Options Trading Strategies

Options trading is an activity that requires a theoretical basis, as well as experience. However, if you are interested in entering the related market and do not have too much knowledge in this respect, don’t worry. Equip yourself with patience and perseverance and start learning. Due to the variety of options trading strategies available, you have the chance to exercise and build the foundation for understanding this kind of trade and develop related skills.

After assimilating notions like options, securities, calls, puts, strike prices, expiration dates, risk-reward systems, assets, underlying stocks and many others, you must progress towards applying them into real life situations. However, this transposition from abstract to concrete takes place in a better manner if one uses options trading strategies, tactics that help one plan their moves to obtain gains. Therefore, the article intends to reveal information on this topic.

The abundance of strategies used in options trading derives from the fact that the value of these securities are not solely based  on the price of the underlying stock they track. The option’s market price is influenced by other factors as well. Hence, you need to get a handle on pricing dynamics before investing money and then couple this information with various techniques.

By using various methods, one can benefit from:

  • a better intuitive understanding of the changes and modifications that occur in the underlying stock (and the market in general) and have an impact on the price of an option;
  • improved working knowledge of strategy mechanics through simulation.

Of course that you need practice in order to become proficient in options trading strategies and a good exercise is through paper trading. Nevertheless, the premise for such an endeavour is to understand how option values are influenced by real market changes over time. Once you cover this “base”, you can advance to other issues such as trading costs (slippage, margin requirements) in order to best execute transactions.

Paper trading is not the only technique to which you can resort in order to test a certain strategy, backtesting being also useful. Contriving a plan for your option approach may slow down your pace, but you can thus address different nuances of option transactions in advance. It is through planning that you will be setting disciplined trading skills in stone.

Before putting options trading strategies into practice, one needs to perform a good amount of advance preparations. Here are the preliminary steps to be taken before implementing a new technique:

  1. understanding the security’s risks and rewards;
  2. practising the strategy;
  3. analyzing the trade.

To create a favorable environment for the “real action”, monitor different option pricing components and use paper trading to simulate live conditions. This way, you polish your intuitive feel for price changes and you avoid making costly errors. To achieve the former objective, you need to formally track changes in all the different components on a daily basis. Access to market prices, an option calculator, and a spreadsheet program are the means to keep record of occurring alterations.

Since option contracts can be used for financial hedges or as tools for speculating, you have several options in terms of next moves. Different needs and conditions require and dictate different actions, so you will want to have your set of options trading strategies ready.

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