GuruSpeak | Rahul Lovi – how to wrestle

with every trade

Using aggressive options trade management, Rahul Lovi has been a consistently profitable trader shifting
between non-directional and directional strategies seamlessly

SHISHIR ASTHANA MARCH 03, 2021 / 09:14 AM IST

Any professional trader would say trading is all about dealing with uncertainty. The moment one embraces
uncertainty of the outcome of his trades, the trader has taken a giant leap towards becoming a consistent
one.
Rahul Lovi deals with uncertainty differently. Rather than booking a loss and moving on, he likes to wrestle
with every trade and try to convert it into a breakeven one or one with a very small loss. He has been
successfully doing it with what he calls an ‘Hierarchy of options’ where he has scenarios planned for every
outcome and has a strategy in place depending upon the move of the market.

An IT professional, Lovi is a health freak, loves outdoor sports, playing chess, solving puzzles, travelling, and
cooking healthy food.
In this interview with Moneycontrol, Rahul Lovi describes his trade management techniques which helps him
become a consistent trader.

Your journey to the market?

I come from a family where no one was ever exposed to the market. My father is a retired professor, my
mother a housewife and my sibling is pursuing PhD. As for me, I am an IT professional from Bhiwani,
Haryana.

After working 4-5 years in the IT field, I felt frustrated with the career growth. While in the job, I kept looking
for business opportunities that could give me financial freedom. My idea of a business was one that requires
low initial investment and manpower.
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It was during this search that I stumbled upon business news
channels and that led me to the stock market.
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I went through the initiation phase by reading books on the
chartered accountant-
turned-trader on his subject and watching videos.
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The initial approach to trading was swing trading in the cash
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market. I took these trades while I was working. The original
Sonam Srivastava who
uses machine learning capital deployed was Rs 5 lakh.
and quants to trade
effectively I bought some low-quality small caps stocks that multiplied in
the 2017 bull run. This was one of the worst things that could
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Nanda – a disciplined have happened to me. With no major liabilities and enough
trader savings to last for a couple of years, I jumped into full-time
trading.

How were your initial years as a full-time trader?

In the first half of 2018 itself I saw a 40-50 percent drawdown. As I was holding smaller stocks, the impact
was severe. Within the first six months of becoming a full-time trader, I realised that the road is not as clear
as it looked in 2017. The initial capital which had doubled in 2017 was back at the same level in 2018.
But it was 2018 that made me a better trader. I did not miss a single day of trading in 2018. Besides market
hours, I spent 10-12 hours of screen time looking at charts, formalising strategies that would fit my
psychology.

During this learning phase, I traded various segments of markets like cash intraday, index futures, index
options with the smallest quantity possible.
Trading the cash market intraday did not suit me. I was making losses, but more importantly, these losses
were affecting my confidence.

I then moved to trade one lot of index options–both Nifty and Bank Nifty. I was mostly a seller of options and
did reasonably well. These trades helped me regain confidence.

My journey as a trader was a lonely one. It was all self-learning, there was no one in my family or friends who
traded. I tested the waters by a series of hit and run moves, taking several body blows, but ensuring that
none of them knocks me out. It was a do-or-die situation for me, with no looking back as I had left my job
behind and was scared even of the thought of joining the rat race.

Thankfully, there was enough free stuff on social media and the internet that acted as stepping stones in my
journey. Theoretical knowledge was largely gained from Zerodha Varsity and other free sources, while
practical learning came from actual trading in the live market. The hard work paid off and sooner rather than
later I started earning consistently by developing strategies that suited my temperament and psychology.

In 2019, I completely shifted to index option trading and one of the highlights of the year was that all months
were positive, boosting my confidence.
What was the most difficult aspect of trading for you?

There were a few major issues that I had difficulty in overcoming. The first was in coming out or managing a
losing position. This part I overcame by deploying risk-defined strategies.

I was under the impression that making money in the market had to do with the ability to predict the market
direction. Over time, I realised it is an exercise in futility and learnt to live with it. I now place a base non-
directional strategy and then add new trades based on the market movement.

