Most Useful Options Trading Strategy
This simple, profitable trading guide educates stock options trading for beginners. The plan relates to the stock exchange, Forex currencies, and commodities. Within the following post, you are going to see on what options are, the way to purchase Put and Call options, the way to trade options plus a whole lot more. When options trading isn’t for you, try our Harmonic Pattern Trading Strategy. It’s an easy step by step guide that has drawn a lot of interest from readers.
The Dfxindo team believes this is the most successful options strategy. When trading, we adhere to the principle of KISS: “Keep it simple, Stupid! “
With simplicity, our advantage is having enormous clarity over price action.
We’ll be focusing on BUYING Put and Call options through this options trading tutorial. Selling options is a different animal. It requires more experience to fully understand the inherited risks. Why? Because you can’t restrain the drawback, exactly the very same way you do whenever you purchase Put and Call options.
This could be definitely the most prosperous options strategy as it consistently provides profitable trade signs. Perhaps not since it doesn’t have losses. The preferred time frame best options trading strategy is the 15 minute time frame.
We will first define what buying a Put and Call options is. After that, we will give out the rules for the best options trading strategy. Here is another strategy called The PPG Forex Trading Strategy.
What are Options?
Options are a specific type of derivatives contracts. The underlying securities is stocks, indexes, ETFs or commodities. With a derivatives contract, you do not directly own the underlying asset. Instead, you own a related asset whose value is affected by changes in price.
With an options contract, you have the right to buy or sell an asset at a predetermined price in the future. When that future point arrives, you will have the choice to exercise the option or let it expire.
Here’s an example. Let’s say the asset is selling for $110, a contract giving you the right to buy at $100 will have an intrinsic value. As the expiration date approaches, the value of the options contract will adjust.
There are two different types of options, call options and put options. When used correctly, options trading will make your strategy much more dynamic. Let’s dive into the next section.
What is a Call Option?
A Call Option gives you the right to purchase an asset in the future. If exercised, this purchase will occur on a predetermined date. It will also occur at a predetermined value. If you are unsure about the future value of an asset, a call option can offer some protection. Call options are commonly purchased by stock traders. However, they can also be found in many other markets. In fact, call options are the most commonly traded options contracts.
What is a Put Option?
A Put Option gives you the right to sell an asset in the future. Like call options, these contracts have predetermined prices and sell dates. Put options and call options are often purchased together in order to make a “hedged” position. Below, we will discuss the different types of options sales. We will then discuss how these sales is introduced into your trading strategy. You may also enjoy this article about options vs futures.
Different Types of Option Sales
It is necessary to remember that an option is a contract that allows you to purchase an asset at a specific price in the future. There are four different types of options sales that can possibly occur. The differences between short and long sales, and puts and calls will be very important.
- A long call option will give you the right to buy an asset at a specific price in the future. Long call option holders will benefit from price increases over time.
- A long put option will give you the right to sell at a specific price in the future. Contrary to call options, long put option holders are hoping that market prices will decrease.
- A short call option gives you the right to sell not the underlying asset, but the option itself in the future. Because the “logic” of short positions is reversed, short call option holders are in similar positions to long put option holders.
- A short put option will hope that long put options become less valuable over time-consequently, holders will be rooting for prices to go up.
Once you can understand the different varieties of options sales, you will be able to engage in more complex trading strategies. These strategies will usually involve purchasing multiple different options in order to manage risk and increase the possibility of earning high returns.
Why Use Options?
Options are used for speculation or hedging. Hedge fund managers are notorious for using advanced risk management strategies to hedge their market exposure.
Options offer high leverage, giving you the chance to trade big contracts and potentially make more money. This is the same for Forex. You need a smaller initial investment than buying stocks outright. When buying options, the risk is limited to the initial premium price paid.
When using options, the risk is limited, but the potential profit is theoretically unlimited. Obviously, we say theoretically unlimited profits. But options prices are going to be range-bound within certain parameters. There’s no stock price to rise to infinity. Also, read this article on Paper Trading Options – The Secret to Riches.
Types of Options Strategies
You can take your trading beyond basic call and put options. That is the beauty of options trading. Other trading strategies include covered call, married put, bull call spread, bear put spread, and more. They can help you better manage your risk and seek new trading opportunities.
