Options Trading Strategies
2019-09-05 | Simpler Trading Team
For anyone considering trading options, it helps to understand securities and the options markets. Trading options presents a vast opportunity to earn profits faster than traditional long-term investments.
You can grow a financial portfolio to levels not quickly matched by other investments such as a broker-managed retirement account. Options trading isn’t a passive investment plan that an investor leaves in the hands of someone else.
This is a do-it-yourself trading opportunity.
Buying and selling options is personally risky, and the risk is in real time.
Options traders can learn to control risk by determining how much they will risk before they ever start trading. Defining risk, which is typically 10% or less of a trading account, allows traders to use proven trading strategies while avoiding risking more than they can handle.
Compared to trading stocks, options traders have the opportunity to use strategies to limit risk more so than stock traders who can be exposed with much higher initial capital investments.
Traders face a learning curve that requires commitment and determination. You must personally take charge to trade options successfully.
Plenty of outlandish claims circulate on the internet about skyrocketing your fortune from a few dollars to millions almost overnight.
Possible, but not for someone new to this trading arena.
Anyone new to trading options is taking a huge step into uncertain territory. There are plenty of confusing tactics, many types of options, strange new terminology, and the very real chance of losing all your options trading money or more.
Yet, all that risk is overshadowed by the incredible opportunity to earn exponential profits, which is enticing to most traders. A purposeful options trader takes heed of the risk, learns how this arena works, and pursues profits that can be snatched from the markets.
You should know up front that the answer to the question, “What is options trading?”, may surprise you.
We’re going to fast-track the necessary details for you to understand options trading. Learn how you can take advantage of this exciting profit potential and create your own sound options trading opportunities.
Trading Options Defined
We can start with the basics…
What is options trading?
Trading options is purchasing securities contracts that allow a trader to buy or sell “options” on a security, such as common stocks, at a predetermined price within a specific time period. An options contract does not require that the purchaser buy or sell the underlying security, i.e. stock, bond, futures, or Exchange Traded Fund (ETF).
Options contracts are purchased on the options market which is based on underlying securities. However, options contracts are not the same thing as the underlying securities (stocks, etc.) and options do not provide any ownership in a company like a stock purchase does. An option is considered a derivative security which means the option price is derived from an underlying security, i.e. stock, future, ETF.
That’s the textbook version you might find at the U.S. Securities and Exchange Commission.
When you look at a day-to-day definition, trading options is like any other market trading.
Basic options trading involves buying call options - expecting the price to rise - and buying put options - expecting the price to fall. You’re purchasing the “option” to buy or sell at a predetermined price point in the future.
Options traders study the options market much the same as any trader looks at stocks, bonds, futures, or ETFs.
Options trading is not the panic-inducing mayhem portrayed by well-meaning financial experts.
Yes, it can be as risky as any other trading arena. But options trading offers unique income-earning opportunities.
Key attractions of options include:
- Low initial capital required to buy a position in the market
- Variety of options trading strategies to buy, sell, or hedge on market moves
- Options expire so there’s no obligation to hold securities for an extended time
Options trading also allows access for traders with smaller accounts to trade in the markets.
As an example, traders might want to invest in Google (GOOGL). Great company, strong business, right?
But Google stock is expensive compared to other stocks or options contracts (price examples used below are market value from first quarter 2019).
As a trading example, if a trader wanted to buy 100 shares of GOOGL the capital required would be $25,436.
That’s out of range for most traders, especially those with smaller accounts.
By comparison, a trader could buy a call option on 100 shares during the same time for $1,900. Whether the trader loses or makes money on the purchase, the option purchase expires in a matter of days.
And, you have a variety of strategies to trade this option for profit depending on your risk tolerance. There is no obligation to keep the option beyond its expiration or to purchase the higher-priced stock.
Options traders know they only have to tie up a couple of thousand dollars in their account (in the GOOGL example, above) for a limited time versus tens of thousands of dollars for months or years to come.
Options trading provides market access and faster profit potential for traders.
Technical Analysis And Strategies For Options
Options traders track securities in the market much like other traders.
