For the year 2022, we have a special resolution of taking our learners and giving them the gift of the first principles of trading strategy. There are many strategies and systems for trading but the basics remain the same. Characteristics of the product that forms the best trading strategy system are as follow.
- Responsiveness – Volatility
These two are the main factors that are driving the decisions of the traders in the market. Price and its fluctuations. Greater the swing more the profits or losses.
The most liquid asset that we have is the currency in terms of cash. We can deploy it anywhere at any time and any place within India with no constraints. In the securities market, the other type of liquid assets are stocks and their derivatives. Particularly, the derivative which is also known as “Options”.
Within the Options, we have a category of Index Options. These index options are very volatile as they derive their value from a basket of underlying securities. This makes them unpredictable and volatile. Traders require volatility to benefit from the price differences created by the volatility.
Based solely on these two factors the millennials have made themselves comfortable with the Index Options. They have chosen for themselves a product that will give them instant results. They will not have to wait for the short, mid or long term. A week minus Saturday, Sunday is all they need to become investors in the market. Sometimes results are quick and the so-called investor traders are in for a surprise. Little did they read about the past and layers of the market.
Mostly such products are related to the field of sports where there is some element of speculation. However, in the markets, there is a limit to speculation. More emphasis is given to information and knowledge which can drive speculation and the government doesn’t seem to have a problem with speculation driven by news and informative inputs. They refer to it as Skills. Such speculation is given the name of predictive analysis or calculative risks.
Let us get back to the topic and look at some of the parameters which are taken into account that is overemphasized and some which are neglected. Most of the traders do not understand the fact that we follow European style options which have predetermined expiry. This is not the case with the American style options. Liquidity and Volatility are more mentioned.
Product Type and Purpose
The type of product and what is the purpose of the product that is not communicated properly. This gives a chance of exploitation for the propagators to exploit the greed part of trader or investor. For example Options work as insurance to the portfolio. The purpose is to hedge the portfolio against adverse price movements but we have found a different use for this product.
A trader or an investor is little or not at all aware of the risks posed by the securities market. There are many reasons for this presumption but mostly it is greed mixed with half or no financial knowledge. Almost every trader is unaware of the fact that options as an investment are a loss-making product. Full capital can be wiped out if the product is not sold before the expiry. Also, there are terms of the product that the traders are unaware of.