High-Probability Trading – Stock Options Trading

WINNING STOCK OPTIONS TRADING STRATEGIES

Successful investors and traders develop and use winning strategies that increase the chances (odds) of success.  While this is true for the stock investor and trader, it is crucial for the stock options trader.

To be successful as a stock options trader, one needs to be mindful of multiple aspects of the trade, including the movement of the overall market, stock sector and industry, and the potential devastating effects of time decay and volatility ‘rush’ or ‘crush’.

HOW TO PICK A HIGH-PROBABILITY WINNING STRATEGY

The following questions will help you decide how to pick a winning strategy in a given situation.

  1. Is the overall market bullish (‘going up’) or bearish (‘going down’)?
  2. Is the sector or industry the stock is in bullish or bearish?
  3. How bullish or bearish on the stock you want to trade?
  4. Is implied volatility of the stock high or low (compared to before)?
  5. Are there any significant events that can influence the stock movement?
  6. Are there any ‘technical patterns’ on the price chart that might suggest future movement?

Winning trades are most likely when the stock, the industry, the sector, and the overall market are moving in the same direction (either up or down).  To make it easier to win, novice investors and traders should only pick stocks which are moving in the same direction as their industry, sector or the overall market.  Experienced traders will sometimes trade stocks that may be moving in a direction opposite to their industry, sector or the overall market IF there are events (news) that is expected to cause the stock to continue moving in the ‘contrary’ direction.

The following table summarizes the choices for the common stock options trading strategies depending on one’s outlook for the stock movement (direction and time) and implied volatility (high or low compared to before).

Since time decay is the greatest in the last month, try to avoid buying stock options with less than 30 days to expiration – ideally, the duration to expiration should match how long you think the stock will take to get to where you expect it to go.

To be successful as a ‘directional trader’, one needs to master the art of technical analysis, which helps one read stock charts to understand market psychology – for a quick review of the subject, check out Market Club’s FREE no-obligation Trading Boot Camp with 10 easy-to-understand lessons that cover the basics of market psychology and technical analysis.  As always, successful stock options traders are those who take the time to learn investing and trading, create a plan for their trades before they enter a trade, and learn from their trading experiences about what works and what doesn’t so that they can improve their trading.  While options trading can be wildly successful, success does not come to those who are unwilling to ‘pay their dues’ by learning the finer nuances of trading.

Good luck!

Happy Trading!

JonLuc

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Comments

High-Probability Trading – Stock Options Trading — 1 Comment

  1. Wow that was unusual. I just wrote an very long comment but after I clicked submit my comment didn’t show up.
    Grrrr… well I’m not writing all that over again. Anyhow, just wanted to say fantastic blog!

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