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Choosing a Trading Strategy

Posted by Pete Stolcers on August 21, 2009

Option Trading Question

How should I choose a trading strategy?

Option Trading Answer

Options trading tends to work best when you have a specific tactic in mind. While this will tend to change, depending on market conditions, a good strategy can keep you on track and boost your number of successful trades, something everyone could use. The trick is to select the right strategy to use at the right time, no easy task if you’re new to the scene.

At the very basic level, trading tactics will involve buying put and call options. This is an area that even beginners can get into with relative ease and it doesn’t require a large cash layout.  However, once you are ready to move beyond basics, you’ll need to improve your technique.

When the market is trending, buying strategies work best. However, to ensure more successful trades, you need to be flexible. That means putting new tactics to use when the market is trading in a range. Once things heat up and the options market is not as stable, you will want to look at implementing credit spreading instead. This is a more advanced technique, but by switching to credit spreading with a more volatile market, you will find that you are more successful overall.

All these techniques require time spent to learn them and practice. However, if you are interested in speeding up the learning process, you should look at studying what others are already doing.  Those who are successful in the industry will have their own techniques that they use. Learn the most successful methods of trading and you will see an improvement in your own options trading.

Option Trading Comments

  • On 10/10, sunil sethi said:

    Can you please explain me in more detail the credit spread techniques.I am new to the option trading.

  • On 10/13, Pete Stolcers said:

    A credit spread sells a near to the money option and buys a farther out option to reduce risk and the margin requirement. The intent is to take advanatage of time decay and to distance yourself from the stock price so that you can increase the probability of success.

    Please review the definitions on the home page.

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