'The trick to being a successful trader': Zerodha's Nithin Kamath on 'Option' strategies

‘the trick to being a successful trader’: zerodha’s nithin kamath on ‘option’ strategies

Zerodha Founder Nithin Kamath recently took to microblogging site X to share valuable insights on trading strategies. He emphasized the importance of surviving the challenging moments in trading, particularly on days with sudden spikes in option prices.

“In trading, surviving the bad days is key to success,” Kamath stated. He highlighted the recent volatility on expiry days, which often catches traders off guard. To mitigate losses due to such volatility, Kamath suggested employing fully hedged options strategies, such as spreads.

He shared a post by @abidsensibull on the benefits of spreads, such as Bull Call Spread, Bear Put Spread, and Iron Condors. These strategies offer several advantages:

Limited Loss: With spreads, like a bull call spread or bear put spread, losses are capped at a fixed number. This means traders don’t need to worry about extreme market swings or events like circuit breakers.

No Need for Stoploss: Many traders are wary of algorithms that might target their stoploss orders. Spreads alleviate this concern as the maximum loss acts as a built-in stoploss. There’s no need to set and manage separate stoploss orders.

Stable P&L: Trading spreads reduces the impact of Delta, Gamma, Vega, and Theta, leading to less volatility in the Profit and Loss (P&L) statement. Traders can avoid the addictive habit of constantly checking their P&L throughout the day.

Kamath also addressed concerns about market manipulation and volatility, suggesting that traders who are worried about these factors should consider staying away from option trading altogether. However, for those still keen on trading responsibly, fully hedged options strategies offer a safer and more peaceful approach.

He humorously added, “By the way, have you invested in any nuclear shelter?” indicating that in the face of extreme events like a nuclear war, losses from spreads would be negligible compared to larger concerns.

Overall, Kamath’s advice encourages traders to adopt a cautious yet strategic approach to trading. By using spreads, traders can limit losses, avoid the stress of stoploss hunting, and enjoy a more stable P&L experience. These strategies offer a way to navigate the complexities of the market while minimizing risks and maximizing peace of mind.

The accompanying illustration provided a visual representation of the benefits of spreads, reinforcing Kamath’s points with clear examples and scenarios. This comprehensive guidance aims to help traders make informed decisions and navigate the market with confidence.

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