Options options work to let’s you trade stocks, stock indices, commodities and currency pairs with a FIXED rate of return. You have to decide whether you think the value of an asset it going to go up (a call) or go down (a put) after a certain time period. Here’s a simple 4 step strategy for you.
1. Choose A Chart Type
No matter which asset you choose to trade, the chart type is so important. You have three options: line, bar, or candlestick charts. The last one works like a charm as it shows trend reversals and continuation patterns. Various candlestick patterns give the next move the market will make:
- Bullish or bearish engulfing
- Piercing or dark-cloud cover
- Morning or evening stars
- Doji candles. All these tell you much about future prices and a trade results.
What if the trend already started?
2. Identify A Market trend
Trend indicators do the job for you. Simply pick the best of them, put them on a chart, and stop the underlying trend. If bullish, wait for a pullback to get in. If bearish, look for a spike to give you the best striking price. Moving averages and Bollinger Bands give great signals for the perfect striking price. How about the expiration date?
3. Check the Time Frames
Imagine you spot a bullish trend on the daily time frame and the market pulls back for a nice call option setup. Choosing a five-minute expiration date for your option is foolish. Be wise and mind the time frame, leave the market room to move for your option to expire in the money.
4. Adjust the Expiry Time
- For 1 min chart use 5 to 10 min. long expiry time
- For 5 min chart use 10 to 1h long expiry time
- For 1h chart use 1 day long expiry time
- For 4h chart use 1 day to 1 week expiry time
- For daily chart use 1 week to 1 month expiry time
- For bigger than daily chart use as big expiration time as possible
Imagine you form a view that the price of oil will fall. You then take $100 from your trading account and place a “put”. If you are right, and the price falls, you will get a fixed payout. In this example, the payout is $175. It does not matter whether the price of oil crashes $10 or just falls by $1. Either way, you will get the payout. However, if the price of oil rises at all, then you will lose your original investment of $100. You limit your risk by choosing the payout and loss percentage that suits you. For example, some brokers will give an option where you can choose to lose only 75% of your investment. The flip side is that if you are correct, you can only get a 75% payout.
Successful traders master fear and greed. To make it in this business, you must stay ahead of the game. The right analysis would not make you money, but the right analysis with the write expiration date will do.