a low investment cost, and it seems like you can double your money very easily.

[07:45] So a small capital, lots of volatility, and in a small time frame, you can double your money. It feels. If you look at any option contract that you're looking to buy,

[08:02] I mean, it costs Rs 1, Rs 10, Rs 20, Rs 30, and it feels like it's easy. Which comes to the third point. Sometimes these people mention specific products to make you transact in them.

[08:18] Sometimes they get a commission through an affiliate link. But whatever the reason is, a lot of these people were also in options. And in options, the thumbnails were crazy.

[08:32] When you see a thumbnail like this which says five lakh rupees in five minutes, You might watch a few minutes because it's entertaining. You might watch the next video because you really want to understand how we made five lakh rupees in five minutes.

[08:48] And then we have the advent of the Internet. Over the last few years, opening an account with a broker has become really easy. So anyone who's not even read or seen this channel or read varsity

[09:06] or done anything to understand how markets work can just trade. And because of all of these reasons, we've gone from 7 lakh traders to 45 lakh traders in a really short period of time.

[09:23] And in fact I can see here that over 85 billion option trades were placed in India. Take a moment to realize how much that is. 80% of the number of option trades happen in India.

[09:39] That's a problem because I don't think most of these people understand how option works and most of them are gambling. It's this. This is not me or our research team saying this.

[09:56] Now in this I'll only explain about buying an option. We're not going to talk about writing an option or selling an option because it might get a little complicated. So the first thing is limited time.

[10:11] One is where we buy a stock and let's see what happens to the stock. In the option market, this stock didn't move at all for the next three days.

[10:25] Okay, this means whatever you invested is almost equal. Let's look at our call options of the same underlying because the stock didn't move well,

[10:38] But as you can see, it's fallen more than 15%. Now you tell me, why did the option fall 15% if the market didn't move only? This is called theta or time decay.

[10:55] And as you go closer and closer to the expiry day, the value becomes closer to zero. Not only do you have to predict the direction of the price, you also have to predict how fast it will go.

[11:10] You have to predict when this will happen. And predicting that, it's kind of difficult. There was this survey over here

[11:26] where the survey said 40% people enter F&O because they think they can double their money quicker. Now, when you start trading, you could lose money or make some money. Here's a story of one guy who started trading with a capital of two lakh rupees,

[11:45] Then you go all in, and one day, I lost one lakh rupees. Clearly, this person hadn't spent any time understanding how the option market works.

[11:57] He just went in to make some quick money, thought of it as gambling, and this is what happened. He first made Rs. 5000, then made Rs. 20,000 in five minutes, and thought, this is not that tough.

[12:12] And eventually he lost Rs. 59,000 in just a few hours. And as soon as this happens, something interesting occurs in your brain. Your brain tells you and intellectualizes it, saying, if you spent a few minutes to earn money, you lost money.

[12:29] You'll find a way to make back that loss and then get back in the game. This, my friends, is called revenge trading. You probably don't know this because you're not in the cycle, but anyone who has should tell their story in the comments.

[12:45] If you have lost money in F&O without understanding how it works, please tell us your story and let the Zero1 community understand, what are the pitfalls and psychological tricks you tell your mind and lose cash for no reason.

[12:58] And I think all of this behavior turns into addiction, right? I watch YouTube videos. I do all these things, and I feel like taking one more trade and it becomes, well, an addiction.

[13:12] And we have the perfect story here as well. Here we can see that someone says, after losing 1.8 lakh in options, I told myself I'll stop. This is the definition of addiction.

[13:25] Imagine someone watching a YouTube video and then trading. I mean, who watches YouTube videos and then starts trading? I mean, can you imagine someone taking a large portion of their salary and actually putting it to options?

[13:42] Over here, we found this really interesting story of someone who bet half of his entire salary in option trading and lost it all.

[13:55] Here he says, the lessons I learnt is that if something is too good to be true, it definitely is. And here it says 36% of option traders are under 30 and they have this fomo of the market and they want to make that money quick.

[14:10] And we also know that 37% of people spend their trading capital after getting influenced by social media. They care about their own stuff, so don't listen to them.

[14:22] It's weird I'm saying this when I'm talking to you on a social media platform, but, well, I'm de influencing it. If you thought this was a nice episode, please say something in the comments. are simply understood without getting too technical.

[14:39] So let me know what other episodes we can do. See you in the next one.