If you’re a versatile trader, take advantage of the flexibility that options trading can give you. Study the top 10 stock options trading strategies below:
- Covered Call Strategy or buy-write Strategy – implies buying stocks outright. At the same time, you want to sell call options on the same stock. The number of shares you bought should be identical to the number of call options contracts you sold.
- Married Put Strategy – implies buying stocks outright. At the same time, you will buy put options for an equivalent number of shares. The married put works like an insurance policy against short-term losses.
- Bull Call Spread Strategy – implies buying call options with a specific strike price. At the same time, you’ll sell the same number of call options at a higher strike price.
- Bear Put Spread Strategy – it’s similar to the bull call spread but involves buying and selling put options. In this options strategy, you buy put options with a specific strike price. At the same time, sell the same number of put options at a lower strike price.
- Protective Collar Strategy – implies buying an out-of-the-money put option. At the same time sell or write an out-of-the-money call option for the same stock.
- Long Straddle Strategy – implies buying both a call option and a put option at the same time. Both options should have the same strike price and expiration date.
- Long Strangle Strategy – implies buying both an out-of-the-money call option and a put option at the same time. They have the same expiration date but they have different strike prices. The put strike price will typically be below the call strike price.
- Butterfly Spread Strategy – implies using a combination of the bull spread strategy and bear spread strategy. The classical butterfly spread involves buying one call option at the lowest strike price. At the same time, sell two call options at a higher strike price. And then sell one last call option at an even higher strike price.
- Iron Condor Strategy – involves holding a long and a short position in two different strangle strategies.
- Iron Butterfly Strategy – involves using a combination between either a long or short straddle strategy. At the same time, buy or sell a strangle strategy.
Now let’s turn our focus back to the most successful options strategy.
Let’s define the indicators you need for the best options trading strategy. And how to use stochastic indicator.
The only indicator needed is RSI or Relative Strength Index.
Options trading is constrained by the expiration date factor. So it’s important to select a technical indicator that is suitable for options trading. The RSI indicator is a momentum indicator which makes it the perfect candidate for options trading. This is because of its ability to detect overbought and oversold conditions in the market.
The RSI indicator’s location is on most FX trading platforms (MT4, TradingView). You will find it under the indicators library.
So, how does the RSI indicator really work?
The RSI uses a simple math formula to calculate the oscillator:
There is no need to go further into the math behind the RSI indicator. All we need to know is how to interpret the RSI oscillation. Basically, an RSI reading equal to or below 30 shows that the market is in oversold conditions. An RSI reading equal or above 70 shows the market is in overbought conditions. At the same time, a reading above 50 is considered bullish. On the other hand, a reading below 50 marks is considered bearish.
The preferred RSI indicator settings are the default settings with a 14 period.
Before we go any further, we always recommend taking a piece of paper and a pen and note the rules.
Let’s dive into the options trading tutorial…
Most Successful Options Strategy
(Rules for Buy Call Options)
Options Trading Tutorial Step #1: Wait 15-minutes after the stock market opens to establish your market bias.
The most successful options strategy isn’t focusing just on the purchase price. Nevertheless they also use the full time section the like peopleperforming this.
The stock exchange opening price is normally the main price. Throughout the very first minutes following the stock starting bell, then we can view plenty of trading activity. That is only because ‘s enough time when big investors ‘ are setting their own rankings from the stock exchange.
Read Day Trading Price Action- Simple Price Action Strategy. You’ll find out about a plan that isn’t restricted to the time element and focuses on price action. It’s one of the most comprehensive guides to successfully trade stocks or other assets by simply using price action.
Our team at Dfxindo wants to develop the best options trading strategy. In order to do that, we have to think smarter. We have to track how the smart money operates in the market.
The best options trading strategy will not keep you glued to the screen all day. You only have to know when the stock markets open.
The NYSE opens at 9:30 EST or 1:30 PM GMT time for those trading from Europe.
This brings us to the next step in our options trading tutorial…
Options Trading Tutorial Step #2: Make sure the 15-Minute candle after the opening bell (9:30 EST) is bullish.
As we have established earlier, we only want to trade in the direction where the smart money is. If we’re looking for buying Call Options opportunity we want to make sure smart money is buying after the open. Conversely, if we’re looking to buy Put Options we want to see sellers appear right after the opening bell.
Important Note*: If we have an opening gap up it means the buying power is even stronger and we should put more weight on this trade setup.
