Best Options Trading Strategy
This simple yet very profitable options trading tutorial will help you understand how to trade stock options. This is a simple step by step guide on how to buy Put and Call options. While this strategy is focused on the stock market, it can be easily applied to other asset classes like Forex currencies and commodities. If options trading is not your thing, you can still check out our Harmonic Pattern Trading Strategy- Easy Step By Step Guide, which recently has drawn lots of interest from our readers.
Our team at Trading Strategy Guide believes this is the most successful options strategy because, when it comes to trading, we adhere to the principle of KISS: “Keep it simple, Stupid!”
With simplicity, we have the advantage of having enormous clarity over the price action.
Keeping the above in mind, going through this options trading tutorial we’ll be focusing only on BUYING Put and Call options. Selling options is a different animal, and it requires much more experience to properly understand the inherited risk associated with this type of options trading. Why? Because you can’t control the downside, the same way you do when you simply buy Put and Call options.
This is the most successful options strategy not because it doesn’t have losses, but because it’s very consistent in providing you with profitable trade signals. The preferred time frame best options trading strategy is the 15 minute time frame.
Before giving out the rules for the best options trading strategy, let’s first define what buying a Put and Call options is.Here is another strategy called The PPG Forex Trading Strategy.
What are Options?
It’s very important that every options traders out there understands what options contracts are. In this section, we’re going to share a simple definition of options as securities. After you read this section you’ll be able to understand very easily what options are.
Basically, an option is placing a bet that the price of a security will be above or below a certain price by a certain in the future. “The certain price” is also called the strike price, while “the certain date” is also called the expiration date.
Since options are financial derivatives, they derive their prices from an underlying assets. The underlying securities can be a stocks, indexs, ETFs or commodities.
What is a Call Option?
A Call option gives you the right to purchase the stock at a specified price, called the strike price, and on a predetermined date, called the expiration date.
What is a Put Option?
A Put option has the opposite effect of Call option as it gives you the right to sell the stock at a specified price, called the strike price, and on a predetermined date, called the expiration date.
Why Use Options?
Options are mainly use for speculation or for hedging. The hedge fund managers are notorious for using sophisticated risk management strategies to hedge their market exposure.
Options, the same like Forex, offers high leverage which gives you the chance to trade bigger contracts and potentially make more money. You need a smaller initial investment than buying stocks outright. When buying options the risk is limited to the initial premium price you paid to own that option contract.
Another reason why you should use options is that while the risk is limited, the potential profit is theoretically unlimited. Obviously, we say theoretically unlimited profits, but, you know, options prices are going to be range bound, within certain parameters and there’s no stock price to rise to infinity.
Types of Options Strategies
The beauty of options trading is that you can take you trading beyond the basic call and put options. There are various trading strategies such as covered call, married put, bull call spread, bear put spread and many more, which can help you better manage your risk and seek new trading opportunities.
If you’re a versatile trader, and want to take advantage of the flexibility that options trading can give you then you can study the top 10 stock options trading strategies below:
- Covered Call Strategy or buy-write Strategy – implies buying stocks outright, and at the same time selling 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, and at the same time buying put options for an equivalent number of shares. The married put works like an insurance policy against potential short-term losses.
- Bull Call Spread Strategy – implies buying call options with a specific strike price, and at the same time selling the same number of call options but 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, and at the same time sell the same number of put options but at a lower strike price.
- Protective Collar Strategy – implies buying an out-of-the-money put option, and at the same time selling or writing an out-of-the-money call option for the same stock.
- Long Straddle Strategy – implies buying both a call option and a put option simultaneously. 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 simultaneously. 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, and at the same time selling two call options at a higher strike price, and then selling one last call option at an even higher strike price.
- Iron Condor Strategy – this is a complex strategy that involves holding both 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, while at the same time buying or selling a strangle strategy.
Now let’s turn our focus back to the most successful options strategy.
Before we advance further, we must define the indicators you need for the best options trading strategy and how to use stochastic indicator.
The only indicator you need is the RSI indicator or the Relative Strength Index.
Since options trading is constrained by the expiration date factor, 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 because of its ability to detect overbought and oversold conditions in the market.
The RSI indicator can be located on most FX trading platforms (MT4, TradingView) under the indicators library.
So, how does the RSI indicator really work?
The RSI uses a simple mathematical 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 or below 30 is considered that the market is in oversold conditions while an RSI reading equal or above 70 is considered that the market is in overbought conditions. At the same time, a reading above 50 is considered bullish while a reading below 50 marks is considered bearish.
The preferred RSI indicator settings are the default settings, which uses a 14 period.
Now, before we go any further, we always recommend taking a piece of paper and a pen and note down the rules.
Let’s dive into the options trading tutorial…..
Most Successful Options Strategy
(Rules for a Buy Call Options)
Options Trading Tutorial Step #1: Wait for the first 15-minutes after the stock market opens to establish your market bias.
The most successful options strategy isn’t focusing only on the price, but they also make use of the time element the same as we’re doing here.
The stock market opening price is usually the most important price. Usually, during the first minutes after the stock opening bell, we can note a lot of trading activity because that’s the time when major investors are establishing their positions in the stock market. Also read the weekly trading strategy that will keep you sane.
Now, if you want a strategy that is not restricted to the time element and focuses purely on the price action we recommend reading Day Trading Price Action- Simple Price Action Strategy one of the most comprehensive guides to successfully trade stocks or other assets by simply using price action.
Our team at Trading Strategy Guides wants to develop the best options trading strategy, and in order to do that, we have to think smarter. In order to accomplish this, 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 are 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 want to lose any more time and we want to buy a Call option right at the opening of the next 15-minute candle after the opening bell.
As easy as its sounds this strategy only requires you to put 15-minutes of your time each day. You’ll either get a signal or not, but in order to take advantage of the best options trading strategy, you need to exercise discipline and don’t take any trades if you don’t have any signal.
So at this point, our trade is running and in profit, but we still need to define when to exercise our Call option and take profit
Options Trading Tutorial Step #5: Choose the nearest expiration cycle. For day trading choose the weekly cycle.
When you buy a Call option you also have to settle an expiration date, as part of that contract.
You might be asking yourself how to choose the right expiration cycle?
Well, because we’re most likely going to sell our Call option the same day as we have purchased it, it’s more appropriate to choose the weekly cycle.
Time to switch our focus to the most important part: Where to take PROFITS and sell your Call Options?
Options Trading Tutorial Step #6: Take Profit and sell the Call Option as soon as you have two consecutive 15-minute bearish candles.
Knowing when to take profit is as important as knowing when to enter a trade. We want to get out of our position as soon as we see the sellers stepping in. We measure this by counting two consecutive bearish candles as a sign of bearish sentiment presence in the market.
You don’t want to exercise your long Call option because you don’t want to own those share stocks, you just want to make a quick profit.
Note** The above was an example of a buying Call option using the options trading tutorial. Use the exact same rules – but in reverse – for buying a Put option trade. In the figure below you can see an actual Buy Put Options example using the options trading tutorial.
We’ve applied the same Step #1 through Step#4 to help us establish our trading bias and identify the Buy Put Option trade and followed Step #5 through Step#6 to identify when to sell your Call option.
Conclusion – Options Trading Tutorial
This is one of the most successful options strategies because when trading stocks, it’s important to have a good understanding of the market sentiment and how the big players are positioned in the market. Another important reason why this is the best options trading strategy, it’s because you’re not required to be glued to the screen all day long.
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.
Thank you for reading!
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