How to Trade Stock Options – Your #1 Guide to Success

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Profitable Stock Options Trading – A Beginner’s Guide: Lessons I Learned Losing $100,000 to Accelerate Your Trading Success

You need to read this book to find out more about Stock Options?

Some books provide a simple introduction to Stock Options.
Some books provide a more detailed framework for how to use Stock Options.

This book provides both!

In this book you will find a collection of eighty consolidated learnings from an experienced derivative trader, with over twelve years of trading You need to read this book to find out more about Stock Options?

Some books provide a simple introduction to Stock Options.
Some books provide a more detailed framework for how to use Stock Options.

This book provides both!

In this book you will find a collection of eighty consolidated learnings from an experienced derivative trader, with over twelve years of trading experience.

You can use Stock Options as Insurance for your long term stock portfolio.

You can use Stock Option Trading as a stand-alone business venture.

Here’s just some of the information that you will find inside this frank, informative compilation:

An explanation of basic Call Options and Put Options in layman’s terms.

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An introduction to using Stock Options as insurance for your stock portfolio.

Discussions and explanation of candlesticks bar charts and the display of financial information.

A breakdown on liquidity and market makers.

The benefits of trend trading and optimizing your profits during price movements.

The importance of Psychology in profitable trading.

Criteria for choosing the best Mentors and the training that suits you.

Your Trading should be an investment so this book covers:

Money management and capital preservation tools.
A realistic focus on the time commitments and the opportunity costs of trading.
Emphasis on the importance of your own written trading rules.

Recognition that trading is a business and help in defining your own trading business plan.

An introduction to more advanced Options trading strategies plus the use of strategic action plans to reduce your reaction times.
This is not a book about making millions of dollars, trading for only ten minutes a day.The Author frankly talks about his $100k losses during his early trading career.
Invest in this book for the price of a cup of coffee and save yourself a fortune! . more

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About Ged Cusack

As a child of the sixties, I’ve always had a thirst for learning and knowledge.

Moving to New Zealand at the end of 2004 (After 22 years as British Military Engineer),I am enjoying the different pace of life.

Since moving to New Zealand I have pursued many ventures including Business Coaching, Trading Stock Options, Trading CFDs, Trading Foreign Exchange, Trading Futures and project
Hello

As a child of the sixties, I’ve always had a thirst for learning and knowledge.

Moving to New Zealand at the end of 2004 (After 22 years as British Military Engineer),I am enjoying the different pace of life.

Since moving to New Zealand I have pursued many ventures including Business Coaching, Trading Stock Options, Trading CFD’s, Trading Foreign Exchange, Trading Futures and project management.

I realized early on in my life, that I have a busy brain. Detailed notes and systems allow me to constantly move between projects.

Realizing that other people can benefit from my systems and guides, I have begun to consolidate information for other busy minds.

I previously spent 4.5 years working in post-earthquake Christchurch where my roles played to my strengths of project management, problem solving and systematization.

At the end of that last contract I decided to have a break from the corporate environment and focus on e-commerce and trading.

I had several friends and former colleagues ask what I was doing and how they too could start an Amazon business.

After many hours of guiding those people (Involving providing schedules and identifying where these people where at) I decided to systematize this guidance.

My Systems eventuated into my first book:
“FBA – Building an Amazon Business – The Beginner’s Guide: Why and How to Build a Profitable Business on Amazon.” myBook.to/booklinkerFBAlink

Spurred by that first success I have begun writing a series of Beginner’s Guide including:

“A Beginner’s Guide Profitable Stock Options Trading: Lessons I learned losing $100,000 to accelerate your trading success”.
myBook.to/StockOptions

and my most recent addition

“How to Choose a Writing Coach – A Beginner’s Guide: Ensuring your best chance for publishing success.” getBook.at/Chooseawritingcoach

I have also started writing an inspirational series of books, beginning with:

“Gratitude for Happiness: How to exercise your gratitude muscles.” myBook.to/GratitudeforHappiness

I hope you enjoy reading the books as much as I enjoyed writing them.

Essential Options Trading Guide

Options trading may seem overwhelming at first, but it’s easy to understand if you know a few key points. Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, ETFs, and even mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.

Key Takeaways

  • An option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date.
  • People use options for income, to speculate, and to hedge risk.
  • Options are known as derivatives because they derive their value from an underlying asset.
  • A stock option contract typically represents 100 shares of the underlying stock, but options may be written on any sort of underlying asset from bonds to currencies to commodities.

