All Option Trading Strategies

All Option Trading Strategies
By
www.ProfitableInvestingTips.com

https://profitableinvestingtips.com/profitable-
investing-tips/all-option-trading/strategies
Those who buy and sell options do so in order to
hedge their risk, lock in opportunities or both. In
doing so, traders employ any and all option
trading strategies. Your choice of one or all
option trading strategies will depend on your
purpose in trading, the market, and current
market conditions. To help our readers sort out
the reasons for using one approach versus
another we offer a few useful suggestions.

What Is The Difference between Options
and Futures Trading?

Futures and options are similar as trading
products in that they give investors the
opportunity to hedge their investments and
make money. But, they differ in terms of
absolute risk. When you purchase an
options contract you obtain the right to buy
or sell shares on or before a specific date
called the expiration date.

However, you are under no obligation to do
so. You are simply paying to have that
option. The seller, on the other hand, is
obligated to sell if the buyer executes the
contract. Futures contracts confer the right
to purchase on or before the expiration
date and these contracts are not optional.

Dispersion Trading Using Options

Dispersion trading using options takes
advantage of two facts. There is always a
difference between implied and realized
volatility when trading. And, this difference
is always greater between index options
as opposed to individual stocks. In this
method of trading one will either buy
individual stock options and sell options on
an index or buy options on the index and
sell individual stock options.

Dispersion trading works the best, obviously,
when there is low correlation between
individual stocks and works poorly when
correlation is high. A good example might
be today’s stressed market in which the
broader market rises and falls with good or
bad news but individual stocks continue to
perform based on their intrinsic stock
value.

When Do Spy Options Stop Trading?

The SPY refers to the ETF or exchange
traded fund that tracks performance of the
S&P 500. You can trade options on this
index during the day until 4:15 pm since
the settlements are based on the 4 pm
market closure. Depending on the broker,
you have until as late as 5 pm to get out of
an option contract that has passed from
being profitable to being a loser.

You can trade SPY options after hours but
the rules are different and liquidity goes
way down. You cannot place market
orders but need to place limit orders. This
means you are not guaranteed an option
contact. And, you had better pay close
attention to your trades as positions can
change more quickly and less fluidly than
during the day!

Option Trading Buy Call

A call option is a good first step for new options
traders. Sadly, many potential options traders
are deterred by the common misconception
about nine out of ten options expiring worthless.
If this were true you would predictably lose
money (your payment for the option on 90% of
trades). However, the fact is that while three out
of four options expire worthless, six out of ten
are either closed by creating an offsetting
position or traded out.

In the end, one in ten call options is exercised. The
reason for buying a call option without any other
actions is that you believe the stock or other
equity will go up in value between when you
make your purchase and when you exercise the
option. For this approach to be profitable over
time you need to analyze your potential trades
sufficiently well so that your total gains exceed
the costs of all of the options contracts that you
buy.

Trading Low Volume Options

One of the pitfalls in trading options is
buying an option contract for an equity
with low trading volume. If the stock trades
at low volume, the price of the option
contract may be irregular and hard to
predict. And, if the options contracts trade
at low volume you may find yourself
trapped in a trade when you want to get
out!

Additionally, higher trading volume gives you a
better sense of the movement of an equity. This
is, of course, why options traders purchase
options as they seek to profit from swings in
price due to both fundamental and technical
factors. Many traders rely on a big increase in
trading volume as an indication that a large price
move is in the offing while they look at a drop in
volume as an indication that their trade will
probably be a loser.

Trading Options on Ninjatrader

If you want to be active in trading options it
is best to use a trading platform. The Ninja
Trader platform has been available since
2003 offering both brokerage services and
trading software. Many traders use its free
market analysis, charting, and live trading
functions as well as simulation trading
functions.

This is a very functional setup at the basic (and
free) level but if you want special features like
automated trading, back testing, and advanced
order types you need to pay a one-time fee of
about $1,000 or a monthly leasing fee of about
$60. The point of using the advanced features is
that these tools can make your trading more
successful and profitable, but you need to learn
them and use them regularly.

Best Books about Trading Options

Options trading can be quite profitable but
you need to learn the necessary skills.
There are three books that we recommend
that will help demystify this pursuit.

Option Trading and Pricing by Sheldon
Natenberg is at the top of almost
everyone’s list of best books about trading
options.

This book is great for beginners and pros as
it outlines practical trading strategies that
reduce risk as well as more advanced
hedging techniques. It even tells you how
tax laws affect your option trading profits!

Fundamentals of Futures and Options
Markets by John Hull is our second
choice.
This a good book for active option traders as
it contains lots of actionable advice from
an authority on risk management in trading
derivatives.

Option as a Strategic Investment by
Lawrence McMillan is ranked first by many
experts, but we place it third. This author
provides a ton of useful information but our
take is that it may be a little too much for
beginners who need to start with basics
and then advance to more advanced
trading techniques before getting into the
philosophy of options.

An often overlooked but excellent set of
training tools for options trading with
Japanese Candlestick Trading Signals is
Stephen Bigalow’s series of options
training videos on his website’s store
pages.

For more insights and useful information
about investments and investing, visit
www.ProfitableInvestingTips.com.

All Option Trading Strategies

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