How to Select a Trading Option Strategy

If you’ve waded into the options trading market, you’re going to need a sound strategy to stay in the black, and you’ll need to be able to assimilate information from various indicators and sources. Luckily, with so many ways to invest in the market, you should be able to find a solid options strategy for steady profits.

Assess Your Stock Positions

While you don’t need to have stock positions to trade options, it is a useful way to ensure that no matter what happens to your long stock positions, your exposure to loss is mitigated by a covered put option. That said, assessing your current mix of stock positions or evaluating stocks for purchase can be one way to begin a comprehensive options strategy.

You can use various indicators such as dividend yield or P/E ratios to help inform your performance expectations and use that data to determine how you’ll enter into an option contract: married, covered, or uncovered, and whether you’ll expect to want to put or call in the near future. If you’re thinking about unloading some positions, you can also use the right option strategy as part of your exit plan to help recoup your losses.

Assess Market Movement

Global players and foreign markets can have a significant impact on your local market and economy, so it’s important to take major economic indicators into account when determining which option strategy to execute. Savvy investors typically watch three primary categories of indicators to help them understand the bigger picture on a day-to-day basis: leading, lagging and coincident.

Leading Indicators are initial datasets that can tell us where trends will go in the next few weeks or months and can include things such as data from the Bureau of Labor. These indicators will be evident in near real-time, long before indicators involving extensive data collection and analysis like the unemployment rate, considered a lagging indicator, is available.

Finally, a whole set of coincident indicators that provide corroborating or conforming data to the leading indicators, which help to round out the overall picture of the health of the economy.  One of the most reliable collections of data comes from the Federal Reserve, which is tasked with maintaining the control valve on the economy. It publishes the data used to make rate determinations periodically throughout the year, and you can use this information to help inform your option strategy as well.

Determine Your Timeframe

No matter what indicators and data you use, the longer you push an option contract expiry date into the future, the less reliable that data will be in terms of predicting a viable strike price. One thing you can do is look at historic indicators to find the patterns in previous markets that might predict where the current market will trend. Pay special attention to foreign markets and trends and how they might affect your market in the months to come. Some changes can happen overnight, but other market events represent a slow-moving juggernaut that can take months or even years to come to fruition.

Craft Your Strategy

Now that you have the necessary information at your fingertips, you can craft an option strategy, such as the swing strategy suggested by Trading Strategy Guides. Depending on whether you want to protect your stock positions or trade uncovered options, and depending on your timeframe for realizing profits from your activities, a specific strategy will likely work best in almost every situation. But it is essential to acknowledge that all trading implies risk. While option trading can mitigate risk in some cases, seeking professional advice is always wise if your livelihood might be affected by market outcomes.

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