Option

What Are Options?

Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the contract expires.   Options can be purchased like most other asset classes with brokerage investment accounts. 

Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock. 

There is no free lunch with stocks and bonds. Options are no different. Options trading involves certain risks that the investor must be aware of before making a trade. This is why, when trading options with a broker, you usually see a disclaimer similar to the following:

Options involve risks and are not suitable for everyone. Options trading can be speculative in nature and carry substantial risk of loss.

Options as Derivatives

Options belong to the larger group of securities known as derivatives. A derivative’s price is dependent on or derived from the price of something else. As an example, wine is a derivative of grapes ketchup is a derivative of tomatoes, and a stock option is a derivative of a stock. Options are derivatives of financial securities—their value depends on the price of some other asset. Examples of derivatives include calls, puts, futures, forwards, swaps, and mortgage-backed securities, among others.

Call and Put Options

Options are a type of derivative security. An option is a derivative because its price is intrinsically linked to the price of something else. If you buy an options contract, it grants you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.

A call option gives the holder the right to buy a stock and a put option gives the holder the right to sell a stock. Think of a call option as a down-payment for a future purpose. 

Call Option Example

A potential homeowner sees a new development going up. That person may want the right to purchase a home in the future, but will only want to exercise that right once certain developments around the area are built.

The potential home buyer would benefit from the option of buying or not. Imagine they can buy a call option from the developer to buy the home at say $400,000 at any point in the next three years. Well, they can—you know it as a non-refundable deposit. Naturally, the developer wouldn’t grant such an option for free. The potential home buyer needs to contribute a down-payment to lock in that right.

With respect to an option, this cost is known as the premium. It is the price of the option contract. In our home example, the deposit might be $20,000 that the buyer pays the developer. Let’s say two years have passed, and now the developments are built and zoning has been approved. The home buyer exercises the option and buys the home for $400,000 because that is the contract purchased.

The market value of that home may have doubled to $800,000. But because the down payment locked in a pre-determined price, the buyer pays $400,000. Now, in an alternate scenario, say the zoning approval doesn’t come through until year four. This is one year past the expiration of this option. Now the home buyer must pay the market price because the contract has expired. In either case, the developer keeps the original $20,000 collected.

Call Option Basics

Put Option Example

Now, think of a put option as an insurance policy. If you own your home, you are likely familiar with purchasing homeowner’s insurance. A homeowner buys a homeowner’s policy to protect their home from damage. They pay an amount called the premium, for some amount of time, let’s say a year. The policy has a face value and gives the insurance holder protection in the event the home is damaged.

What if, instead of a home, your asset was a stock or index investment? Similarly, if an investor wants insurance on his/her S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2500, he/she can purchase a put option giving the right to sell the index at $2250, for example, at any point in the next two years.

If in six months the market crashes by 20% (500 points on the index), he or she has made 250 points by being able to sell the index at $2250 when it is trading at $2000—a combined loss of just 10%. In fact, even if the market drops to zero, the loss would only be 10% if this put option is held. Again, purchasing the option will carry a cost (the premium), and if the market doesn’t drop during that period, the maximum loss on the option is just the premium spent.

Put Option Basics

Buying, Selling Calls/Puts

There are four things you can do with options:

  1. Buy calls
  2. Sell calls
  3. Buy puts
  4. Sell puts

Buying stock gives you a long position. Buying a call option gives you a potential long position in the underlying stock. Short-selling a stock gives you a short position. Selling a naked or uncovered call gives you a potential short position in the underlying stock.

Buying a put option gives you a potential short position in the underlying stock. Selling a naked, or unmarried, put gives you a potential long position in the underlying stock. Keeping these four scenarios straight is crucial.

People who buy options are called holders and those who sell options are called writers of options. Here is the important distinction between holders and writers:

  1. Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights. This limits the risk of buyers of options to only the premium spent.
  2. Call writers and put writers (sellers), however, are obligated to buy or sell if the option expires in-the-money (more on that below). This means that a seller may be required to make good on a promise to buy or sell. It also implies that option sellers have exposure to more, and in some cases, unlimited, risks. This means writers can lose much more than the price of the options premium.   

Why Use Options

Speculation

Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.

Hedging

Options were really invented for hedging purposes. Hedging with options is meant to reduce risk at a reasonable cost. Here, we can think of using options like an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn.

