The ride of an options trader

I read

Alexander Hurst, ‘How I turned $15,000 into $1.2m during the pandemic – then lost it all,’ The Guardian, 4 November 2022

and

I remembered my stint with options trading, which was my first brush with the stock market, in 2015. I had just finished Varsity on Zerodha. My monthly UGC fellowship was Rs. 32,500. I was without a permanent job and my PhD literature survey was returning more misses than hits. I wanted to hit the big shot. Having learnt the basics, I thought all I needed to do was buy at the cheapest point, sell at the highest point, and earn a crore in a month. I thought having learnt the basics of the stock market, I had hit the jackpot--I had unlocked the secrets of Warren Buffett and Rakesh Jhunjhunwala and their ilk. In August 2015, I put Rs. 20,629 (almost 15% my savings) in Nifty options, and I ended up with a loss of Rs. 18,977, that is a loss of 92%. I felt like digging a hole in the ground and burying myself. On expiry day, when I ended up with this loss, after 3:30 pm, I had to go out of the house and go somewhere. On the bus, I looked at all the faces in the bus. Did they not realise that the Nifty had dropped by 5% in the course of two trading days? The world, in all its August heat and brightness, seemed to go on. I, in my curtained room, was apparently living in a world of my own. I was reminded of Pieter Bruegel the Elder's painting Landscape with the Fall of Icarus. I was like Icarus, a tiny dot in the background, while the world, like the farmer, was completely unaware of my presence.

I hid this loss from my spouse for some time because I was so ashamed of having lost such a huge chunk of the family savings. I did confess to her later.

I tried again in September. I put in some money, and ended up with a profit of Rs. 10,000. I thought, I have managed to win back from the world what the world had taken from me. I thought let me recoup my remaining Rs. 9,000. I tried doing that and poured the remaining 85% of my savings in it. I went all out to recover that 9000. On the day before expiry day, at 2:30 pm, I saw my trades going deep in the red and I exited all the positions. I finished September with a total loss of Rs. 36,411. After 3 pm, the markets started going in the opposite direction. By the close at 3:45, there was a 3% upside from the low at 2:30 pm. Had I held on for 30 more minutes, I would have noticed the trade going in the different direction and I would have made a profit of 2 lakhs! Instead, I had lost Rs. 55, 430 over the course of two months whereas my monthly salary was Rs. 32,500.

The experience was one of the lowest points in my life. I realised that the stock market is irrational and beyond one's control. I deleted all emails related to the stock market (except a spreadsheet where I made detailed records for the sake of taxation and which I am using now to come up with these figures) and closed my Zerodha trading account. I even tried closing the ILFS demat account but it was a cumbersome process and that inactive demat account exists to this day. I gave up the idea of finding quick money and get rich-quick schemes and laboured through my PhD, applied for all reasonable jobs and managed to secure one in 2017.

By 2018, I realised, I had to pay income taxes for the first time in my life. I had had a bad experience with stocks and so stayed off them. I thought bonds were safer than stocks and with inflation adjustment in long term capital gains in bonds held for more than 3 years, I would be better off than fixed deposits. I invested Rs. 10,000 in January 2018 and have had an annual unrealised profit of 8.6%. I was not unhappy.

Then came the pandemic and the unheard of gains in the stock market in 2020. I was unsure whether I would keep getting my salary and so stayed out of it. But the greed got to me. In February 2021, I opened another demat and trading account with a different broker. I thought I would buy individual stocks and hold on to them for more than one year. I invested Rs. 30,000 in exactly 19 shares of 7 companies (all in the Nifty 50) over the course of one year. Then the market started going down. I exited 3 shares (of 2 companies) at 30% annual profit but I am holding onto 16 shares (of 5 companies) with most of them in losses.

I thought I had learnt my lesson. No more Nifty 50 direct stocks for me.

After I did my taxes for Financial Year, 2020-21, I realised that the government had made such rules that if I invested Rs. 50,000 every year in the NPS (in mostly a Nifty 50 index fund), I stood to make a lot of tax gains. Irrespective of my desire to have little to do with the stock market, here I am trying to time the market and invest Rs. 50,000 every year in the NPS.

I read Warren Buffett saying that in order to time the market, one has to be right twice. One has to know when something has reached the lowest and buy at that point of time, and when something has peaked, and sell then. Since, it is impossible to know either, and knowing two impossibles is beyond the realm of the possible, it is futile to time the market. Yet, here I am, having learnt perhaps nothing, being forced by taxation rules to give into this form of gambling.

I can fully empathise with whatever Alexander Hurst has written in the article mentioned at the beginning of this post.