Why Traders Buy Calls and Puts and Lose Money

These are very kind of emails that I receive almost every day:

Email received on 18-03-2016

Here is the text of the email:

Dilip,

Need your advice. Could you help me?

Before I became your subscribed member, I made the following mistake:

NIFTY 31st March Series:

Bought Put Option 7450 @ Rs. 148.80.

Bought Call Option 7800 @ Rs. 24.40 2 lots.

Today the Put Premium is Rs. 35.85.

and Call premium is Rs 7.80.

So my total loss ( 148.80-35.85) X 75 + ( 24.40-7.80) X 150= Rs 112.95X75 +16.6X150
= Rs 8,472+2,490
= Rs 10,962

Yes I made idiotic decisions for which I repent. it’s my idiocy.

Now as an advisor could you tell me any strategy to mitigate this loss?

Looking forward.

First let’s get into psychology of these kinds of traders why they love to buy calls and puts.

When most of us first learn about options on the Internet or in any book or by our brokers, we are told that “option buying is unlimited profit and option selling is unlimited loss.” As soon as we read it an idea comes into our minds (mostly to do with greed and easiness of trading).

This is the virtual dream that we start dreaming:
“Let me buy any Call and any Put – if Nifty goes down Put will make unlimited profits and if Nifty goes up Call will make unlimited profits. It is so easy. I will become very rich in couple of years.”

And then they press the button of a Call buy and Put buy the next day without using their brains and they feel happy that they have done a great trade. After a few days reality kicks in. Both calls and puts lose money. Then they see their virtual dream breaking and search the Internet in vain for help. They do not get any help and close their position in losses.

Wait the story doesn’t end here. They think they were unlucky so they try another time. And this time to recover the losses they buy 2 lots of both calls and puts. After a few days the story repeats. First loss was around 10,000 this time 10,000 more so total loss stands at 10000+20000 = Rs. 30,000/-.

Unfortunately the story continues for years and now the losses stands at lakhs. Then they either stop trading or start selling options. Unfortunately even after losing money in lakhs they do not understand that hedging your trades is very important. Just like a medical and a term insurance is important for all of us, hedging is like an insurance in option trading so its an important part of option traders life. This time in one or two trades they make a profit then one day a huge movement comes in.

Remember that selling options means losses are unlimited. But somehow they forget that or live in the hope that before expiry Nifty will reverse and they will end up in profits. It does not happen. So now this loss not only takes away their last two profits but they lose even more. Again the story continues. Then one day they realize losses standing at more than 5 lakhs.

Now they understand the reality – they are not good traders and need help. Here tip providers comes in. Welcome more losses. 🙂

Did you notice that most of us want to take the easy route to make money? Nobody wants to learn about stock markets but still think they think they can make money.

How is that possible tell me?

Trading Options and Futures in not an investment it is a business. If you are not willing to get knowledge someone with knowledge will take your money away. Also remember that in any business lazy people who look for making easy money never succeed in making money. So why do you treat stock markets as a different ball game? Stock markets also needs hard work and knowledge to succeed.

Do you think Warren Buffett made money easily in the stock markets? No. He used to visit the offices and factories of the companies he wanted to invest in. He used to even talk to managers of the companies he wanted to invest in. He used to calculate MOAT of the stocks to know the real valuations of the companies he wanted to to invest in. Only after some conditions were met he invested in only those companies those passed his test. How many of you do research on the companies that you invest in? Most of you invest out of pure speculations no research. Because research involves hard work and we do not want to work hard.

You may have heard and read it a thousand times but I will repeat it again.

To achieve Success there is NO substitute to Hard Work. Do not take short cut you will destroy your wealth.

If buying options and making money was very easy then imagine what kind of world we will be living in. No one will go to school. Because our fathers will be buying options calls and puts and making huge money and they will teach us the same when we turn 18 and give us 1 lakh, open a trading account and tell us the easiest way to make money. The whole world will collapse. No one will open a factory, no one will start a business, no one will become a scientist. So there won’t be any offices or jobs. The only work in the world will be buying options. So all will be option buyers. There won’t be any farmers too. So there won’t be any food to eat too. Even though we will be earning a lot we all will die of hunger. Do you think there can be a world where the only job people do is to buy options? And one more thing – if option buying only makes money then no one will sell options. If no one will sell options then trading will also stop. The whole world will collapse. God knows this and therefore makes sure that greedy and lazy traders lose money so that they get back to work.

People do not use their brains and think what I have written above, but just press the buy button because they only think about unlimited profits. No one thinks of the possibilities of losses. Only when they start losing they realize the fact that option buying cannot make money.

They also forget that options premiums are decided by five factors: Delta, Gamma, Theta, Vega & Rho and when they buy they are fighting against Theta (Time). Tell me in the history of this world who has won against time? No one so why and how do you think you will?

Ok some of you may have made money by buying options sometimes but how many of you got unlimited profits? Remember that unlimited profits are only in books. In reality you press the sell button much before unlimited profits kicks in. Because of the fear that the profits may again go away and turn into losses. So in real world buying options is only limited profit trade.

So unlimited profits is only in the books, not in real world. Long back I had written why option buyers lose money. Please read it for more information.

Once they realize that knowledge is important to make money trading options they enroll for my course. But unfortunately by that time lakhs are already lost and when they tell me their story I feel sorry.

By the way. I was also in the same shoes once upon a time. I did a lot of mistakes and lost about 7 lakhs in my first 3 trading years. 700000/36 = Rs. 19,445 lost on average every month for continuously 36 months. My salary at that time was just 25,000 per month. So basically I lost all my savings of years. I realized my mistake that I wanted to make easy money without gaining any knowledge so I lost. To this day I regret the losses but those losses changed my thinking.

I am today not only a very conservative trader but very conservative with my spending as well. I can easily live a more luxuries life, but to save money I am sacrificing them. To give you an example I can right now walk in a car dealers shop and buy a car worth 12 lakhs without taking a loan but I still use a car that’s less than 5 lakhs and 5 years old. So I save 12 lakhs. You know what whether a car is worth 12 lakhs or 4 lakhs, its only job is to take me from one place to another – so why should I spend more? Hope you get the point I now tell myself the real way the world works and do not dream a virtual world. Do you think if I buy a car worth 12 lakhs my business or life will improve? A BIG NO. So basically I will just waste 12 lakhs on NOTHING. Luckily I have a great and supporting wife too. She was and still is a very conservative shopper. We always see the newspapers for offers and discounts and never leave such shopping opportunities. I think because of this in one year we save thousands on shopping itself.

Obviously money saved is money made. We will teach our children the same. Believe me showing off your wealth to others is very costly and no one cares. Over the long run you only lose money showing off. Live a lifestyle below what you earn and I bet within years you would have saved a lot and it will make you very happy.

One more thing – after my accident I realized the importance of health. I realized that health is more important than wealth. What shit a life will be if you have crores in banks but you spend nights in hospitals. All that money will only be lying in the banks. So now I have decided to start exercising and eat very healthy food to remain healthy. Good health will allow me to work harder and create more wealth for my family.

If you are reading this and are still losing money trading options I highly recommend my course. Apart from the strategies it offers a lot of knowledge. You can even apply this knowledge in your own strategies as well or make your own strategies. You can pay for the course here. Remember that you can do this course from your home. It’s done through email only. I will support you for one year to become a better trader. Who in the world offers support for one year for less than 100 dollars? So do it now.

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