Imagine that you want to buy technology stocks. But you also want to limit losses. By using put options, you could limit your downside risk and enjoy all the upside in a cost-effective way. For short sellers, call options can be used to limit losses if wrong—especially during a short squeeze.

How Options Work

In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.

The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminish as we draw closer to expiry. This is why an option is a wasting asset. If you buy a one-month option that is out of the money, and the stock doesn’t move, the option becomes less valuable with each passing day. Since time is a component to the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa.

Accordingly, the same option strike that expires in a year will cost more than the same strike for one month. This wasting feature of options is a result of time decay. The same option will be worth less tomorrow than it is today if the price of the stock doesn’t move. 

Volatility also increases the price of an option. This is because uncertainty pushes the odds of an outcome higher. If the volatility of the underlying asset increases, larger price swings increase the possibilities of substantial moves both up and down. Greater price swings will increase the chances of an event occurring. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way. 

On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; that’s why you must multiply the contract premium by 100 to get the total amount you’ll have to spend to buy the call.

What happened to our option investment
May 1 May 21 Expiry Date
Stock Price $67 $78 $62
Option Price $3.15 $8.25 worthless
Contract Value $315 $825 $0
Paper Gain/Loss $0 $510 -$315

The majority of the time, holders choose to take their profits by trading out (closing out) their position. This means that option holders sell their options in the market, and writers buy their positions back to close. Only about 10% of options are exercised, 60% are traded (closed) out, and 30% expire worthlessly.

Fluctuations in option prices can be explained by intrinsic value and extrinsic value, which is also known as time value. An option’s premium is the combination of its intrinsic value and time value. Intrinsic value is the in-the-money amount of an options contract, which, for a call option, is the amount above the strike price that the stock is trading. Time value represents the added value an investor has to pay for an option above the intrinsic value.   This is the extrinsic value or time value. So, the price of the option in our example can be thought of as the following:

Premium = Intrinsic Value + Time Value
$8.25 $8.00 $0.25

In real life, options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely.

Types of Options

American and European Options

American options can be exercised at any time between the date of purchase and the expiration date. European options are different from American options in that they can only be exercised at the end of their lives on their expiration date. The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type.   Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.

There are also exotic options, which are exotic because there might be a variation on the payoff profiles from the plain vanilla options. Or they can become totally different products all together with “optionality” embedded in them. For example, binary options have a simple payoff structure that is determined if the payoff event happens regardless of the degree. Other types of exotic options include knock-out, knock-in, barrier options, lookback options, Asian options, and Bermudan options.   Again, exotic options are typically for professional derivatives traders.

Options Expiration & Liquidity

Options can also be categorized by their duration. Short-term options are those that expire generally within a year. Long-term options with expirations greater than a year are classified as long-term equity anticipation securities or LEAPs. LEAPS are identical to regular options, they just have longer durations.

Options can also be distinguished by when their expiration date falls. Sets of options now expire weekly on each Friday, at the end of the month, or even on a daily basis. Index and ETF options also sometimes offer quarterly expiries. 

Reading Options Tables

More and more traders are finding option data through online sources. (For related reading, see “Best Online Stock Brokers for Options Trading 2020”) While each source has its own format for presenting the data, the key components generally include the following variables:

  • Volume (VLM) simply tells you how many contracts of a particular option were traded during the latest session.
  • The “bid” price is the latest price level at which a market participant wishes to buy a particular option.
  • The “ask” price is the latest price offered by a market participant to sell a particular option.
  • Implied Bid Volatility (IMPL BID VOL) can be thought of as the future uncertainty of price direction and speed. This value is calculated by an option-pricing model such as the Black-Scholes model and represents the level of expected future volatility based on the current price of the option.
  • Open Interest (OPTN OP) number indicates the total number of contracts of a particular option that have been opened. Open interest decreases as open trades are closed.
  • Delta can be thought of as a probability. For instance, a 30-delta option has roughly a 30% chance of expiring in-the-money.
  • Gamma (GMM) is the speed the option is moving in or out-of-the-money. Gamma can also be thought of as the movement of the delta.
  • Vega is a Greek value that indicates the amount by which the price of the option would be expected to change based on a one-point change in implied volatility.
  • Theta is the Greek value that indicates how much value an option will lose with the passage of one day’s time.
  • The “strike price” is the price at which the buyer of the option can buy or sell the underlying security if he/she chooses to exercise the option. 

