ETMarkets Trade Talk | Jaipur derivative trader strikes gold using simple IV formula

“My derivative strategy on a given day or in different phases of the market is based on implied volatility (IV). My strategy involves options buying when the IV is low, options selling when IV is high, and when IV is in equilibrium, I hedge my positions with futures,” he says.

Edited excerpts from a chat with Tanwar about his journey and trading strategies:

Let’s start with your family background and early years in Jaipur. How was life before you started trading and what were your dreams?
I come from a military background, as both my father and brother are in the Indian army. My father, Shaheed Ajit Singh Tanwar (Deputy Commandant BSF), was a role model for me. I’ve always seen a very supportive environment at my home. When it comes to my education, I completed my secondary education in my hometown Jhunjhunu (Rajasthan), and for further studies, I came to Jaipur. I’ve always wanted to start a business, but at the same time, I wanted to try something different. Initially, I assumed that I would start a business in the automotive industry. However, life had a better plan for me; as we say, “If something is not happening as you wanted, god always has a plan for you in a better way.”

So while studying engineering what brought you to the market?

I always used to read about financial news and events, and was curious to know about the financial market and how it works. My friend Sooraj and I were always discussing the economy and what is going on in the financial market, but at that time, I did not think of this as a career. Although it was unplanned, fate was in my favor. As time passed, I got a deeper understanding of the market. One of my teachers who used to trade in the stock market also gave me some guidance about the stock market. This is how I entered the stock market.

Was there any family pressure to do a job rather than tolerating the unpredictability of the market?
No. Since I belong to a well to do family and am the youngest member in my family, there was no such pressure to do a job. Initially, when I started this business, I did not even inform my family about my trading and involvement in the stock market; however, after two years, when I felt that I am on the right path, I took the right decision to tell them, and they all were very happy and supportive at that time too. From selecting a career as an automobile engineer to becoming a full-time stock market trader, my family has supported every choice I have made.As far as your trading is concerned, you have not kept yourself limited to just options or futures or cash markets but spread across segments. Why is that so?
I’ve learned one thing about the market – you should not create unnecessary opportunities; instead, you can take advantage of the opportunities that the market provides you. Making trading and investment decisions depends entirely on market conditions. Sometimes you are bullish about the direction of the market, and you choose to buy options when implied volatility is low.

On the other hand, you must sell options to generate a good profit when implied volatility is high. Sometimes, you use futures and options to hedge your position. Sometimes, when you know the direction of a stock, but the stock is not optionable, or it is on the F&O ban list, then you can buy that stock in cash/equity only.

When the market is sideways then you must use some other strategies, like an iron butterfly, iron condor, short strangle, short straddle, etc, depending upon the implied volatility. So, I always keep myself diversified according to the market situations and invest in all kinds of assets whenever needed.

How do you decide your strategy on a given day or in different phases of the market?
If I talk about the cash market, I use sectoral analysis along with demand-supply to understand the overall market more deeply. Then I look for the opportunity to trade with proper risk management. Here I use the top-down approach to pick a stock and to make the best decision.

My derivative strategy on a given day or in different phases of the market is based on Implied volatility (IV). My strategy involves options buying when the IV is low, options selling when IV is high, and when IV is in equilibrium, I hedge my positions with futures. I believe Implied volatility is one of the major options greeks, and a change in implied volatility can have a greater impact on an option’s premium than the effects of delta, gamma, theta and rho combined. Of course, I also give the same weightage to direction, for which I use the same cash market approach, that is top-down approach along with demand-supply to understand in-depth price action behavior.

At Get Together Finance, you have trained thousands of newcomers in the stock market. Why are you staying away from showing them live trades when most influencers proudly flaunt their P&L statements?
I can show my P&L whenever my students want to see it (laughs). On a serious note, I am an instructor, and I only aim to deliver knowledge to my students so they can build confidence in trading. I am not fond of showing my P&L and my lifestyle because I do not believe in quick gains. I can proudly say that I am a profitable trader and have the guts to show my profits on a public platform. But that will never help people make money in the stock market because every individual does not have the same capital, risk management, and time they can give to the market.

I believe in knowledge that comes from dedication to be a successful trader. Many people or we can say influencers, are influencing people by showing them screen recordings of their profit on YouTube and their lifestyle too. But as an instructor, I do not want to influence people to make impulsive decisions based on my P&L and my lifestyle. I never sell a fake lifestyle. In my opinion, a teacher is determined by knowledge, not by lifestyle.

How risky is it for someone starting afresh to begin his/her journey with options trading?
Options trading is a very attractive segment for traders, and people believe that by investing a small amount of money, they will be able to generate more profits, but I believe that if someone starts afresh in the market, options trading should always be the second choice for them.

There are a lot of factors that need to be considered while trading options, such as the direction of the market, options Greeks, and volatility. Generally, people ignore all these factors and directly jump onto options trading. Options trading requires deep knowledge and valuable skills, and without these, it is like diving in a sea without knowing how to swim.

Why do you think 9 in 10 derivative traders lose money when so many courses, workshops, and data are available?
Like sometimes, we say there are some cons to our education system. I believe the same when it comes to the stock market education system. The people who are organizing these workshops are influencing traders to jump directly into options trading, but in my opinion, if you want to learn how to drive a car, first, you will have to learn how to operate it; you will not just take the car and drive in the city, options trading is that car for me. If anyone wants to succeed in this market, first of all, he/she must understand the stock market’s basic terminology and how it works. They need to understand the role of fundamental and technical analysis and demand-supply in the stock market. They need to understand the role of risk management in trading and investing.

A trader should always start from the equity cash market to learn these concepts first. And once you feel confident in the equity cash market, then only you should consider jumping into the derivative market.

If you don’t want to be a part of these 9 out of 10 derivative traders who lose money, then opening a demat account and attending a two day workshop won’t make you a profitable trader. You need a solid set of skills and hard work to succeed. Because I believe trading is a serious business. And successful trading is a journey, not a destination