How to Choose the Best Options Trading Strategy
Article by Rob Forbes
The magic of options trading is that allows for a variety of strategies to be matched with different stock trading philosophies. Each strategy has a different profitability and risk tolerance level, and using a variety of strategies can spice up a portfolio very nicely! In this article, I will outline four different stock trading strategies, and how they can be matched with corresponding options trading strategies which you can apply to your portfolio. The main idea is to first focus on an underlying stock trading strategy, and then add significant leverage and power to the trade by using options.
The most important factor when considering each of these strategies is the concept of TIME DECAY. The value of any option declines over time, until the day the option expires. This concept can be the major enemy of any option trade, eating into its profits, or it can be the key to successful and profitable option trading.
Firstly, which Strategy? There are generally four different strategies employed by stock traders, each of which has implications when applied to options:
(i) Position Trading Traders buy a stock and hold it for long periods of time, based on good fundamentals of the company. They will often wait for a stock to reach really good value, and then watch for institutional or insider buying before making a move. As the stock price increases, they look out for other buyers to step in and move the price even further.
APPROPRIATE OPTION STRATEGYBuying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which could be wiped out over time even as the stock gains in price. TIME DECAY is your enemy. Selling covered calls each month in the option cycle on the stock you already own can significantly reduce the cost you paid for the stock in the first trade. Even if the stock goes down, you can still come out a winner!
(ii) Momentum or Trend trading
Once a stock has made clear move or breakout, the Momentum traders step in, and ride the stock up along a trend to its first major reversal. They hope to make shorter term profits from a rapid move in the price. Holding periods range from six weeks to six months.
APPROPRIATE OPTION STRATEGYBuying calls and puts is NOT appropriate, because you pay large premiums for time value, most of which will be wiped out over time even as the stock gains in price. TIME DECAY is your enemy with Momentum Trading, unless you have a particularly strong and fast moving trend.
Selling Credit Spreads is a good strategy, and in fact can be very profitable, because as you sell spreads on the opposite leg from the stock’s direction of momentum (e.g. selling put credit spreads in stock with a strongly bullish trend), you can repeatedly buy back the spreads for minimum cost and sell another spread closer in. This strategy can easily yield 10-15% profit per month. Time Decay is your secret weapon for trading this strategy.
Selling Naked Puts is a good strategy, and can be even more profitable than selling credit spreads. However, it leaves you a position of possibly having to buy a lot of stock if the trade goes against you, and so your broker requires you to have a lot of margin. (iii) Swing Trading Swing Traders buy and sell swings or oscillations within a trend. Holding times are from between 2 and ten days. This is a shorter term trading technique that is more dependent on the trend direction than it is on fundamentals or technical indicators.
APPROPRIATE OPTION STRATEGYIf you have mastered the skill of identifying reversals or swings within a trend, and know how to plan an exit strategy, you will be able to start buying calls and puts, or DITM options, which will take you to real profits! With Swing Trading, holding times are short (2-10 days) and so you minimise the effect of your arch enemy, TIME DECAY. (iv) Day Trading Day traders focus on the many small moves that happen during the trading day, mainly shown up by candlestick patterns. This strategy has a broker’s requirement of a minimum of $ 25,000 to qualify, which knocks out many beginners. APPROPRIATE OPTION STRATEGYOption trading is not appropriate with this strategy. Broker fees for options trading are quite high, and Day Traders end up paying vast sums to their brokers. In Summary: If you own at least 100 units of a stock that is not particularly trending in any particular direction, sell Covered Calls each month in the option cycle. You can reduce the net price that you originally paid for the stock by between 5-12% each month.
If you have at least $ 1,000 in your account, and can identify a trend (using the method I will show you), you can easily sell Credit Spreads or Sell Naked Puts each month in the option cycle. If you have mastered Swing Trading principles, especially the idea of planning entries and exits, you can start to buy Calls and Puts, or DITM options and make phenomenal profits.
You can find more on this subject at www.swing-trading-options.com
Rob Forbes is a World Citizen with a wide variety of interests and expertise. A wildlife ecologist by profession, he currently lives in Asia, where he is the director of a small humanitarian aid organisation that specilises in education projects, leadership training, family development, small business develoment and investment.
