The options seller now runs close to 10 trading strategies which are different in terms of risk, reward, timing and regime of the market. “You can’t time the markets every time so the best approach is to make a portfolio having different kinds of strategies which are profitable on an individual basis and have low correlation,” Agrawal says, explaining how algo trading has helped him become less prone to human error and take emotionless trading decisions. Edited excerpts:
Please take us through your previous work experience and educational background and how you got into trading?
I was always fascinated with how numbers in the balance sheet had a significant impact on the share price of the company.
Gradually, I started with cash markets to try my luck. Like it happens with everyone else, I made some profit in the initial trades and then with the greed of making money quickly, I moved to the derivatives segment within a couple of months. As it was bound to happen, I made big losses and lost almost 50% of my capital in a handful of trades. I understood the toughness of this game and figured out that there should be a system in place rather than trading completely in a random way. For a couple of years I traded manually, tried various systems and thought that strategies were the holy grail in markets. But with time, I gradually realized that risk management, money management and position sizing are equally important to succeed in the markets. Later on when I got to know about rule based trading, I finally changed my approach towards trading as I moved to algorithms completely. I have been a consistent profitable trader ever since then. Currently, I run completely automated systems primarily on options.
Was it easy for you to quit your job and get into full-time trading?Generally quitting a job to pursue full-time trading is a tough decision, but the passion and interest for trading made it much easier. I was lucky that I had no financial obligations at that time. Also being a CA proved to be a safety net for me, in case full time trading didn’t work out. First couple of years were tough as I did not make any profits at all but finally things became better gradually.
Can you take us through your trading strategy?
I have always believed in diversification. So I have a portfolio of close to 10 trading strategies which are different in terms of risk, reward, timing and regime of the market. You can’t time the markets every time so the best approach is to make a portfolio having different kinds of strategies which are profitable on an individual basis and have low correlation. So currently I have a trading portfolio which is mainly in option selling which ranges from intraday to positional. Some strategies are based on Delta, some are on implied volatility, some are on open interest. In some models I trade only once in a week whereas in some I trade multiple times throughout the day. In addition to this a small portion of my portfolio is in option buying which is high risk, high return. The idea is to diversify my portfolio as much as possible so as to get the same return with the reduced level of risk. The benefit of this is scalability. In other words, you can afford to have a 10% drawdown on a Rs 10 lakh portfolio but can’t afford to have the same on a Rs 5 crore portfolio. So this year the maximum drawdown on my portfolio has been under 3%. Even today, my main objective as a trader is to reduce this portfolio drawdown much further without reducing my returns.
After completing CA, you learnt two skills - trading and coding. How did you manage to learn both on your own?
Even after completing CA, I was not satisfied. I had this hunger and ambition to do something more. Trading and coding are both results of this. Honestly, I would not say that I am an excellent discretionary trader but yes a combination of coding and markets have suited my personality very well.
I have always loved technology and tried to use smart ways of doing things whenever possible. Even during my job, I was good at excel and tried to do things much faster using improvised ways. But I never knew what coding was capable of. Almost 2 years into trading manually, when I got to know about algo trading and its benefits, I tried my hands on it. After almost 3-4 months of consistent practice, I started writing some workable codes.
Coding and testing different hypotheses and logics takes my whole day.
What made you choose algos over manual trading?
The choice between algorithmic trading and manual trading depends on a variety of factors, including the trader's goals, expertise, and resources. I know both discretionary traders and algo traders who make money consistently. So both the type of traders can make money in the financial market
In my case, I have always preferred algo trading as it suits my personality and gives me an overall comfort in life. I realized the power of algorithms early on and wanted to use it fully to my advantage. Algorithmic trading is much faster and more efficient than manual trading.
I have a trading algorithm which analyses the option prices of all the weekly options on every tick and makes trading decisions in the live market. I just can’t do the same through manual system.
In the initial years when I traded manually, I remember making a lot of execution errors every now and then, which impacted my trading results. Algo trading has helped me to become less prone to human error and take emotionless trading decisions.
All my trading strategies have been rigorously backtested on various parameters. Only when the strategy fulfills the risk return criteria along my psychology, it becomes part of my trading portfolio. So the backtesting allows me to scale up pretty quickly. Also, algo trading has made it possible for me to trade so many strategies at the same time.
How accurate is the perception that algo traders don't have enough work to do on a regular day?
This perception is not at all accurate. Being an algo trader is really not an easy task.
Developing an algorithmic trading strategy requires a great deal of research and analysis, including the selection and testing of various indicators, market data, and trading rules. This involves a significant amount of data preparation, statistical analysis, and programming. I have taken a couple of servers which run almost every hour for the research and analysis purpose. Out of 100 backtestings I do, only 2-3 models are profitable with low drawdown which can be deployed in the live environment.
Algo traders need to deal with technical issues and bugs that arise in the algorithm of the trading system. A coding error can result in heavy losses so one needs to be very careful in this regard.
Also, as the markets are dynamic and always changing, once an algorithm has been deployed, it requires ongoing monitoring and adjustments to ensure that it continues to perform effectively in changing market conditions. The strategies that I started trading at the start of my career, no longer work now. So the key is to continuously improve them as per the market conditions and experience. With more option sellers coming, markets have surely become more challenging, thus adaptability is the key.
Why do you think 90-95% of option traders lose money? When the odds of you winning are so much against you, does it make sense to try your luck in it?
According to me, diversification and risk management are key pillars in markets. Anyone who fails in either of them will not be able to go far.
Options traders need to have a basic understanding of options pricing, volatility, and other factors that impact option prices. So many people jump into options trading without sufficient experience which leads to losses. Also, since Options trading is a leveraged product it involves significant risks, and traders who fail to manage risk effectively experience large losses. I have seen traders not using stop losses, or taking unhedged overnight positions. They are certain to be penalised in the long run.
Yes the odds are against you when you are in the financial market but almost every business has these similar odds. The key here is being a solid risk manager and not trying to predict every direction of the market. Having good data source, rigorous historical backtesting and not trying to overfit are some important things one can do to be in that 5% category
Apart from all this, execution plays an important role in options trading. A robust execution not only saves a lot of cost in the long run, it helps to trade in scaling up quickly.
(Disclaimer: The Economic Times doesn't endorse any product or service that may be offered by the expert. Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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