How To Choose The Best Options Trading Strategy

How To Choose The Best Options Trading Strategy

The special moment of options buying and selling is the fact that enables for various ways of be matched with various stock buying and selling philosophies. Each strategy includes a different profitability and risk tolerance level, and taking advantage of a number of strategies can enhance a portfolio very nicely! In the following paragraphs, I’ll outline four different stock buying and selling strategies, and how they may be matched with corresponding options buying and selling strategies which you’ll affect your portfolio. The primary idea would be to first concentrate on a fundamental stock buying and selling strategy, after which add significant leverage and capacity to the trade by utilizing options.

The most crucial factor when thinking about all these strategies is the idea of TIME DECAY. The need for any option declines with time, before the day the choice expires. This idea could possibly be the major enemy associated with a option trade, eating into its profits, or it may be the important thing to effective and lucrative option buying and selling.

First of all, which Strategy?

You will find generally four different strategies utilized by stock traders, because both versions has implications when put on options:

(i) Position Buying and selling

Traders purchase a stock and hold it for lengthy amounts of time, according to good fundamentals of the organization. They’ll frequently wait for stock to achieve great value, after which watch out for institutional or insider buying prior to making moving. Because the stock cost increases, they consider other buyers to part of and slowly move the cost even more.


Buying calls and puts isn’t appropriate, since you pay large premiums for time value, many of which might be easily wiped out with time even while the stock gains in cost. TIME DECAY is the enemy.

Selling covered calls every month within the option cycle around the stock you already own can considerably lessen the set you back compensated for that stock within the first trade. Whether or not the stock goes lower, you may still emerge a champion!

(ii) Momentum or Trend buying and selling

When a stock makes obvious move or breakout, the Momentum traders part of, and ride the fill up along a pattern to the initial reversal. They are hoping to make shorter-term profits from the rapid relocate the cost. Holding periods vary from six days to 6 several weeks.


Buying calls and puts isn’t appropriate, since you pay large premiums for time value, many of which is going to be easily wiped out with time even while the stock gains in cost. TIME DECAY is the enemy with Momentum Buying and selling, unless of course you’ve got a particularly strong and fast paced trend.

Selling Credit Spreads is a great strategy, and actually can be quite lucrative, because when you sell spreads around the opposite leg in the stock’s direction of momentum (e.g. selling put credit spreads available having a strongly bullish trend), you are able to frequently buy back the spreads for minimum cost then sell another spread closer in. This tactic can certainly yield 10-15% profit monthly. Time Decay is the ace in the hole for buying and selling this tactic.

Selling Naked Puts is a great strategy, and could be much more lucrative than selling credit spreads. However, it leaves a position of possibly getting to purchase lots of stock when the trade is the opposite of you, and thus your broker requires you to possess a large amount of margin.

(iii) Swing Buying and selling

Swing Traders purchase and sell swings or oscillations inside a trend. Holding occasions come from between 2 and 10 days. This can be a shorter-term buying and selling technique that’s more determined by the popularity direction than on fundamentals or technical indicators.


For those who have mastered the ability of identifying reversals or swings inside a trend, and understand how to plan an exit strategy, you’ll be able to begin buying calls and puts, or DITM options, which will give you to real profits! With Swing Buying and selling, holding occasions are short (2-ten days) which means you minimise the result of the arch enemy, TIME DECAY.

(iv) Day Buying and selling

Day traders concentrate on the many small moves which happen throughout the buying and selling day, mainly proven up by candlepower unit patterns. This tactic includes a broker’s dependence on no less than $25,000 to qualify, which knocks out many beginners.


Option buying and selling isn’t appropriate with this particular strategy. Broker charges for options buying and selling are very high, and Day Traders finish up having to pay billions for their brokers.

In Conclusion:

Should you own a minimum of 100 units of the stock that isn’t particularly trending in almost any particular direction, sell Covered Calls every month within the option cycle. You are able to lessen the internet cost that you simply initially compensated for that stock by between 5-12% every month.

For those who have a minimum of $1,000 inside your account, and may identify a pattern, it is simple to sell Credit Spreads or Sell Naked Puts every month within the option cycle.

When trading in options, you need to have options trading strategies that work. Depending on luck is not quite safe because it might not work for you after some time. It is imperative to have a solid tactic that you can use each time, especially in making the right predictions.