Guide to Trading Options in Individual Stocks, E-minis, Crude Oil, Gold and Other Liquid Instruments

Traders of Options Contracts should be fully aware of the following factors before committing risk capital to the options markets. One should be aware of all of the factors in the following outline to assure that they have a reasonable chance of making money. At Options Strategy Network we use our decades of experience in trading and risk management to assist traders in fine tuning their options trading technique:  Contact us to enhance your understanding of these issues. Our Private Webinar Training Sessions, for a fee of $75/hour, will enhance your options trading.   The following guide should be mastered including beginners’ information at the top to information for professional traders at the bottom. Understanding these concepts is essential for long-term profitable trading.

Full understanding of the basics of Puts and Calls:
          Rights
          Obligations
          Strikes
          Duration
          Underlying Contract

Understanding in-the-money and out-of-money Options:
          Intrinsic Value
          Time Value
 
Break Even Points of Simple Strategies:
          Long and Short Calls
          Long and Short Puts
          Spreads

Understanding the Risk/Rewards of Basic Strategies:
          Long Options
          Short Options
          Options Spreads

Once the basic information above is understood, one should pursue the following factors:

Understanding the Greeks:
          Delta
          Gamma
          Vega
          Theta

Implied Volatility:
          Numerical Comparison of Options Prices
          Comparison to Historical Volatility
          Effectively comparing Options by Using Implied Volatility

Black Scholes Model:

          The Nobel Prize Winning Model:
          Why it’s still relevant to today’s Options Markets
          Where Black Scholes is ineffective
          Other Models
 
Valuing Options Comparatively:

          Using Implied Volatility
          Using Butterfly Spreads and Synthetic Positions
 
Evaluating Liquidity:

          What is the percentage difference between the Bid/Ask Spread
          Do the costs of trading the option prevent the likelihood of a profitable outcome
 
If one comprehends the issues outlined above then they are in a position to do advanced analysis which will provide the best chance of improving their long-term trading results.

Understanding the Implied Volatility Skew:

          Different Skews for Different Markets
          What is the genesis of the Implied Volatility Skew
 
Structuring Positions based on Implied Volatility and the Skew:
 
          Using the Skew to Design an Options Strategy
          Analyzing how to create the Appropriate Strategy
          Defining the proper Strategy to meet one’s goals
 
Analyzing Risk/Reward Factors:

          Determining the benefits of a Strategy and how it may increase the likelihood of a more                   profitable outcome
          Evaluating Hedging and Speculative Strategies for managing risk
          Designing the correct strategy for a specific Risk/Reward Parameter

Essential information to review before trading:
          Implied Volatility
          Historical Volatility
          Implied Volatility Skew
          Information Provided in the underlying’s Chart including Relative Strength Index
          Liquidity Factors
          Analysis of the Trading Costs as a percentage of the bid/ask spread plus commissions
          Pre-determined Entry and Exit Point

For those who have mastered these concepts, the likelihood of successful options trading is greatly improved. Each component listed above builds on the previous components to the point where one is able to recognize trading opportunities which are enhanced by the leverage options trading provides.

OPTIONS TRADING INVOLVES SIGNIFICANT RISK AND IS NOT SUITABLE FOR EVERY INVESTOR. THE INFORMATION IS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE, BUT IS IN NO WAY GUARANTEED. PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS.

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