Buying at the bid and selling at the ask is how market makers make their living.

Long Calls/Puts

The simplest options position is a long call (or put) by itself. This position profits if the price of the underlying rises (falls), and your downside is limited to loss of the option premium spent. If you simultaneously buy a call and put option with the same strike and expiration, you’ve created a straddle.

This position pays off if the underlying price rises or falls dramatically; however, if the price remains relatively stable, you lose premium on both the call and the put. You would enter this strategy if you expect a large move in the stock but are not sure which direction.   

Basically, you need the stock to have a move outside of a range. A similar strategy betting on an outsized move in the securities when you expect high volatility (uncertainty) is to buy a call and buy a put with different strikes and the same expiration—known as a strangle. A strangle requires larger price moves in either direction to profit but is also less expensive than a straddle. On the other hand, being short either a straddle or a strangle (selling both options) would profit from a market that doesn’t move much.   

Below is an explanation of straddles from my Options for Beginners course:

Straddles Academy

And here’s a description of strangles:

How to use Straddle Strategies

Spreads & Combinations

Spreads use two or more options positions of the same class. They combine having a market opinion (speculation) with limiting losses (hedging). Spreads often limit potential upside as well. Yet these strategies can still be desirable since they usually cost less when compared to a single options leg. Vertical spreads involve selling one option to buy another. Generally, the second option is the same type and same expiration, but a different strike.

A bull call spread, or bull call vertical spread, is created by buying a call and simultaneously selling another call with a higher strike price and the same expiration. The spread is profitable if the underlying asset increases in price, but the upside is limited due to the short call strike. The benefit, however, is that selling the higher strike call reduces the cost of buying the lower one.   Similarly, a bear put spread, or bear put vertical spread, involves buying a put and selling a second put with a lower strike and the same expiration. If you buy and sell options with different expirations, it is known as a calendar spread or time spread. 

Spread

Combinations are trades constructed with both a call and a put. There is a special type of combination known as a “synthetic.” The point of a synthetic is to create an options position that behaves like an underlying asset, but without actually controlling the asset. Why not just buy the stock? Maybe some legal or regulatory reason restricts you from owning it. But you may be allowed to create a synthetic position using options.   

Butterflies

A butterfly consists of options at three strikes, equally spaced apart, where all options are of the same type (either all calls or all puts) and have the same expiration. In a long butterfly, the middle strike option is sold and the outside strikes are bought in a ratio of 1:2:1 (buy one, sell two, buy one).

If this ratio does not hold, it is not a butterfly. The outside strikes are commonly referred to as the wings of the butterfly, and the inside strike as the body. The value of a butterfly can never fall below zero. Closely related to the butterfly is the condor – the difference is that the middle options are not at the same strike price. 

Options Risks

Because options prices can be modeled mathematically with a model such as the Black-Scholes, many of the risks associated with options can also be modeled and understood. This particular feature of options actually makes them arguably less risky than other asset classes, or at least allows the risks associated with options to be understood and evaluated. Individual risks have been assigned Greek letter names, and are sometimes referred to simply as “the Greeks.” 

Below is a very basic way to begin thinking about the concepts of Greeks:

How to Trade Stock Options for Beginners – Best Options Trading Strategy

This simple, profitable trading guide teaches stock options trading for beginners. The strategy applies to the stock market, Forex currencies, and commodities. In this article, you will learn about what options are, how to buy Put and Call options, how to trade options and much more. If options trading isn’t for you, try our Harmonic Pattern Trading Strategy. It’s an easy step by step guide that has drawn a lot of interest from readers.

The Trading Strategy Guides team believes this is the most successful options strategy. When trading, we adhere to the principle of KISS: “Keep it simple, Stupid!”

With simplicity, our advantage is having enormous clarity over price action.

We’ll be focusing on BUYING Put and Call options through this options trading tutorial. Selling options is a different animal. It requires more experience to fully understand the inherited risks. Why? Because you can’t control the downside, the same way you do when you buy Put and Call options.

This is the most successful options strategy because it consistently provides profitable trade signals. Not because it doesn’t have losses. The preferred time frame best options trading strategy is the 15 minute time frame.

We will first define what buying a Put and Call options is. After that, we will give out the rules for the best options trading strategy. Here is another strategy called The PPG Forex Trading Strategy.

What are Options?

Options are a specific type of derivatives contracts . The underlying securities can be stocks, indexes, ETFs or commodities . With a derivatives contract, you do not directly own the underlying asset. Instead, you own a related asset whose value is affected by changes in price.

