Blog #25 : How to develop a view on the market or a particular stock (Strategies For Trading Options - Part I) - Finance With Atul


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Wednesday, September 8, 2021

Blog #25 : How to develop a view on the market or a particular stock (Strategies For Trading Options - Part I)


Blog #25 : How to develop a view on the market or a particular stock?


Views on a stock or index are developed on the basis of technical analysis, fundamental analysis or expected/unexpected news. In my experience a view on the basis of technical analysis works best in the case of trading options. Am I biased? May be. Making money in the equity market is challenging if there is a time element attached to it.


Charts and current prices often have all the fundamentals and news built in, more so in India because here some people are more informed than others and insider trading is rampant. This is proven by the fact that stock move spectacularly days before announcements of any important relevant news. So the only way to beat these insiders is to know what they are doing and that can be discovered on the charts. There is no question that over the long term stocks moves because of fundamentals but whatever they do so for the same reasons over the short term is open to question. Option trading has nothing to do with long term fundamentals because such trades last only one month. This leads us important time related issues.



Option Trading
Option Trading

Why time to expiry is so important in choosing options strategies in India?


In India, the most important point to remember is that presently the most liquid options are those of the current month. So no matter how sure one is about a stock’s movement, if the expected movement doesn’t take place by the time to expiry, the options expire worthless. Strategies that work in India are thus a little different from those that work worldwide mainly because the Indian option buyers needs to deal with time to expiry issues. Worldwide far month options which are expire are several months from now or even years later are quite liquid. Traders interested in other strategies will find a lot of excellent literature available on the topic on the net. Also we will discuss the practical trading issues and concepts without going into detailed theories as this blog seeks to help you become a better trader and not PhD in derivatives. If you wish you can consult standard textbooks on options which rally get into pay off diagrams for a theoretical explanation of strategies. 


The time factor discussed above thus calls for codifying some certain unwritten rules. Following these rules would greatly improve your chances of making in the Indian options market. These rules which experience in the Indian equity options market have taught the savvy among the Indian traders.


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