Trading is hard enough even without knowing some of the ins and outs of how the market works. There are some tricks that you can use in order to help make the trading game just a little bit easier on yourself.
Not all of these tricks are going to work for everyone. However, there always going to be some that will work while others do not. It is up to you to decide which works best for you and which you should just forget in order to maintain your success. There is no special strategy, or a cannot miss gimmick. Just like stock trading, options trading is a game that you can either win or lose at. Options happen to be the best investment you can get into because they allow the investor to be able to have a long, short, or even neutral position. As the investor, you are going to be able to manage your risk better than if you were using a different investment method.
- It is best to use options as a risk-reducing tool rather than a gambling tool.
Options will allow you to decrease the risk of what you are trading because the contract will have an expiration date and if the agreed upon terms are not met by that date, then the contract will expire, therefore not holding you to finish paying out the contract should you decide not to purchase the contract.
- Use the measurements that the Greeks did.
There are different measurements that the Greeks used that you can use while trading options.
- Vega: this can be used to measure the sensitivity of the option’s price change as implied to volatility. It also represents the amount by which the volatility will change even if by one point.
- Gamma: this will measure the rate at which the Delta is going to change while the underlying securities move one point.
- Delta: the rate at which the option changes when the underlying asset moves by one point is Delta. The Delta is not going to be constant.
- Theta: measures the amount that the value of an option will decrease as a day passes. Therefore, the Theta is time decay.
- Manage your risk carefully. Try not to hold on to any position that can end up costing you more than you are wanting to use.
- Be careful with how many options contracts you trade. It is very easy to get in over your head and over trade when you have inexpensive contracts. This is especially easy when you are selling contracts.
- Never allow yourself to clear out your account entirely. In doing this, you are going to end up causing yourself, even more, problems because you will not have the money to cover any of the trades that you are making.
- Miracles aren’t going to happen. Do not get your hopes up. If you buy an option that is far out of money, you will be losing money because these options are not cheap, and the success of these options will be little to none at all.
- Be careful when you are selling naked options. While this is cheaper than if you buy stock. The ownership will be a risk. The only exception you are going to find a reason to sell naked puts, however only if you decide to buy the shares.
- The best way to try and limit your losses is to buy one option every time that you sell an option. If do this, you are not going to sell naked options; you will not be working with spreads instead.
Positions are can bad. However, you are not going to get anywhere if you do nothing and just hope for a good outcome. In doing this, you are not only putting yourself at risk but also gambling with your trades. Gambling is never going to work in your favor because things can go wrong.