Winning strategies for trading in Options..........

Winning strategies for trading in Options

1.   Stay away from deep in money options

High leverage and limited risk makes options better than the rest but if option is too deep in money, risk increases and leverage for investors goes down. Investor in this case pays more and is prone to lose more. Here the limited risk is also higher. So, deep in money options should be avoided.

2.   Stay  away from deep out of money options

There is an illusion that deep out of money options provide with more leverage. But talking about reality they promote over commitment and limit opportunity for earning profit. One cannot deny the fact of them hitting at times but this game is game of odds which are against the investor if he is buying deep out of money. It may be more realistic to purchase deep out of money option if time frame is big but leverage is reduced as he pays for time.

3.   Know your market and trade slightly out of money, at the money or slightly in the money options

Option writing can bring high profits in dull and flat markets. If wave in market changes, cover fast before that catastrophic loss. If option premiums feel too low to provide adequate cushion of income, common wisdom is to ‘sell flat market’ but this is time to think to buy. Selling should be avoided in period of rising volatility.

4.   Covered call writings is a good strategy for what appears to be a bullish environment and covered put writings is generally good for what looks like a bearish one

In this strategy, both futures and options are used together and it has ability to earn profit on both legs. It works well in modestly bullish and bearish environment as well.

5.   Look for opportunities to backspread

It involves selling a call or put at one strike price and buying greater number of calls at higher strike price or buying greater number of puts at lower strike price. Strategy of this sort has predetermined and limited risk and it is one which can prove to be profitable despite one being dead wrong. The profit is unlimited on major upside or major downside move.

Options are wonderful tools. Although, options are not magic potion but they can offer best in both worlds to a major extent if implemented with proper knowledge.