Option Trading Education Signals Strategies Software Brokers
October 24, 2015 - The Right Stock Options Trade For You
4 Steps To Finding The Right Options Trade By NetPicks
I got an email from one of our Options Mastery students this week asking some really great questions.
Iím sure these are questions that many traders have when starting out with options so I decided to answer them in this blog post.
Here are the questions that came in:
ďHow do YOU determine when to buy a call or put versus using a spread or collar or butterfly or iron condor?
What are the criteria you are looking for to make the decision?Ē
I have mentioned numerous times over the past few weeks that I love the flexibility that options offer. We arenít limited to buying and selling calls and puts. We can actually trade different options strategies that will allow us to adjust how aggressive we want to be.
To take it a step further we can also use different strategies to adjust whether we want to be bullish, bearish, or market neutral. You canít say this about any other market out there.
If you are trading futures, Forex, or stocks you are basically limited to buying or selling individual contracts, lots, or shares. This is fine if you want to put on a directional bet but we all know that the market doesnít always trend. In fact, more often than not we are stuck in a sideways range.
Trading options allows us to profit from these sideways moves instead of getting whipped back and forth with false breakouts.
While the flexibility that options offer is great, I understand that it can be intimidating when starting out to know which strategy is best to use at the given time.
Over the last 13 years I have taken thousands of trades and have tracked each one. As a result, I have come up with a methodology that fits my trading style and could also help you out if you are looking for an edge in the markets.
Letís walk through what my normal process looks like when setting up a trade.
My Options Trading Edge
Steps for Identifying Options Trades
1. Have a small universe of stocks/ETFís that you look at on a regular basis.
I write and talk about this all the time in our training materials. I donít want to look at hundreds of names on a daily or weekly basis because in many cases you are left trading names that you arenít familiar with.
I would rather focus on a small list of names that I get to know over time. This way I can easily determine whether I am bullish, bearish, or neutral without spending a ton of time each day staring at the charts.
My watch list can change once a month. Currently my list is 24 names.
Those 24 names come from my universe of 50 stocks and ETFís that I track on a monthly basis. In other words, when I created my watch list of 24 names for the month of October, those names came from my universe of 50 products that I have tracked and researched for an extended stretch.
How do you determine which products should be on your watch list? Check out the blog post ďHow To Simplify Your Trading With A Good Watch ListĒ
2. Look at the charts for each product on your watch list to get a feel for any key levels, directional outlook, or overbought/oversold extremes.
This step is really important in helping you determine which options strategy should be used.
Example: We just closed out of an Iron Condor on USO here this week that we opened back in early September.
We chose this trade because we looked at the USO chart and saw that we were at a bearish extreme. We were expecting either a bounce higher or a sideways consolidation.
The only way I had a feel that the Iron Condor was a good strategy to use was because I have traded USO for the last few years. This gave me a comfort level with the ETF that I wouldnít have had if I just pulled it up off a stock scan.
Looking at the charts will help us determine how aggressive we want to be.
If we are strongly bullish or bearish then we can reflect that in both position size and the options strategy that we will use.
If we are neutral then we can also adjust position size and go to options strategies that work well in sideways moves.
3. Look at the levels of volatility to determine if itís high or low.
We track the Implied Volatility levels for each stock/ETF on our watch list. This helps us know if those levels are high or low at the given time.
If IV is high, then we know we have the opportunity to sell premium.
If itís low, then we will lean towards using strategies like long calls/puts and long vertical spreads.
My first choice is always to sell premium because those strategies give us so many ways of being profitable. However, we have also seen over the years that when we wait for IV to be high when selling premium our odds of success really improve.
4. Determine which options strategy best fits our outlook.
We started by looking at the charts of each of the products on our watch list. This helped us decide if we wanted to be bullish, bearish, or neutral. This also helped determine how aggressive we want to be (position size, option strategy selection).
Once we have an opinion on what we think the stock or ETF is going to do, then we go to our playbook to follow the guidelines that we outline for each strategy.
For example, if we are bullish on a stock and want to sell a put spread then we follow our Short Put Spread criteria outlined in the Options Mastery playbook. Itís important to have criteria to follow for each strategy to make sure you are placing trades that give you good odds of success.
4 Simple Parts Of My Options Trading Plan
The 4 steps listed above are the steps that I follow in my own trading everyday. Itís important to note that this is not a perfect science when selecting trades and adjusting position size.
There are times when I want to be conservative so I trade more spreads and use smaller position size and end up leaving profit on the table. The whole goal here is to have a method in place that you can follow everyday.
We arenít going to be perfect on every trade but by following a method we will be sure to have trades on that we are comfortable with. If this is the case and we are using proper risk management, then this will lead to us getting the number of trades on that will give us better odds.
You wonít be backing yourself into a corner by putting on 2-3 trades and hoping for the best. By having a bigger sample set of trades then the odds will better play out in the long run.
Stay Disciplined In Your Trading
As is the case with any trading approach the key is having a system that you can stay disciplined to.
Swaying in the wind with everything you hear in the media these days or from other traders can lead to inconsistent results. Every trader is a little different, so make sure you are using a trading method that fits your style and risk tolerance.
This might take time to develop your methodology but in the end it will make all the difference in the world.
Itís so important that if you donít have a system in place now then take a big step back and donít put any more money to work until that system is in place. You will see the benefits right away not only in your P/L but in your confidence as a trader.
In the end, trading is all about discipline.
If you can become that disciplined trader with a detailed system in place, then you will be well on your way to success.
Click the Links Below to Review Compare Options Education Courses, Trading Market Advisory Services, and Software
Invest2Success "Profit Rockets" Stock Picks
Free Trial - Use Our Daily Long and Short Stock Picks with Your Option Trades Receive daily low-risk high-reward SP500 NYSE Nasdaq buy-long and short-sell stock picks that are experiencing strong increasing and decreasing earnings, that include buy sell entry, stop-loss, take profit area price targets, and trade management information to your email inbox.
Profiting from Trading Stock Options
What Are Stock Options?
Options are financial instruments that give the right, but not the obligation, to engage in a future transaction on some type of underlying security. Buying a call option provides the right to buy a specified amount of a security at a set strike price at some time on or before expiration, and vice versa buying a put option provides the right to sell. Upon the option holder's choice to exercise the option, the options writer who sold, or wrote the option must fulfill the terms of the contract.
Options Trading Software Valuation Models
Theoretically the value of an option can be determined by a variety of techniques, software, systems, including sophisticated option valuation software models. These software models can forecast and predict how the value of the option will change with changing market conditions. The risks associated with trading and owning options can now be better understood and managed with higher degrees of precision with these options software models.
Different Types of Stock Options
Exchange-traded options are an important type of options which have standardized contract features and trade on public exchanges, allowing trading among independent parties. Over-the-counter options are traded between private parties, most times well-capitalized institutions, which have negotiated separate trading and clearing arrangements with one another. Another important type of option, particularly in the U.S.A., are employee stock options, that are awarded by a company to their employees as additional incentive compensation.
Stock Option Forex Futures Training Seminars Webinars Workshops
Click Here For The Complete 2015 Schedule
Professional investors traders teaching successful low-risk high-reward
trade strategies. Power profit secrets for stocks, options, forex, futures
investing trading success. Or avail of Home Study Courses and or
Trading Softwares available to improve your investment returns.