CHOOSING A RISK STRATEGY FOR TRADING OPTIONS

Options are a highly advantageous trading approach since they are versatile and extensive in their range, which essentially allows for limitless choices when it comes to appropriate trading strategies with regards to managing risks, selecting assets, determining strike prices and selecting expiration dates. While these advantages are fine and well, they can make it difficult for new traders to find their feet, since selecting a strategy to implement can be overwhelming even for those with substantial experience. So, to help you select the right risk strategy when trading options, here are a few crucial things to consider:

WHAT ARE YOUR EXPECTATIONS?

While stock traders have just two outlooks to consider, namely whether the price of their stock will rise or fall; options traders have four: the price could rise or drop, it could remain neutral, or it could be subject to volatile and relatively unpredictable fluctuations in price. All of these present risks and opportunities for options traders to make a profit.

The more precise your expectations are, the more suitable your approach is likely to be in terms of both managing risk, and generating a profit.

WHAT IS YOUR RISK-REWARD PAYOFF?

Determining a clear risk-reward ratio will allow you to implement a strategy that suits your trading style and options. It describes the relationship between how much you stand to gain and how much you stand to lose, which lets you be clear about whether or not it is a wise investment or not. If the risk far outweighs the reward, then you need to change your investment choices or your strategy.

AGGRESSIVE OR CONSERVATIVE STRATEGIES?

The type of strategy that you select will depend as much on the type of investment you are working with, as it does with your preferred trading style. Your expectations with regards to the options, your desired risk-reward payoff and the nature, price and volatility of the stock will all play a role in the strategy that you select. Your trading goals also have a role to play in whether you select an aggressive strategy, or a conservative one.

WHAT ARE YOUR STRATEGY PARAMETERS?

Once your selected options strategy is in place, it is imperative to determine its trading parameters, which will act as signals for you to make decisions or moves on the market. To this end, you should consider the ideal strike price, shifts in the price of the underlying asset, and the expiration date. You may opt for parameters that provide low deltas where OMT calls are suitable, or ones that are subject to volatile changes with ITM options.

CONTACT THE STOCK MARKET COLLEGE FOR DETAILS?

If you would like more information or advice surrounding becoming a trader, or would like to find out more about enrolling in courses that outfit you with the tools and understanding necessary to start trading with success, contact us at the Stock Market College or visit our website for details today.

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