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Pran Katariya

19 May, 9 tweets, 2 min read

I disagree with the view that hedges are used by Indian Traders to protect themselves. Actually a majority of Traders here use hedges just to reduce the Margin in a Trade so that they can take more Trades. This motive actually increases their Risk.

So say you sell a BnF Straddle for 400 for which you utilize a Margin of Rs 1.5 lacs per lot. Say the Trader does 6 lots utilizing Rs 9 lacs. Now to cut down his Margin he buys the wings 400 points away for 100 resulting in the Margin coming down to Rs 1 lac per lot.

However, given the mentality of the typical Retail Trader, who wants to maximize his use of Margin, he now sells 9 lots instead of 6. So now he has reduced his POP by almost 30% because his Breakeven is down from 400 to 300.

That's a steep price to pay for not having the discipline to either follow an appropriate Position Sizing Strategy or to adhere to a SL- it's madness to allow the loss to run beyond what it would with the hedge. And having the bigger size of 9 vs 6 lots is a road to disaster

So you will have some 30% more losing Trades and if you utilize the full margin, you will suffer catastrophic losses. All you will gain is protection against a Black Swan Event of the kind that happens very rarely.

So, IMHO it's better to Trade without the hedges but to size the Position to consider a Margin of Rs 5-6 lacs/lot instead of Rs 1.5 or Rs 1 lac/lot. Many more of your Trades will be Profitable and if you have the discipline to take SL's, your losses on failed Trades will be low

The secret is to take many, many small bets at different points of time in different underlying and eschew excessive leverage.

In the US there are 2 types of accounts. The Reg-T accounts where Risk has to be defined- as by Spreads. This is for most Retail Traders. The other is the PM accounts where you can Trade undefined Risk Strategies such as Straddles and Strangles. This is used by the big guys

It's difficult to get this account and it requires a large Capital- over $250,000. The Margin is the Risk of a 2SD move plus MTM's on a live basis. If you check the Tastytrade videos, you will find that people like Tom Sossnoff and Tony Batista Trade these accounts

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Pran Katariya

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8 Apr

Samir Arora'a talk on How To Build an Equity Portfolio is one of the most fascinating and profound things I have heard on the Markets. We are conditioned to believe that Money is made in Markets thru our ability to pick the very best performers in the Market.

He turns the proposition on it's head and shows that if we had a Portfolio of 30 Stocks and average Stock in Portfolio was only the 90th best in the Nifty-combination of say some being 50th best and others 150th best- then we would be up 56x times over 15 years vs 7x for Nifty!

This is a return which very few have seen. He then argues that it is impossible for anyone to pick the best performing stocks in any Market due to it's random nature. So Steve Jobs had only 20% of his holdings in Apple while 80% was in Disney,

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7 Apr

Sachin Vaze was suspended only when the NIA was allowed to investigate. ATS suddenly started finding evidence against him. Today the new CP has come out with reports casting serious aspersions on the functioning of the whole Dept.

Can we really trust the Mumbai Police or the Maha Govt to get to the bottom of this sordid affair? It is so much beyond the 'federal structure' being threatened as the Maha Govt would have us believe. The very faith of citizens in law and order has been shaken to the core

I hope SC throws out the appeal with some stinging observations. I also hope that no 'Political deals' are made to hush up the issue. Many Politicians, who are undoubtedly involved, need to feel the full force of the law and face the consequences for this betrayal of democracy

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The more I trade, the more convinced I get that the most improvements in performance come not from discovering some brilliant strategy or even in it's execution but from cutting down common mistakes- most of which are common too and well documented for most Traders

Despite being aware of it and working on it for ages, my biggest flaw remains letting the losses in a few of my Trades run too far. These mistakes are not many but they still end up dragging my Performance by a few percentage points.

Yet I find many Traders seem to wear some large losses as a 'badge of honor'. Something that must be tolerated in the quest for possible gains. Who knows- it may actually work for them. Personally I would like to get out with a small loss than hang on in the hope of a larger gain

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We live in an extremely competitive society and everyone wants to benchmark themselves with the very best. However everyone cannot be a Mukesh Ambani, a Sachin Tendulkar, a Rakesh Jhunjhunwala or a Tom Basso. Fortunately we don't have to be to live a happy and prosperous life

I doubt Warren Buffett spends sleepless nights thinking that in the last 5 years he has made less than 20% while Jim Simons has exceeded 60. In Investing and Trading, even 'mediocrity' is actually quite good.

In a seminar Samir Arora pointed out that even if your Portfolio was made up of Stocks which were 150th best, you would handily outperform the Nifty by as much as 9% and generate a CAGR of over 25%.

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A 50 lac loss on a Capital of 1cr will destroy you as a Trader. But let me tell you that even on a Capital of 50cr it will send you in a depression. Which is why scaling up is so difficult. Probability of bigger losses keeps increasing but ability to stomach them goes up slowly

Investing is a compounding game- Trading isn't. Which is why the legends like Rakesh Jhunjhunwala, Radhakrishan Damani and others focused on Investing after generating their initial corpus from Trading

Forget feeling depressed after making big losses, people feel depressed when in a particular month they don't earn what they feel is their entitlement or quota from the Market🤣🤣🤣

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Pran Katariya

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20 Mar

Trading is a business of Probabilities not Certainty. So the road to Trading success is to take many high probability Trades and let the odds play out in your favor. 'Many Trades' is key here because probability is subject to the law of large numbers.

The very worst Traders are the ones who rely on certainty- the kind who look for a 80-90% success rate in the Trades they do. You can find then all over Twitter extolling the remarkable accuracy of some 'gurus' calls while singing his praises

Backtesting is the hot topic these days and relies on years of data to arrive at the Expectancy of a Trading System or Strategy while giving you a fairly good idea of the volatility of the Returns you can expect and the drawdowns you can be subjected too

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