Disclaimer: Options trading is considered extremely risky, 9 out of 10 traders incur a net loss, please trade responsibly. See the SEBI circular for more details
Who does not want a insanely high return and risk free investment strategy? I know I do and I am sure you do as well. So lets see if there are any high return and low risk opportunities with Options trading.
First, let us understand why do we expect returns on any investments. Lets start with something we all consider risk free.
Why does bank give us any interest for keeping our money with them? Sure, you can say that they use our money to give loans and get crazy returns and in turn share a tiny bit with us, but let us explore what happens when the loan is not paid back and our money gets stuck in bad debts. Who takes the responsibility to get the money back? of course the bank, why am I asking silly questions. But if all the loans default or even a significant majority of the loans default, then what happens? This situation would lead to collapse of the bank, and then may be if the bank is big enough, then a bailout from the government. Have you seen such things happen? If you read news papers ( do people really still read newspapers?) or follow news on social media or TV, you may have heard of SVB bank collapse.
So essentially there is an inherent risk associated with keeping your money with the bank, there is an inherent risk associated with keeping your money with anyone except you. If your money is being used for any purpose, then there is a risk and since you are investing your money and sharing that risk, you get a part of the returns generated.
When you work for someone or even your own business, you spend 8-9 hours building something worth value which people need and are ready to pay for. The higher the value, the more is it worth, irrespective of how much effort goes into making it. So when you put your money in any investment, you are not working, you are not creating anything of value, so why should you expect any returns?
I hope by now, you would have got the gist of what I am trying to prove. You are getting the returns on your investment because you are taking risk with your money. Just like when you put in hours to create something of value, you make money. The more the value, the more is the returns, similarly in investment the higher the risk, the higher is the rewards.
Are there any risk free investment at all?
The short answer is NO, the long answer is, it depends. Most of us see risk differently, for some of us, keeping money in bank is “virtually” risk free, while for some of us the risk appetite would be little higher and we may dabble with debt funds, corporate bonds, or govt bonds, all of which we consider “relatively” risk free.
When we are referring to “risk free”, we are essentially meaning “low risk” opportunity, and yes low risk opportunities exist in every investment, even options trading.
What is Low Risk option strategy?
Every one has a different risk appetite and hence would define the term “low risk” in a different way. So I find it easier to define it based on risk and rewards scale.
We are going to assume that fixed deposit is the baseline for our low risk concept, and current fixed deposit rates in India are hovering around 7%.
Nifty ETF has given a historical annualized return of 13.77% over 10 years, so why would you seek an option strategy if you can not beat 14% return a year, as options are not only inherently risky but they do require a lot of time and commitment.
So now our benchmark has been raised to 14%, and I do not think anything which can generate more than 14% would be low risk, considering that the best minds in market like George Soros has only generated 35%.
Conclusion
If you are looking for low risk or risk free strategy, that would be similar to looking for a job where you do not have to work but it would have amazing pay. In most of the cases you would get into a scam if you seek a job like that, and the case is similar for investment. Most of the opportunity promising high return risk free strategy are scams.
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