Six Vital Options Trading Tips To Consider

Sep 14, 2020 03:05 AM ET
Six Vital Options Trading Tips To Consider

Options are trading vehicles. The level of risk associated with options trading is related mainly to the trader’s position size. You need to know that the options market is not as liquid as the other markets like commodities and futures. Volume is a big issue with trading options. When you have good trading volume in a popular stock, you can find the tightest ask/bid spreads for options. The most liquid options are the ones with strike prices close to the money. 

If you want to be a successful trader in options trading, here are six basic strategies you need to learn before starting trading:

1. Have A Detailed Trading System Before Putting Your Capital To Work

Every successful trader makes sure to have a detailed trading system in place to follow on every trade. It is the same when it comes to options trading. You need the system so it can let you know when to enter and when to exit before you invest your hard-earned capital on the trade. Many trading systems are available in the market claiming to be useful. You need to have the one that prints entry, stop, and target points right on the chart live. Avoid the systems that need to make too many discretionary decisions. You also need to make sure that the system works on all ETFs and stocks because the market is volatile and the system should be able to adjust to changes fast. 

2. Compare Weekly Vs Monthly Options

While trading stock options, you need to consider certain factors, for example, which strike price you should trade, if you should buy or sell the options, and lastly, if weekly or monthly options must be used. The problem is that none of these questions has a certain answer that fits all situations. All of it depends on the trader’s outlook and goal out of the trade. In recent years, weekly options have become popular because they provide retail traders with a cost-effective way to enter a trade in most cases. 

The options expire every Friday. So, they are ideal for traders that prefer quick movements in the ETF or stock. The cheaper price also assures safer trades. However, you also need to keep in mind that you will get more time value by holding options longer. The weekly options only let traders earn faster if they get a quick move on their favor, but if the trade takes longer than what they have predicted, the time decay will hurt the position. With this in mind, you may want to go for monthly options more. 

3. Focus On Risk-Management

A big reason why traders fail to reach the trading goals is trading positions too huge for the account size. When you trade with small account size, you need to concentrate on consistent growth over time. It is easy to notice the power of compounding taking over if the trader focuses on small winners regularly. If you are a beginner, it is always better to take a few small positions instead of taking one big position. If a trader only takes one or two trades at a time, it is a long shot before you can see the expected results. However, if you have a larger set of trades, you can be benefited from the diversification and have the odds in your favor. 

4. Make Sure To Keep A Trade Journal

It is crucial to keep a detailed trade journal where you can document every trade in any type of trading. You also need to note down statistics like entry and exit points, entry and exit dates, P/L, average holding time, types of trades, and levels of implied volatility which is very important for options trading. 

Moreover, it is a great idea to document all important events happening during the trade. For example, note down any big news events like the FOMC statement and employment report if they are affecting the trade, holidays causing unusual market movement and your previous executions of the trade plan. Documenting everything can be very helpful in long-term trading because whenever you face an issue, you can look into your journal for a solution and it will be there most of the time. 

Make Sure To Keep A Trade Journal

5. Consider Trading The In-The-Money Options

When you buy a long call or put, you should know the direction of the ETF of Stock in the near term. Keep in mind that time decay is deeply related to buying an option and it starts to add up while eating the profit potential. To avoid this, you have to be accurate on market direction and make the move quickly. 

The importance of market direction remains the same when it comes to buying long vertical spreads. However, unlike a long call or put, you can rely on the long vertical spread to limit the effect of the time decay slightly. You may want to use it when you prefer to be in a more conservative position. It has a unique ability of risk management while it allows the traders to determine their maximum gain, maximum loss, maximum return on capital, break-even price, and the odds of a winning trade. You can determine all of this when you open a position. 

6. Narrow Down The Stocks And ETFs 

It is overwhelming for any trader to find the best trades for a day or week. You have to come across thousands of ETFs and stocks. Instead of scanning all of the products every day, it is better to narrow down the products to a smaller list that you can check out regularly. By doing this, you can focus on your favorable assets better and easily determine if you are bearish, bullish, or neutral without wasting all day staring at the charts. You can maintain a worksheet for your favorite stocks and ETFs and this watch list can be changed monthly.

With these strategies, you can earn more profits from options trading with minimal risk.


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