How do you feel about trading options, do sophisticated investors recommend it?
Trading Options is bread and butter for me so I am eligible to answer this question.
What I understand from your question is that, do investors recommend trading options?
Options are derivative contracts. This is what one of the best investors of our time has to say about derivatives:
Warren Buffet: Financial Weapons of Mass Destruction
Every investor has a different style when it comes to stock markets. There are people who are purely technical investors or fundamental investors or a mix of both.
To make long things short, I recommend Investing and Trading Options side by side. On a longer time frame, I intend to milk investing and options trading all the way. Hear me out:
I trade Options through 100% of my capital and derive a minimum of 6% profit out of it every month. Presently, 3% of it goes into my monthly expenses and rest is compounded into the trading account. As my capital grows, my expenses will remain only a tiny percentage of my profits.
Off my profits, 10% I invest every month in stocks that are traded in the FNO section also. I have a system wherein I select which stocks I want to invest in for a lifetime. Every time the stock makes a plunge, I keep buying it. I average my buying price.
If I buy shares worth 100,000 then my broker returns me 90,000 back as a trading margin so practically I only invest 10000 whereas I get to keep the benefit of 100000 worth of shares in the form of dividend and company growth. Plus I get to trade with the money on which I earn constantly.
If my calculations are right, then in 4 years this is how my Trading Capital, Income, Expenses, Remaining which goes into compounding and new trading capital will look like.
At this time, rather than averaging my investments, I will start buying shares in FNO section on a complete 1 lot basis. So if Reliance has a lot quantity of 500 and is trading at 1500, I will buy 500 shares of Reliance at 1500 in 1 go. They will cost me around 7,50,000. My broker will return me a margin of 6,00,000 on it for trading. With that, if my investment goes down, I will keep on writing calls to make some income out of it. If reliance keeps on going up, then I will keep on selling far OTM calls to earn income out of it. I will have dividends. With the rest of the 4,50,000 that I will have, I will keep on trading options the way I do right now.
This I will keep on doing every month with every major good blue chip company. Even if I forget what I have just said and keep on doing what I am doing right now, then also in 10 years period my capital will look like this.
These are just basic calculations as I will have to pay income tax, other kinds of expenses will increase, but just think that when I have invested that money and with the same money I am leveraging on Options Trading, it will only expand my per month returns. Even now I don’t earn only 6%. 6% is very conservative in what I earn. In my best days, I earn around 8% on my traded capital. But what is clear is that I am investing right now. I am trading options right now. 5 years down the line, I will be a bigger investor and a bigger option trader. 10 years down the line, even bigger. But I will surely be an investor and an options trader because I know how to leverage both to each other's benefit. It is called money management. Sooner you learn it, better you can utilize it to multiply your wealth.