The truth about getting rich with Options Trading | De-influencing

Summary

This video script discusses the allure and risks of options trading, highlighting how few actually profit despite its popularity. It explains derivatives and options contracts with an analogy, pointing out the complexity and the psychological pitfalls, such as revenge trading and addiction, that lead to the majority of traders losing money. The script warns against the influence of social media and the misconception that options trading is a quick path to wealth, urging viewers to be cautious and well-informed.

Takeaways

• 💡 Options trading can be highly profitable, but it's also risky, with a majority of traders making losses.
• 📈 The script emphasizes that only 6% of F&O traders made money, with an average profit of just Rs. 3400, according to SEBI statistics.
• 📚 Derivatives, including options, are financial agreements derived from the prices of an underlying asset, like stocks or shares.
• 🔄 An options contract gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a preset price within a given period.
• 🚲 The script uses a cycle purchase example to illustrate the concept of an options contract, focusing on the premium, strike price, and expiry date.
• 📉 Options trading is complicated due to variables like direction, premium, and expiry date, making price prediction difficult within a time limit.
• 💸 The allure of quick money and low entry barriers attract many to options trading, despite its complexity and high risk.
• 📊 The rise in options trading is partly due to the influence of finfluencers and the ease of account opening with brokers, leading to a surge in traders.
• ⏳ Options trading involves time decay (theta), where the value of an option contract approaches zero as it nears its expiry date, adding to the trading challenge.
• 🧠 Many traders lose money due to a lack of knowledge, poor decision-making influenced by social media, and the psychological trap of revenge trading.
• 🚫 The script warns against the dangers of options trading without proper understanding, highlighting the high percentage of traders who end up losing money.

Q & A

How much money did the person claim to make in options trading within five days?

The person claimed to make 20 lakhs in just five days.

What is the claim about the ease of making money through options trading?

The claim is that it's super easy to make money out of options trading, and one can start with as little as Rs. 5000 to make lakhs.

What is the reality of the profitability of options trading according to the script?

According to the script, nine out of ten traders in the F&O segment made losses in FY 22, with an average loss of 1.1 lakh rupees.

What does the script suggest about the general public's understanding of options trading?

The script suggests that the general public may not fully understand options trading, as only 6% of all F&O traders individually made money, with an average profit of just Rs. 3400.

What is a derivative in the context of the financial market?

A derivative is a financial instrument derived from an underlying asset, such as stocks and shares, and its price is based on the value of that underlying asset.

Can you explain the concept of an options contract using the script's example of buying a cycle?

An options contract grants the buyer the right, but not the obligation, to buy or sell an underlying asset at a preset price within a given period. In the cycle example, the buyer pays a premium to secure the right to purchase the cycle at a fixed price within a specified time frame.

What is the phenomenon known as 'theta' or time decay in options trading?

Theta or time decay refers to the decrease in the value of an option as it approaches its expiry date, regardless of the movement in the underlying asset's price.

Why does the script suggest that trading options can be considered gambling for some people?

The script suggests that trading options can be considered gambling because many people do not understand the market and are primarily driven by the potential for quick profits, leading to risky and uninformed decisions.

What percentage of option traders lose money according to SEBI's findings mentioned in the script?

According to SEBI's findings mentioned in the script, 89% of option traders lose money.

What is the term used to describe the behavior of traders who increase their trading activity following a loss, hoping to recover their losses?

The term used to describe this behavior is 'revenge trading'.

What are some of the psychological pitfalls mentioned in the script that can lead to losses in options trading?

Some psychological pitfalls mentioned in the script include the belief that options trading is easy and can lead to quick money, revenge trading after a loss, and addiction to trading as a result of the excitement and volatility of the market.

Outlines

00:00

📈 The Illusion of Easy Money in Options Trading

The paragraph introduces the allure of options trading, suggesting that it's a simple way to make substantial profits quickly, as exemplified by an individual's claim of making 20 lakhs in just five days. However, it challenges this notion by presenting statistics from SEBI that reveal a stark reality: the majority of traders in the F&O segment actually incur losses, with an average loss of 1.1 lakh rupees in FY 22. It emphasizes the misconceptions about options trading's profitability and sets the stage for a deeper discussion on the complexities and risks involved in this form of trading.

