Why this math teacher-turned option trader loves the sell side

In Sundar's words, an option seller loses money only if the market falls out of favour violently, and makes money if it:

goes in favour bigtime

goes in favour slightly

goes sideways

goes slightly against favour

"So it may be appropriate to say that the option seller has 80 percent probability of winning, contrary to the option buyer, who only has 20 percent," he said in an interview to CNBCTV18.com.

However, it is not that simple. Option writing works differently from option buying. An option  seller must deposit margin money based on the contract's value as collateral, which is much more than what a buying counterpart must pay. This amount is decided by the exchange and varies from time to time.

An option buyer, on the other hand, only has to pay the premium for the option upfront and not the full price of the contract.

This is why an option buyer has limited liability — in the form of the premium paid — but an option seller has potentially unlimited losses.

"There is no such thing as entering the market safely... Markets are subject to risk... If you have the right skillset just like any other business, you need not worry. Every business is unique and needs a different kind of capital requirement," he asserted.

"Although we do not have data on what percentage of option buyers make profits, if 99 percent of traders do not beat fixed deposit returns over a long period of time, we can logically conclude that many option buyers lose multiple small amounts which reach as profit to some HNI clients who are sellers with huge capital," Sundar said.

Zerodha CEO Nithin Kamath had in January 2022 taken to Twitter that only one percent of active traders beat FDs over three years.

Sundar identifies himself as an option seller, not a buyer. However, he buys option as part of his strategy, such as a ratio spread.

"I normally do just straddles, strangles and ratio spreads in all market conditions but as and when VIX is higher, I reduce volume. If VIX is above 30, I try to stay away from markets," he said.

Straddle, strangle and ratio spreads are market-neutral trading strategies, used to limit the risk involved in case of unfavourable movement in the market.

The India VIX -- known in market parlance as the fear index -- is a measure of expectation of volatility in the market. Besides the general sense of fear, it also determines how much the market can move in a given period either way.

"Where you can make money easily, you can also lose it easily," said Sundar, who describes the stock market, derivatives (futures & options) in particular, as "the hardest place to make easy money". Derivatives are leveraged products where your reward is higher but, proportionally, the risk is also higher, he said.

One can make money in trading with the right skillset. That is what Sundar thinks.

"Normally, trading is like business, you do not make fantastic returns but decent returns for your capital. So trade, make money and invest the profits for long-term wealth creation. Trading is to make money, and investing is to make wealth," he explained.

"Option selling can be done with a capital as low as Rs 25,000. It all depends on whether you are a part-time or full-time trader, your risk appetite and your return expectation etc.," he said.

But a word of caution: "There must be enough backup cash should you want to take any adjustment trades in case an existing trade goes wrong."

Sundar suggests those looking to enter trading stick to index derivatives and not stock derivatives. This is in order to avoid higher margin requirements for stock derivatives. Derivatives of indices -- which comprise a pool of stocks -- do not tend to move that violently.

He has over the years switched from teaching mathematics to school students to teaching trading to adults. He has had about 3,000 students over the past 3-4 years.

Asked about any common traits between students of mathematics and of trading, he said: "Those with a strong mathematics background generally have good analytical skills as well. They do have a mild upper hand as trading involves a lot of strategy building and quick decision making. Excited students from both fields tend to be very curious."

"Teaching is not a lucrative job. Moreover, I have already spent 20 years in teaching, and so have turned to trading even though they seem unrelated," said Sundar, who has a trading portfolio of Rs 40-50 crore.

Sundar describes himself as neither an expert fundamental analyst nor an expert technical analyst but a strategist. To be a strategist, his mathematics background has helped him to some extent. In his own words, he does "not know anything except teaching and trading".