Options Trading Tips

It is not wrong to concern yourself with the direction of the market, but with trading in stock options it is not a good strategy.To better understand this let us look at an example.Let’s try to forecast the winner of an NBL Basketball Game. If you had the favorite team, that is the team that has not lost a game all season up against a team that has lost most of their games all season who would you pick to win the game? more than likely you would say the team that has won all season.

It is simple, all the facts, history and analysis are there to predict more that likely who will win the game. This is like directional trading. In directional trading you are concerned with the movement of a stocks price, that is, whether it goes up or whether it goes down. If you chose right you win that trade.

With options trading or when your are trading is stock options you need to keep in mind that it should not be about the direction of the stock options price but rather the size of the stock options price movement.
Let us look at that example again. In the first example you basically need to pick a winning team, it does not matter how much they win by, a win is a win even by one point. What if the scores actually mattered? what if there was a spread of the points? what if the favorite team had to win by a certain amount of points to actually win the game? now things start to change a bit. What if the favorite team had to beat the other team by 20 points?

This may not happen, sure the favorites may win but if they don’t win by the point margin then you have basically lost because the winning margin will not cover your cost.

Options trading is exactly like the example discussed. When you are embarking on stock options trading you need to understand that you are making a prediction on the size of the move.

Now the best part of this, and this is why options trading or trading in stock options is very lucrative is that not only can we predict the size of the move but we can also predict the probability of that move actually occurring.

This is essentially what professional traders have been doing for years they have traded stock options using a strategy that involves the size of the movement of the stock options price. Once we get this in our mind we can copy what the professional traders do and set up a sound trading strategy that basically consists of three main points.

1 A professional will analyze the return potential of a trade ( that is they will see how much they can make out of an options trade }
2 A professional will look at and analyze the risk that will come trading in that stock option.( this is self explanatory )
3 A professional will look at and scrutinize the chances of making a loss and the chances of making a profit.

And these three steps can be accurately done using a simple spread sheet program. We will show you how this is done in later articles.

Options Trading Tips