05:01

🧐 Understanding Derivatives and the Risks of Options Trading

This paragraph delves into the basics of derivatives trading, explaining the concept of an options contract and how it derives its value from an underlying asset. It uses an analogy of buying a cycle to illustrate the concept of a call option, highlighting the importance of the premium, strike price, and expiry date. The summary points out the inherent risks, such as the potential loss of the premium if the contract is not exercised, and introduces the idea of variables that contribute to the complexity of options trading, including direction, premium, and expiry date.

10:03

📉 The Reality of Losses in Options Trading

The third paragraph addresses the harsh reality that the majority of options traders lose money, citing SEBI's statistic that 89% of traders incur losses. It discusses the psychological aspects of trading, such as the tendency for traders to engage in revenge trading after a loss, which can lead to a cycle of addiction. The summary also touches on the influence of social media and the ease of access to trading platforms, which have contributed to a rapid increase in the number of traders and the volume of trades, often without a proper understanding of the market dynamics.

Keywords

💡Options Trading

Options trading is a form of derivatives trading where investors can buy or sell contracts that give them the right, but not the obligation, to buy or sell an underlying asset at a set price within a specific time frame. In the video, it is highlighted as a high-risk activity where many traders lose money due to lack of understanding and the complexity of the market dynamics.

💡Derivatives

Derivatives are financial instruments whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, or currencies. They are used for hedging risk, speculating on price movements, or gaining leverage. The video script uses the example of curd and butter being derived from milk to illustrate how derivatives are priced based on the underlying asset.

💡Option Contract

An option contract is a financial agreement that grants the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price within a specified period. The script explains this with a simple example of buying a cycle, where the cycle is the underlying asset, and the upfront payment is the premium.

💡Premium

In the context of options trading, the premium is the price that the buyer of an option pays to the seller for the right to buy or sell the underlying asset. It is a critical component of options trading, as it represents the cost of the contract and can fluctuate based on various market factors. The script mentions the premium in the context of the cycle example and its impact on the trader's decision-making.

💡Strike Price

The strike price, also known as the exercise price, is the fixed price at which the buyer of an option can buy or sell the underlying asset. It is a key element of the option contract and is used in the script to explain the terms of the cycle purchase agreement, where Rs. 10,000 is the price at which the cycle can be bought.

💡Expiry Date

The expiry date is the date on which an option contract becomes invalid if it has not been exercised. It is a critical factor in options trading as it influences the time value of the option. The script uses the ten-day period in the cycle example to illustrate the time limit within which the option can be exercised.

💡Theta (Time Decay)

Theta, also known as time decay, refers to the rate at which the value of an option declines as it approaches its expiry date. The script explains that even if the underlying asset's price does not change significantly, the value of the option can decrease due to time decay, leading to potential losses for the option holder.

💡Volatility

Volatility in financial markets refers to the degree of variation of a trading price series over time. High volatility can lead to significant price fluctuations, which can be both an opportunity and a risk in options trading. The video script highlights how the potential for high returns in a short time frame due to market volatility attracts many traders to options trading.

💡Leverage

Leverage in options trading allows investors to control a large amount of the underlying asset with a relatively small amount of capital, by using options contracts. This can amplify both potential gains and losses. The script points out that the low cost of entry and the potential for high returns with small investments contribute to the appeal of options trading.

💡FOMO (Fear of Missing Out)

FOMO is a psychological phenomenon where people feel an urge to engage in an activity that others are participating in, for fear of missing out on a rewarding experience. In the context of the video, it is mentioned as a factor driving young traders to participate in options trading, hoping to make quick profits without fully understanding the risks involved.

💡Revenge Trading

Revenge trading is a behavior where traders, after experiencing a loss, make impulsive trades in an attempt to recoup their losses quickly. This can lead to further losses and is often a result of emotional decision-making. The script describes revenge trading as a common pitfall among inexperienced traders who are trying to make up for losses in the options market.

💡Addiction

In the context of the video, addiction refers to the compulsive need to continue trading, despite experiencing losses, due to the psychological hooks of potential gains and the excitement of market participation. The script mentions addiction as a serious issue among some traders who get caught in a cycle of trading, losing, and then trading again in an attempt to recover their losses.

💡Influencers

Influencers in the financial context are individuals who have the power to affect the investment decisions of their audience, often through social media platforms. The video script warns about the potential negative impact of financial influencers who may promote options trading without adequately disclosing the risks, leading to inexperienced traders making uninformed decisions.