Charting software displays technical indicators to help options traders predict upcoming market trends and price changes. This technical analysis is fueled by mathematical formulas that consider factors such as price or volume of an option.
There is a bit of art to technical analysis because indicators are not an exact science. Traders can use them in a variety of combinations, and tend to customize these indicators based on experience or preference. Some traders follow a single indicator while others may use an intricate, overlapping web of indicators.
While indicators provide valuable insight into options, various trading strategies define how traders purchase options.
How well traders use strategies to predict moves in the options market determines how well they profit.
More complex options strategies use a combination of purchasing puts and calls to maximize possible profits while buffering losses. These combinations can lessen risk by hedging against a price that moves against the expected position.
It takes time, effort, and a willingness to trust your system to gain options strategy skills.
Psychology Of How Trading Options Works
Newer traders always seem to be searching for the next “best setup.” They ask about market direction, iron condors, butterflies, and watch media outlets for advice.
Seasoned traders have mastered the technical elements and are searching for ways to handle the challenges of their innermost thoughts.
What all traders should consider is the psychology of trading - how to conquer emotions while trading.
Traders tend to experience a lifetime of emotions each week. Fear, uncertainty, confidence, euphoria, hope, and many more emotions flow through traders’ minds.
The best thing traders can do to control their emotions is to learn a central truth: The market is always moving, and the market doesn’t care how it affects traders.
Much like the ocean couldn’t care less if you’re surfing its waves or not, the market couldn’t care less if you’re trading or not.
Traders can flounder in the rough surf of the market until they fail or succeed, or they can learn to plan, focus, and follow strategies to trade for profit.
It is necessary for traders to adjust their emotions to adapt to the uncertainty of an uncaring market.
Loss is inevitable in trading.
Traders want to believe that their technical knowledge of trading and the markets is the key to success in trading options.
Professional traders will readily acknowledge that mindset - controlling their emotions - dictates their failure or success.
Mindset is the hurdle traders need to overcome to hit their trading potential. It’s also the part of every person that resists change as the mind finds any excuse possible not to summon the desire to move forward or act.
Ponder this: your trading account will give you unbiased feedback on how effective your beliefs, emotions, and mind are helping you achieve success in trading.
Changing your psychology, or mindset, can be a tough journey.
Good traders constantly work on emotional control. They don’t focus on fear of the uncertain and an uncaring options market, they focus on controlling personal risk and reward.
Does Trading Options Work?
The easy answer is yes, trading options does work. There are literally thousands of traders making weekly income trading options and just as many adding funds to their retirement accounts trading options.
So, the realistic answer is, yes, but trading options is work. Trading is challenging, and traders need to be committed to succeeding.
Traders who build their trading plan with technical skills backed by a positive mindset have the opportunity to excel in trading options.
Options traders should have a definite focus on their trading plan and a realistic understanding of their financial goals in the market. Traders should determine clear plans and goals before investing in trading options.
Traders who make the options market work for them know how to accept and limit losses while consistently working to achieve trading profits. They build skill and confidence to battle against the uncertainty of the market. And, they can repeat this process without letting their emotions take over and blow up their account with bad trades.
There are many investors who successfully trade options on a regular basis.
Traders who find a training program and a mentor can move ahead of those traders who are struggling to learn by reading the latest book about trading options for dummies or skimming through information on the internet.
Seasoned traders have discovered that participating in a community of like-minded investors helps build options trading skills faster.
Simpler Trading provides a variety of options training powered by a community of expert traders. The Company was founded by John Carter, a best-selling author with almost 30 years of trading experience.
Traders involved in the Simpler Trading community can gain skills to minimize their risk. These trades are set up using a unique combination of analysis and strategies proven by our active trading mentors.
Every day the Simpler Trading team offers support and insight while promoting confident trading performance to combat the uncertainty of the markets.
When faced with a market that ultimately doesn’t care about traders, Simpler Trading opens the door to new possibilities for traders. You can experience what successful options trading can be by joining the Simpler Trading community.