Bad ideas, F&O trading and the market

Find out the mindset required to find success in F&O trading

- Sanjeev Pandiya

We know from SEBI studies that 99 per cent of option traders trade in the Nifty/Bank Nifty. Have you ever wondered why?

It is because trading indices in the retail market takes no real skill. There’s nothing to go on except perhaps a P/E ratio: nobody has evaluated an index, stock-by-stock, or done a DCF (discount cash flow) or understands the broad direction of the underlying businesses. All a trader has is an underlying ‘India Story’ and some kind of perpetual bullishness. It is an exact recipe for a Lemming Rush.

Strangely, nearly none of these option traders (just 2 per cent of traders) are active in the actual underlying stocks that make up these indices. So who do you think is determining the price discovery of these stocks and hence, their derived indices? If you ask me, I call them the alligators: they’re these sundry, silent players of the market. And they use algorithms to provide the two-way trades that slowly bleed retail.

Limited success often makes one look intelligent. We believe that people who have made money are in some way intelligent and not plain lucky. Importantly, self-attribution bias ensures that they think that they’re intelligent.