Highlights

Individual made 20 lakhs in five days through options trading, suggesting it's easy to make money quickly.

Options trading is popular, but 90% of traders made losses in FY 22, with an average loss of 1.1 lakh rupees according to SEBI stats.

Only 6% of F&O traders made money individually, with an average profit of just Rs. 3400.

Derivatives, including options, are financial agreements derived from the prices of an underlying asset.

An options contract grants the buyer the right, but not the obligation, to buy or sell an underlying asset at a preset price within a given period.

Options trading is complicated due to variables like direction, premium, and expiry date.

The rise of options trading is attributed to the perception of quick money and excitement.

In India, option contracts are traded 400 times more than the actual cash market.

Investors are drawn to options due to the potential for high returns, such as a 137% increase compared to a 3% stock market rise.

The low barrier to entry and low cost of options contracts make options trading seem accessible and enticing to beginners.

Finfluencers and social media play a role in promoting options trading, sometimes for personal gain.

Easy account access and the allure of quick money have led to a surge in the number of traders, many of whom may not fully understand options.

89% of option traders lose money, a fact highlighted by SEBI.

Time decay, or theta, causes options to lose value as they approach their expiry date, even if the underlying asset's price remains stable.

Lack of knowledge and the misconception that options trading can quickly double one's money contribute to trading losses.

Personal stories illustrate the risks of trading without understanding the market, leading to significant losses.

Revenge trading, or trading aggressively to recoup losses, is a common behavior among inexperienced traders.

Addiction to trading and the influence of social media can lead to poor decision-making and financial loss.

The video aims to de-influence the glamorized perception of options trading and educate viewers on its complexities and risks.

Transcripts

With option trading, I have made 20 lakhs in just five days.

It's super easy to make money out of Options trading.

And yes, you can do it too!

With just Rs.5000, I have made lakhs.

It's so simple.

I am also gonna put in three months of my saving into this.

Hmm.

This is interesting.

Oh, damn!

Okay.

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.

But here are the stats.

Nine out of ten traders in the F&O segment actually made losses in FY 22.

And the average loss was 1.1 lakh rupees.

And these are not some random stats.

SEBI says it.

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.

Rs. 3400 was the average profit.

What?

So, basically, very few people actually make money in options.

So we'll talk about all the things that seem shiny about options.

We'll talk about the good.

We'll talk about the bad.

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,

let's quickly understand what derivatives are.

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.

So, just like you can buy and sell shares in the cash market,

you can also trade in the derivatives market with futures and options.

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,

because that's the raw material needed to build this up item.

It's a derivative.

Similarly, the derivative market is derived from an underlying, usually stocks and shares.

So here's an official definition of an option contract.

An options contract is a financial agreement that grants the buyer the right,

but not the obligation, to buy or sell an underlying.

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.

And like that famous movie dialogue,

let's explain with a simple example.

So let's imagine you want to buy a cycle.

You know, the simple tring tring, the cycle.

You go into a shop and he says, if you want to buy it, please pay me cash right now.

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.

And in ten days time, I will come and I will pay the rest.

And the cycle is Rs. 10,000.

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.

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.

He's a little unsure whether he'll actually ride the bicycle and he really needs it.

He wants to think about it.

And he's also unsure of the price.

In fact, he's speculating that the price of this cycle may go up or down for multiple reasons.

Now, two things can happen.

You can either come before the ten days, pay the rest and take the cycle, or you come back after ten days.

What do you think is going to happen?

Do you think that the owner is going to sell you the cycle after deducting that Rs. 1000 advance you gave to him?

What's likely going to happen?

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.

So he will not honor it.

And that Rs. 1000 is gone.

Now, can someone force you to buy the cycle?

No, you've bought the right.

It's not an obligation.

If you don't want to buy it, don't.

But if you don't, then at Rs. 1000, it's gone.

Now, of course, options isn't that easy.

There are other aspects to this as well.

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.

So now, here is the thing.

You have a bunch of variables here.

First, you have direction.

Whether you think the price of the underlying is going to go up or down.

Second, you have the token amount that you're paying for.

That's the premium.

This moves as well.

Then you have the expiry date.

This entire contract expires at a certain time in the future.

By adding all these variables, the prediction of the prices becomes really tough,

especially when it's within a time limit.

This makes option trading really, really complicated and difficult.

But despite this, option trading is on a rise.

