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How to Find High Probability Trading Set Ups

Posted by Pete Stolcers on August 27, 2009

Option Trading Question

How can I find high probability trading set ups?

Option Trading Answer

In options trading, whether you are experienced or not, it all comes down to finding the best trading set ups possible. Just how you go about this will depend on your experience and the strategies you use. There are two main methods of finding the best set ups.

Method One: DIY

The best way to ensure a high percentage of great trading set ups is to stay on top of the market. You need to know what is going on if you expect to make informed decisions. That means checking the markets each morning, looking at all the factors that could affect the trading and following the ones that interest you. Look at the volumes for those markets over the past week, months, etc. Then develop your strategy based on the history and projected future.

This method takes time, a lot of it, and you’ll learn from experience, so expect lots of ups and downs as you pick it up.

Method Two: Mentored

If you simply don’t have the time to put into studying the market, yet still want to be successful in options trading, there is another option. Choosing a mentoring service that will provide you with the information necessary is a great way to get top quality information with very little time investment. You do need to be careful to select the right service, since some of them have never actually implemented the tactics they are promoting.

Option Trading Comments

  • On 10/09, Brian said:

    Anyone who paid attention to the news today knows that ACOR was a big loser today based on news that wasn’t good from the FDA.  I’m somewhat new to options trading, but have had modest success that was mostly based on small trades.  I found an options trade that I liked through an analysis tool a few days ago on ACOR.  It was showing 96% probability of profit on:

    Sell Oct $15 put
    Buy Oct $10 put

    I went with 10 contracts at a total net credit of about $625, max gain of $625 and max loss of about $4,300.  I know the loss/profit ratio probably wasn’t good....but I can’t change that decision obviously.  I was looking at a stock that was at $23 at the time and had spent very little time under $15 in the past 3 years and only for a short time, even through the ‘crash’ last fall and felt OK with expiration not being far away. 

    A $4,300 max loss wouldn’t kill me but would be a loss that I will definitely feel.  I won’t lose any sleep tonight worrying, but it’s frustrating seeing what is a winning trade if expiration is now still showing a $1,300 unrealized loss due to being short 10 $15 puts that have been driven up huge due to today’s volatility. 

    Option prices seem very balanced in both directions in that both puts and calls are highly priced.  If the worst is over, I still wind up winning.  Any further hedging options seem to lock in the loss too much. 

    Any opinions?  smile

  • On 05/03, Bob said:

    I would never sell puts on a biotech stock that’s going to live or die on the basis of an FDA ruling.  Options on such stocks are priced high for a reason.

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