Options trading has its fair share of risk. Sure, you want to always come out on top, but sometimes, factors beyond your control will lead to a loss. However, adopting various strategies can increase your odds of winning more trades. For starters, consider a stock options service for intermediate traders to stay ahead of the curve. Meanwhile, let’s look at ways to help you win most of your options trades.
Trading Quality Stocks
It sounds like a no-brainer, and mostly, it is. The more quality stocks you trade, the higher your probability of winning. So, study various stocks and identify those with good growth potential. For example, if a stock is part of the S&P 500 or has strong earnings projections for the coming quarter(s), it may offer an opportunity worth exploring.
But how do you find such stocks? Well, you can use technical analysis (details below) and charting tools to observe the market. Alternatively, subscribe to a stock options service offering quality picks. The great thing about the latter option is that the experts do the heavy lifting for you – which essentially takes the guesswork out of stock picking.
Using Covered Calls
A covered call involves writing a call option on the stock you own in exchange for a premium. This strategy may not work for everyone, but if used correctly, it can help you win more trades with minimal loss potential. How does it work?
Let’s say you own a stock, and the market price is higher than your buying price. You can write a call option, selling the rights to purchase it from you at a higher price (the strike price). In exchange for writing up this option, you receive a premium from the buyer. If the stock’s price exceeds or reaches the strike price, you can keep the premium and sell it at a higher price, resulting in a profit.
Tapping into Spreads
This trading strategy allows you to buy and sell options simultaneously. For example, you could sell a put option to buy a call option based on whether you think the underlying stock will finish above or below its strike price at expiration. This way, you can create a bull call spread or bear put spread.
The idea is to create a spread between the two option prices – which is no greater than the maximum loss you can take from the position. By doing so, you reduce the risks associated with trading options. And as a result, you increase the probability of winning.
Using Technical Analysis Tools
When you analyze a stock, you basically study its historical price data to identify patterns and forecast future trends in asset prices. As such, technical analysis help you determine when to enter and exit a trade.
If you spot a chart pattern suggesting the underlying stock is about to rally, you may want to jump in with a call option. Conversely, if the stock price is about to drop, you may sell a put option.
Similarly, you can look at a technical indicator, such as the horizontal support resistance, which shows a price level at which an asset has had difficulty breaking through. You should buy or sell the appropriate option if the stock price reaches this support or resistance line.
An analytical tool can also help you identify sectors performing well over a one-week to three-month period. You can then screen to find stocks in the sector by using the relative strength index (RSI) and moving average convergence divergence (MACD).
Technical tools can also come in handy when identifying trend reversals – which you can use to your advantage for trading options. Sound too technical? No worries. You can still use a platform that integrates these indicators and gives you the signal to enter or exit trades.
Checking the Implied Volatility Rank
The key to successful options trading is understanding how to evaluate a stock’s implied volatility rank (IVR). The IVR shows you how much an option is expected to move in relation to the stock. A higher IVR means the stock is more volatile and poses more risk, whereas a lower IVR suggests the opposite. Based on this understanding, you can make better-informed decisions about when to buy or sell options on certain stocks.
These strategies merely scratch the surface concerning options trading. But if you are serious about trying your hand at options, the said approaches offer a great starting point and can enhance your wins significantly. And as with any investment, do your homework before diving in.