Updated: Apr 8, 2021
Welcome to the final article on the basics of options trading for beginners. In our previous article, we had seen about the options Greeks in detail. We had learned about the options Greeks such as Delta, Gamma, Vega, Theta, and Rho. We had also learned about these Greeks. How they are going to make a difference in the trading? So, we had covered all those topics in our article.
One thing I want to tell you that in options trading, there is nothing called the best technique or strategies. Every technique has its good thing and its bad thing. Sometimes they work they don't work i.e. basically in any kind of market activities i.e. in the stock market, what are you doing? You are trying to predict the future and nobody even I mean nobody with the latest technology and computers and everything can predict whether it is going to ups and downs tomorrow.
There is, of course, a whole department to do that and record every aspect but still lots of time they feel the same thing happens when you are in the stock market dealing with the options and futures. Anything you are trying to predict the future and there is no correct and perfect way to do that. All these things are like you are going to build your system can be sometimes damn good and sometimes bad.
It was something doesn't work in any situation. How hard you are going to do to build your system that is somewhere going to be seen but I have some opinions about technical analysis, about using Greeks and this is why I am not dependent on them much.
If I say on either technical analysis or option Greeks, I have my system and I keep my system very simple. A logic based on common sense works the best and what is the reason I don't like the technical analysis and what is called options Greeks, that’s I am going to tell you.
First of all, let’s the recap and see what are the options contracts. Options are depending on derivatives contracts that permit buyers of the contracts (option holders) to buy or sell a security at a chosen price. Options buyers will pay an amount called a "premium" by the sellers for such a right. If the market prices are adverse for option holders, they will let the option expire worthless, thus make sure the losses are not higher than the premium. In opposite, option sellers (option writers) presume greater risk than the option buyers, which is why they demand this premium.
Options are divided into two options. One is the "call" option and the second is the "put" options. With a call option, the buyer of the contract buys the right to buy the underlying asset in the future at a fixed price, called the strike price. With a put option, the buyer obtains the right to sell the underlying asset in the future at the fixed price.
So now see, technical analysis has some basic assumptions and the perception. It has a history. We know that history is going to repeat itself but that is not right all the time. Sometimes it repeats most of the time it does not repeat. The technical analysis is dependent on data. The market is future-oriented. It is depended on what is going to happen in the future and not what is happened in the past.
Having said so, I need to see the past a little bit. We have gone through a very rough patch like there was a corona-virus all over India, all over the world, in the USA and their trade war between USA and China and then there is almost like situation in India.
What happened? The stock market is moving like a bull. It is not stopping anywhere why because that all has already happened. Now the market is looking at a future and it looks like for the market quite a few times. The future is bright because the Corona cases are increasing but so is the recovery number. The growth rate in the USA is increasing so that's good news. Soon or later people will learn how to live with it.
Companies are opening in China. The corona virus cases are almost sorted out. So, the market is positive about that also. You cannot trade in the market looking at the past while the market is looking future. History cannot repeat itself all the time like the future is not predictable. You cannot judge a future by looking at history.
These two things keep me away from technical analysis. I used some things which are very simple things from the technical analysis which is called support and resistance and I also used price and volume movement that I do not over-dependent on that. I don't use these options Greeks also very much because the problem with the option Greeks keep is that is changing every day. If you are going to buy the options for one month, then there is a monthly contract but option Greeks were going to change every day.
So, with that to tell you, I am glad to inform you that here is the ending of the basics of options trading strategies. Now, what we are going to learn in the future’s article. We will learn about the Advance strategies.