Options trading can be very attractive for traders of all skill levels and account sizes. The leverage that these products offer can lead to large returns very quickly. Most traders start out by buying call options when they are bullish on a stock. While this approach can lead to nice profits using calls as a bullish strategy is only barely scratching the surface of what you can do with options. Trading options really gets fun when you can use different types of strategies that give you ways of profiting in all market conditions. As a trader I want the ability to make money regardless of the market condition that we are in. Let’s discuss some ways of doing this.
Buying calls and puts to make a directional bet is a good way of getting started with using options. However, the next step in your trading should be learning how to put movement in volatility on your side. Implied volatility is the most important input that can affect the price of an option. If we know whether I.V. is high or low, it can give us some direction on what type of options strategy we decide to play.
When I.V. is high we like to sell premium by using strategies like selling Vertical Spreads or selling Iron Condors. These strategies look to benefit from I.V. dropping back down to average levels. When I.V. is low then we can stick with buying long calls and puts and buying vertical spreads. This will allow us to benefit not only from a move in our direction but also an increase in I.V. Selling premium can be very powerful because it also allows us to take advantage of time decay.
Another key to trading options successfully is to make sure you have strategies that profit from the market going sideways. For many traders this is the dreaded market condition but with options we can actually use strategies that allow us to make money when the market does nothing. When we get stuck in slow markets we like to focus our attention on selling premium. This can be done by using strategies like Iron Condors, Calendar Spreads, selling Vertical Spreads or selling Straddles and Strangles.
Finally, the more you trade options the more tips and tricks you will start to pick up on. When placing trades many traders are used to wanting a fill on their order right away. On liquid products this isn’t necessarily a problem. However, over time by working your orders a bit you can really save some money. When I place orders I like to do so by placing my entries at the mid price of the bid and ask spread. While this doesn’t guarantee me an instant fill, the savings this approach can give me over time makes the patience well worth it. It might take a few minutes to get the order filled so be patient and let it work. Start to track your trades throughout the year and look at how much saving $.05 here or $.10 there. Over time this can lead to a large savings. Learn to work your orders and you will find your P/L numbers go up as well.
Trading options can be incredibly powerful when you start to learn the intermediate techniques like putting I.V. on your side and by using a whole list of different strategies. While it does require some time learning the different strategies you will find your overall equity curve will also get more consistent. That is something all traders would love to see.