ETMarkets Trade Talk: Not Nifty or Bank Nifty, this crorepati trader minting money with stock options

Unlike most retail option traders who bet on Nifty or Bank Nifty, Gupta loves the world of stock options. “I trade volatility and not direction per se. So my systems are either long or short volatility on several underlyings. With indices, there are just two underlyings Nifty and Bank Nifty (Finnifty is still not very liquid) but with stocks, there are about 200. More the number of instruments, more the opportunity to trade volatility,” he says in this chat with ETMarkets.

Gupta claims to have made a CAGR of over 40% in his full-time trading career. Edited excerpts:


Please tell me something about your educational and career background. How was life before you started trading?
I started my journey as an engineering student from NIT Allahabad way back in 2007. I have also done my MBA from NITIE Mumbai and have been fortunate enough to have landed great assignments at IT behemoths. My journey in IT includes working at names like IBM,

and Capgemini, in India, the UK, Hong Kong and Dubai. It did take me a fair bit of courage to leave this cushy corporate life and start my trading journey but I am glad I undertook it!

How did you get introduced to trading? What was the trigger?
Honestly, I am the first generation in my family to do so. One of my uncles made quite a few investments, but I only got to know about it after I took to trading full time. I started my investment journey back in early 2009 when I got to know about it from my colleagues at the office. There used to be a lot of coffee discussions around it that got me intrigued and that’s how I started my journey.

Later, I started options trading sometime in 2013-14 but only to lose money initially. I still remember one of my future trades being long

some time in 2014-15 and the market started tanking because of some global news. Every day I was paying a lot of money in MTMs and that was a brutal lesson for me. I started learning a lot more about F&O trading from various sources available on the internet and turned things around from there. I have never looked behind since then.

Why did you take the risk of being a fulltime trader when you were pretty successful as a senior consultant at an IT MNC? Was quitting your job a tough call to make?
It was not a hasty decision to quit my corporate job and become a full-time trader all of a sudden. It was rather a very considered decision, as there are a lot of checkboxes one needs to tick before deciding to become a full-time trader. A lot of budding traders who aspire to become full-time traders ask this question to me a lot, and every time I try to caution them as it’s a very different experience.

While I was working, I was already profitable trading part-time for a few years, as having a profitable system is the first and foremost thing you need to be pursuing trading as a full-time career. I had adequate capital to start with, had no loans or liabilities, had other sources of income in terms of rental and my wife was still working, so it wasn’t a case of my family being solely dependent on the trading income in the future.

I decided to quit my job and pursue trading as a full-time career for two primary reasons – one to be able to do something I have become passionate about with my full time and dedication to it and two, because of the enormous growth potential I saw. About four years down the line, I am so happy I took this road.

Option trading in Nifty and Bank Nifty seems to be much more popular than trading in stock options among retail traders. So why is it that stock options work better for you than index options?
When it comes to trading, there are a lot of things that work in the stock market. Some people are successful at cash trading without having to bother about F&O at all while others do very well trading F&O but can’t get it right trading in equities. Put simply, what works for you might not work for others.

One must try out various methods of trading before trying to conclude what works for them. Even if I handed over my profitable system to someone, it might not work for them as conviction cannot be borrowed.

I trade stock options profitably today and it’s because I have tried several other trading methods myself and this is something that has worked for me well and I am comfortable trading this through thick and thin.

I trade volatility and not direction per se. So my systems are either long or short volatility on several underlyings. With indices, there are just two underlyings Nifty and Bank Nifty (Finnifty still not very liquid) but with stocks, there are about 200. More the number of instruments, more the opportunity to trade volatility.

As for option buying or selling, there’s something called vol risk premium (VRP) and when my system suggests it to be higher than usual, I am short volatility or a net option seller. When it’s perceived lower and a vol expansion is expected, I am long volatility or a net option buyer.

How has your trading portfolio performed in the last 3-4 years after you left your job?
I have clocked an average of 40%+ annual returns during my full-time trading career. I did 35% first year, 60% second year and 32% last fiscal and this fiscal I am up 19% so far trading a comfortable 8-digit figure for myself.

While such returns might look very good to most of those who know what it’s like to trade decent size, it might not look very appealing when it comes to social media. While everyone talks about the returns, a very few people talk about the risk or the leverage taken to generate those returns.

I want to draw attention to a very important term called exposure taken trading F&O as both futures and options are leveraged products. I take no more than 2X exposure on my account size which in fact is precisely what is allowed to a category III AIF when they trade derivatives – they can’t take more than 2X exposure because of the risks involved.

To put things into context, most of the time I require only about 50-60% of my account size as margin needed to take all the positions that I have. Most others who flaunt big fat MTM screenshots on social media carry as much as 6-7X exposure at times while carrying 4-5X is a norm.

Why is it that your drawdowns have been less than 7%? How do you hedge your trades?
I am a very conservative trader and believe in the risk over returns principle. The biggest hedge lies in sizing your position right. In the negatively skewed strategies that I deploy mostly, there are two kinds of primary risks involved.

One is at an individual trade level – since I trade stock options mostly and you often see stocks hitting 10% circuit up or down so that exposes a risk to my portfolio if I have a position in that stock. This is best managed by having a low exposure in one single stock.

I work with sizing as low as 10% or below exposure with regard to overall account size, so even if a stock does 10%, I would usually lose about half a percent in that trade.

Second is the tail risk hedge when there is an extraordinary event that leads to circuit opening in all stocks/indices the next morning – Sky is falling kind of an event! I try to hedge my overall portfolio by buying low delta options in Nifty as per account size. This gives me a cushion of about 5% and so even if there’s a tail risk event, I won’t lose more than 15% of my overall account size assuming the worst case scenario – a more realistic estimate though is 10-12% and I have stress tested it many times in my options book. And, this is the risk I am willing to take in case of a tail event.

We see a lot of techies getting attracted to option trading. What’s the connection?
There are usually two arguments for this case – One techies can code so they have the advantage of having a background in greetings systems/algorithms and secondly it is easier for them to backtest strategies to see what works and what doesn’t.

They can also write an algorithm to run the strategies in an automated way without any manual intervention. Most techies are engineers. They are supposedly good at numbers and technical analysis which is needed for one to

in the market.

While it might look as if these arguments have a lot of merit on the face of it, make no mistake this is not the only ingredient one needs to be successful in trading. There is much more to it. So my humble advice is just because you are good at numbers and you can code, it’s not a certainty you will do well in the stock market.

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