Online Trading Academy Trading Experts Share Best Practices at the All-Star Trader Event in Denver on Tuesday, September 15, 2009
Online Trading Academy Trading Experts Share Best Practices at the All-Star Trader Event in Denver on Tuesday, September 15, 2009
Castle Rock, CO (PRWEB) September 11, 2009
Online Trading Academy is hosting a one-of-a-kind All-Star Trader Event in Colorado on Tuesday, September 15th. The event is scheduled from 8am to 5pm at the Denver Marriott South at Park Meadows located at 10345 Park Meadows Dr, Littleton, CO 80124. The tuition for this special event is free and includes complimentary lunch.
The All-Star Trader Event brings Online Trading Academy’s top trading professionals into one room to share their trading insights and their secrets to successful trading. Topics that will be covered are risk management, technical analysis, using forex to supplement profits, how to become a “Market-Driven Trader” and much more. Get a chance to interact with top trading professionals and get your questions answered. The All-Star ensemble includes Online Trading Academy instructors Brandon Wendell, Sam Seiden, Michelle Volmering, and John O’Donnell, Chief Knowledge Officer.
Brandon Wendell CMT, an Online Trading Academy graduate, has travelled around the world spreading his wealth of knowledge to the trading community at EXPOs and trading events, as a guest on CNBC Asia’s Cash Flow, at special seminars for CNBC staff on technical analysis of the financial markets, in published traders magazines, and more. As a former stock broker, brokerage trader and hedge fund trader, Wendell brings a variety of market views and insight into his trading classes and speaking engagements.
Sam Seiden, Director of Online Education, brings over 15 years of experience of equities, forex, options and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Seiden has educated hundreds of traders and investors in seminars and conferences.
Michelle Volmering, an Online Trading Academy instructor in Equities, E-minis, Forex, Mastering the Online Trading Platform and Active Investor, has been involved in the markets since the late 90s. Volmering grew up on a cash crop and beef farm which helped her understand the worldwide effects on commodity markets such as wheat, corn, beans, live cattle and feeder cattle. She has individually trained and mentored over 200 students and uses her trading experience to teach students how to use broad market, fundamental and technical analysis to learn how to trade with an emphasis on minimizing your losses.
John O’Donnell is Online Trading Academy Chief Knowledge Officer. His extensive management and consulting experience has been a key ingredient in Online Trading Academy’s fast global growth and industry recognition and awards. Mr. O’Donnell was a finalist two years in a row for the “Entrepreneur of the Year” award by Inc. magazine in Orange County, California. He has often been featured on financial web portals and television networks such as CNBC, CNN and MarketWatch. Mr. O’Donnell has also been featured in financial publications such as The Wall Street Journal, Investors Business Daily, Traders Journal and EQUITIES magazine, just to name a few. Mr. O’Donnell is frequently a keynote speaker at global finance expos including Trade2Win, Online Traders Expo, London IX Expos, Brazil Active Traders Expos, World’s First Virtual Online Traders Expo, Canadian Financial Forums, and The MoneyShow.
Eyal Shahar, President and Founder of Online Trading Academy, said “I think it is wonderful that we are able to offer an event that brings many traders together into one arena and share our insights with them. We are excited that we are able to offer this event to people achieve their financial goals.”
Call 303-325-2776 to register for this event or visit Online Trading Academy for more information about the school.
About Online Trading Academy
Online Trading Academy is a global network of financial education centers focused on teaching students the art of trading since June of 1997. With over 10,000 graduates, Online Trading Academy offers professional instruction from experienced Wall Street professionals, as well as a wide array of beneficial home study materials to supplement classroom study. Online Trading Academy locations include Phoenix, Irvine, Los Angeles, Concord, San Jose, Denver, Orlando, Tampa, Fort Lauderdale, Atlanta, Chicago, Kansas City, Boston, Baltimore, Detroit, Minneapolis, New York City, Secaucus, Charlotte, Austin, Dallas, Houston, San Antonio, Seattle, Washington DC, Milwaukee, Dubai, London, Singapore, and Toronto. For more information, visit Online Trading Academy.
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10 to 20% if it falls that much it will likely fall further
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