People love trading options because money can seem like it will come quickly, and it's just.

It's just exciting.

And that's the root of the entire problem.

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.

But why is this?

Let me show you one thing which will blow your mind.

This is asian paints.

And I can see that Asian Paints has risen in this time by about 3%.

If you had invested one lakh rupees, you would have made 3000.

This is how a normal investor would think about 3% as a return.

But the same timeframe.

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,

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.

He'd think let me start trading and figure out how options work.

Let me make this example a little more exciting.

This 137% and all sounds interesting, but in real cash.

What does that mean?

So, in derivatives market, you can't just buy one share.

You have to buy a certain number of shares.

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.

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,

and this Rs. 5800 would have given you a 137 profit.

Theoretically, this is what beginners think.

It's a low investment cost, and it seems like you can double your money very easily.

So a small capital, lots of volatility, and in a small time frame, you can double your money.

It feels.

And this is the second point, the barrier to entry is really low.

If you look at any option contract that you're looking to buy,

I mean, it costs Rs 1, Rs 10, Rs 20, Rs 30, and it feels like it's easy.

Let's see if I can make 20%.

Which comes to the third point.

Finfluencers.

Sometimes these people mention specific products to make you transact in them.

Sometimes they think it's a good idea.

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.

When you see a thumbnail like this which says five lakh rupees in five minutes,

you might click because you're curious.

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.

And if someone can actually do that, why aren't they rivaling Ambani?

And then we have the advent of the Internet.

Over the last few years, opening an account with a broker has become really easy.

Access has become really easy.

So anyone who's not even read or seen this channel or read varsity

or done anything to understand how markets work can just trade.

And that is the definition of gambling.

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.

And in fact I can see here that over 85 billion option trades were placed in India.

That's 83% of global option trades.

Take a moment to realize how much that is.

80% of the number of option trades happen in India.

That's a problem because I don't think most of these people understand how option works and most of them are gambling.

But you know what's the most interesting thing out of all these facts?

It's this.

89% of option traders lose money.

This is not me or our research team saying this.

SEBI said this.

So why do people lose money?

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.

Because this video is for absolute beginners.

So the first thing is limited time.

Let's say we take two trades.

One is where we buy a stock and let's see what happens to the stock.

And second is we buy a call option.

We are bullish on it.

In the option market, this stock didn't move at all for the next three days.

Look at that, it's barely moved.

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,

the options also should not have moved.

Right.

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?

What happened?

This is called theta or time decay.

Basically, the option contract has an expiry day.

And as you go closer and closer to the expiry day, the value becomes closer to zero.

So this adds a new dimension.

Not only do you have to predict the direction of the price, you also have to predict how fast it will go.

You also have the option premium.

Well, now you also have time.

You have to predict when this will happen.

It has to happen sooner.

And predicting that, it's kind of difficult.

The second reason is just plain lack of knowledge.

There was this survey over here

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.

So let me tell you some two interesting stories we found.

Here's a story of one guy who started trading with a capital of two lakh rupees,

and he says, you make a few wins, then you realize it's quick money.

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.

He just went in to make some quick money, thought of it as gambling, and this is what happened.

Another story on Reddit is even more interesting.

He first made Rs. 5000, then made Rs. 20,000 in five minutes, and thought, this is not that tough.

I can figure it out.

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.

It's part of the game.

You'll find a way to make back that loss and then get back in the game.

And then you start trading a little more aggressively.

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.

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.

And I think all of this behavior turns into addiction, right?

Revenge trading.

I want to trade again.

I'll find a new strategy.

I watch YouTube videos.

I do all these things, and I feel like taking one more trade and it becomes, well, an addiction.

And that's a problem.

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.

But I did it again.

This is the definition of addiction.

The fourth point is wrong influence.

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?

Of course this is true.

And that's why this is a point.

Over here, we found this really interesting story of someone who bet

half of his entire salary in option trading and lost it all.

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.

And we also know that 37% of people spend their trading capital after getting influenced by social media.

The guys on the Internet don't really care about your capital.

They care about their own stuff, so don't listen to them.

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.

So Zero1 rocks!

If you thought this was a nice episode, please say something in the comments.

We're trying to make videos which appeal to a larger audience which

are simply understood without getting too technical.

So we thought there should be some series de influencing all of it.

So let me know what other episodes we can do.

See you in the next one.