Options Trading Tutorial Step #3: Check if the RSI is above 50 level – This is a bullish momentum signal.
We use the RSI indicator for confirmation purpose only. We want to make sure that once we have identified the bullish price action the momentum behind the move is confirmed by the RSI indicator. We’re not concerned with overbought and oversold conditions because the market can stay in these conditions longer than you can stay solvent.
In the chart above, we can note the RSI is well above 50 during the first 15-minutes of trading. The price action is confirmed by the RSI momentum reading.
Now, let’s jump and define where exactly we want to enter our buy a Call option.
Options Trading Tutorial Step #4: Buy a Call option right at the opening of the second 15-minute candle after the opening bell.
Now, that we have confirmation that smart money is buying we don’t wish to drop any additional hours and you would like to purchase a Call option at the beginning of the upcoming 15-minute candle following the opening bell.
As easy as it sounds that this tactic only requires one to put 15minutes your time and effort daily. Now you ‘ll either find yourself a signal or never, however in order to make the most of this most useful options trading plan, you want to use area and also don ‘t take any trades if you don’t have some signal.
So as of this time our trade is currently running and at profit, however we need to specify when to practice our telephone option and make the most.
Options Trading Tutorial Step #5: Choose the closest expiry cycle. For day-trading select the weekly routine.
When you purchase a Call option additionally you need to stay an expiry day, as a portion of this contract.
You could be asking your self the way to select the ideal terminal bicycle?
Well, because we’re almost certainly going to market our Call option exactly the exact day since we’ve purchased it, it’s appropriate to pick the weekly routine.
Time to switch our attention on the most essential section: Where to shoot PROFITS and sell your own Call Options?
Options Trading Tutorial Step #6: Take Profit and market the Call Option the moment you have just two consecutive 15-minute bearish candles.
Knowing where to make the most is as vital as knowing when to put in trade. You wish to escape our position the moment we view the sellers stepping into. We quantify it by counting two consecutive bearish candles being a indication of bearish belief presence on the marketplace.
You overlook ‘t want to exercise your long Call option because you don’t desire to have those share stocks, then you only wish to create an instant profit.
Note** The preceding was a typical illustration of a purchasing Call option with the options trading tutorial. Make use of the specific same rules – however in reverse – for purchasing a Put option trade. From the figure below you are able to see an authentic Buy Put Options example working with the options trading tutorial.
We’ve implemented the exact same Step number 1 by Stepnumber 4 to help us set our trading prejudice and establish that the Buy Put Option trade and followed closely Step number 5 through Stepnumber 6 to spot when to market your Call option.
Selecting the Options Contract which ‘s Right For You
Now that you know the way to successfully trade options, you are going to require to understand the best way to pick the deals that are perfect for you personally. These options contracts are going to have some level of risk. That is particularly valid when trading binary options. That is because of the simple fact that options could possibly be useless in their expiry date. The probability of trading options might be handled.
When picking options, keep the following things in your mind:
- Your private degree of risk tolerance
- Your Preferred trading interval (Day-trading, Longterm trading)
- The volatility of every prospective advantage
- Past yields on options contracts
Options contracts additionally have elevated degrees of volatility. Throughout the first half an hour of trading, options contracts undergo large fluctuations in value. When volatility is high, the the degree of risk and potential reward will probably be higher. In that time period, your own trading plan will have to be a whole lot more active. Risk could be handled by devoting orders. Additionally, it may be handled by means of speeding your standing and diversifying your rankings.
Both call and put options may be quite lucrative. As a way to prepare as an options trader, it is going to soon be a very good concept to clinic. Luckily, Dfxindo which makes it effortless to hone your knowledge and get into new markets. Carefully joining the actions mentioned previously might assist you to unlock the most effective options trading plan.
Conclusion – Options Trading Tutorial
This is amongst the very prosperous options strategies because when stock trading, it’s ‘s vital that you have a fantastic comprehension of the industry opinion and the way many players have been situated on the marketplace. One other crucial reasons why that really is your better options trading strategy would be that you simplynot essential to become glued to the monitor throughout the day .
Don’t forget also to read our Support and Resistance Zones – Road to Successful Trading one of the most comprehensive guides to successfully trade stocks or other assets by simply using support and resistance levels.
Please leave a comment below if you have any questions on How to Trade Stock Options!