Making money on derivatives sounds easy. Yes, the gut feeling inside says, Yes I can make quick money. The margins are good and just a few hits and quick money is made. Well one place that does not reward optimism is DERIVATIVES.

Some how a few trades and the feeling is yes I have mastered it. No matter how much people say that no one has got created wealth trading derivatives “I can always be the first.” Well if you think you can identify with this, it is time to pinch yourself. This works like a psychological trap, where one does not realize that the risk is huge and the gains tough it seems high is just conceptual and not a reality. The voice comes in "one more trade and it's all even" and the voice keeps coming and the end of the period, the voice never dies but the cash flows do.

Do a reality check!

 

The advice is just buying call or a put option is not going to pay off on a long run.The time value works against the buyer, the price needs to move towards the strike price to remain profitable. It hardly does so.

 

So there has to be someone who is making money after all the money has to go somewhere. Yes you can be the one by adopting some derivatives strategies. Just buying call options and waiting for the price to move in your favor does not help. So the best thing to do is to be on the other side i.e. SELL an option. It is the option writer that makes the money most of the times. The risk which seems unlimited can be limited by adopting some simple strategies like butterfly, covered call, straddle, and strangle. OR just be patient and get back to investing in equities. Sooner or later one realizes this. I realized it and that is why I would like to share it with you.


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