How do you presently trade?

My basic premise is that the market is uncertain and I have to deal with what is thrown at me. As long as it
remains non-directional, I will keep trading non-directional strategies but with any sign of a directional move, I
will manage my trades and convert them to directional to give me the best advantage possible.

Since I trade only the Nifty and Bank Nifty options, the weekly settlements have helped my trading strategy.

Most of my base trade starts with non-directional options strategies like Iron Condor or Iron Fly which are
then adjusted according to the market condition.

Let me explain with the help of a real-life example of how I converted a neutral position into a directional one.

On the day before the budget, I had an Iron Fly position by selling 13800 calls and put and buying 14000 call
option and 13600 put option. This is a neutral options strategy.

On the budget day, the market opened high but within the first half-hour itself, it started coming down.
I analyse the market based on Price Action Analysis and Derivative Data Analysis. The price action on the
first half-hour of the budget day was suggesting a downward movement, but derivative data was not
supporting this.

In my derivative data analysis, I generally track Open Interest build-up in at-the-money (ATM) and out-of-the-
money (OTM) strikes.

On the budget day, the highest ATM call side OI was at 13800. But even when the market was slipping there
was no addition on the call side--- instead OI of 13800 calls was declining. When the market started moving
up after the initial fall and OI started building up at the near PE strikes, it provided me with the first clue that
the market has a high probability of moving upwards.

As part of my price action studies, I keep VWAP (Volume Adjusted Weighted Average Price), Pivot Points,
and Volume on my chart and observe the price movement on the 15 minute and 60-minute timeframe. I keep
the chart of futures and ATM options open and observe them closely. In this case, when the market started
moving above the VWAP, the trend was confirmed to me that the market may rise.

When the direction was confirmed, I created a spread by buying 14000 calls and selling double the quantity
of 14300 calls of next week's settlement. This 1:2 ratio spread trade offered limited risk.

What happened here is that the loss of 13800 calls sold position (which I booked when the market crossed
14000) in the original Iron Fly was covered by the 14000 call position long, plus the 13800 puts sold was also
making money and the 14000 call options of next week also started making money.
The fourth leg of the Iron Fly–13600 puts-- was making losses which I managed to salvage by selling a
13600 Put and buying a 13400 Put of next week, thus creating a spread.

The only position that was now creating a problem was the 14300 calls of next week, which were sold.

The market on the budget day closed near the 14300 levels, so by the end of the day, I sold 14300 puts and
bought 14500 calls and 14100 puts making an Iron fly trade again. This trade I managed to exit with a small
profit.

I have made a hierarchy system that helps to convert a losing trade either into profit or at breakeven or with a
small loss. One way or the other, this hierarchy of contracts helps minimise losses and help exploits the
market when there is a money-making opportunity.

This helps in money management, as I do not deploy the entire amount at one go and helps in diversification.
That is the beauty of options.

I trade in three strategies–Iron Fly, Iron Condor, and Spreads. I use spread for directional trades,
management, and directional adjustments of non-directional trades like Iron Fly and Iron Condor.

Spreads help me to salvage a losing non-directional trade. I salvage the trade by taking a position in a next
week's contract or even on the monthly. I create my Iron Fly and Iron Condor with a 1:2 risk-reward ratio. My
exits from the losing leg of Iron Fly would be when price crosses the leg. For Iron Condor, I will manage it by
converting it into an Iron Fly.
In the above instance, when the market crossed the VWAP at 13800, I sold a 13400 Put and bought a 13200
Put on the monthly expiry. Premiums here are high and they act as a good cushion.

Directional adjustment according to the market movement (price action analysis & derivative data analysis)
plays a key role in my trading style.
Because of the active management of my position, my losses are generally low. For the current fiscal,
October was a losing month and for the year I have a three-figure return.

Your future plans?

I aspire to become one of the best traders in the country and would like to change people’s perception of
making trading a career choice. I also would like to be a fund manager someday.

SHISHIR ASTHANA