While there are millions of Options Contracts Trading on a daily basis, if you are one of the lucky participants who feels confident in your approach, then at least consider whether you are evaluating the following factors that should always be considered 1) Edge, 2) Commissions, 3) Delta, 4) Implied and Historical Volatility and the 5) the Skew. For short-term traders, these five factors have an enormous impact on the value of your transaction and for long-term traders the analysis can greatly assist you in establishing Options Trading Positions. Our Options Trading PDF provides a detailed view of the factors discussed. Options Trading can be particularly effective for Portfolio Hedging and certain types of speculation, but establishing the appropriate position to meet you risk/reward parameters is essential.
Whether you are a short or long-term trader, the edge you give up on each transaction, combined with the commissions, can have an enormous effect on you profitability. Edge, or liquidity, can be defined as the breadth of the Bid/Ask Spread. I typically measure it as a percentage of the value of the Put or Call I am trading. For example, an Option with a Bid of .90 and an Ask Price of 1.00 would have a 10% Liquidity Percentage. ((1.00-.90)/1.00). In addition, you must include commission costs. It is essential to analyze these costs before entering a position. Contact Us for an Individual Options Trading Webinar to review the content of our articles or the information on our website.
Another factor to consider is the Delta of the Option that you are Trading. The Delta describes the movement in the price of the Option as a percentage of the movement of the underlying. If the underlying moves $1.00, an Option with a Delta of .15 would move 15 Cents. This is where your analysis is so important. If you are Trading a Stock and looking for a dollar move and the Option has a Liquidity Percentage of 10% and a Delta of .15, you won’t make any money even if the move you were hoping for occurs. This is essential analysis that every Options Trader should make. Remember, if you pay 10% to get in and 10% to get out, plus commissions, you must have a good move in your favor just to break even.
For longer-term traders, analyzing the Historical, Implied and the Implied Volatility Skew provides the opportunity to examine how the Options Prices are Structured and how that may assist in establishing the appropriate Trading Position to meet your risk/reward requirements. While it is a complicated topic, Webinars for Corporations and Individuals provide an opportunity to expand your knowledge. Feel free to Contact Us for an Outline of your Personalized Webinar Training Session. The Table below shows the Pricing Structure of the E-Mini NASDAQ 100 and Gold Futures. The Structure of their Implied Volatility Skews is completely different. The NASDAQ has a strong Skew to the Put side, while Gold has a less accentuated Skew to the Call side. Due to the structural differences, your approach to choosing a particular Options Trading Strategy would likely be different in the two markets.
At Options Strategy Network we provide lessons 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 will increase your understanding of all facets of Options Trading. Take a look at our Full Syllabus to see where your knowledge base fits in.
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.