With an options contract, you have the right to buy or sell an asset at a predetermined price in the future. When that future point arrives, you will have the choice to exercise the option or let it expire.

Here’s an example. Let’s say the asset is selling for $110, a contract giving you the right to buy at $100 will have an intrinsic value. As the expiration date approaches, the value of the options contract will adjust.

There are two different types of options, call options and put options. When used correctly, options trading will make your strategy much more dynamic. Let’s dive into the next section.

What is a Call Option?

A Call Option gives you the right to purchase an asset in the future. If exercised, this purchase will occur on a predetermined date. It will also occur at a predetermined value. If you are unsure about the future value of an asset, a call option can offer some protection. Call options are commonly purchased by stock traders. However, they can also be found in many other markets. In fact, call options are the most commonly traded options contracts.

What is a Put Option?

A Put Option gives you the right to sell an asset in the future. Like call options, these contracts have predetermined prices and sell dates. Put options and call options are often purchased together in order to make a “hedged” position. Below, we will discuss the different types of options sales. We will then discuss how these sales can be introduced into your trading strategy. You may also enjoy this article about options vs futures.

Different Types of Option Sales

It is necessary to remember that an option is a contract that allows you to purchase an asset at a specific price in the future. There are four different types of options sales that can possibly occur. The differences between short and long sales, and puts and calls will be very important.

  • A long call option will give you the right to buy an asset at a specific price in the future. Long call option holders will benefit from price increases over time.
  • A long put option will give you the right to sell at a specific price in the future. Contrary to call options, long put option holders are hoping that market prices will decrease.
  • A short call option gives you the right to sell not the underlying asset, but the option itself in the future. Because the “logic” of short positions is reversed, short call option holders are in similar positions to long put option holders.
  • A short put option will hope that long put options become less valuable over time—consequently, holders will be rooting for prices to go up.

Once you can understand the different varieties of options sales, you will be able to engage in more complex trading strategies. These strategies will usually involve purchasing multiple different options in order to manage risk and increase the possibility of earning high returns.

Why Use Options?

Options are used for speculation or hedging. Hedge fund managers are notorious for using advanced risk management strategies to hedge their market exposure.

Options offer high leverage, giving you the chance to trade big contracts and potentially make more money. This is the same for Forex. You need a smaller initial investment than buying stocks outright. When buying options, the risk is limited to the initial premium price paid.

When using options, the risk is limited, but the potential profit is theoretically unlimited. Obviously, we say theoretically unlimited profits. But options prices are going to be range-bound within certain parameters. There’s no stock price to rise to infinity. Also, read this article on Paper Trading Options – The Secret to Riches.

Types of Options Strategies

You can take your trading beyond basic call and put options. That is the beauty of options trading. Other trading strategies include covered call, married put, bull call spread, bear put spread, and more. They can help you better manage your risk and seek new trading opportunities.

If you’re a versatile trader, take advantage of the flexibility that options trading can give you. Study the top 10 stock options trading strategies below:

  • Covered Call Strategy or buy-write Strategy – implies buying stocks outright. At the same time, you want to sell call options on the same stock. The number of shares you bought should be identical to the number of call options contracts you sold.
  • Married Put Strategy – implies buying stocks outright. At the same time, you will buy put options for an equivalent number of shares. The married put works like an insurance policy against short-term losses.
  • Bull Call Spread Strategy – implies buying call options with a specific strike price. At the same time, you’ll sell the same number of call options at a higher strike price.
  • Bear Put Spread Strategy – it’s similar to the bull call spread but involves buying and selling put options. In this options strategy, you buy put options with a specific strike price. At the same time, sell the same number of put options at a lower strike price.
  • Protective Collar Strategy – implies buying an out-of-the-money put option. At the same time sell or write an out-of-the-money call option for the same stock.
  • Long Straddle Strategy – implies buying both a call option and a put option at the same time. Both options should have the same strike price and expiration date.
  • Long Strangle Strategy – implies buying both an out-of-the-money call option and a put option at the same time. They have the same expiration date but they have different strike prices. The put strike price will typically be below the call strike price.
  • Butterfly Spread Strategy – implies using a combination of the bull spread strategy and bear spread strategy. The classical butterfly spread involves buying one call option at the lowest strike price. At the same time, sell two call options at a higher strike price. And then sell one last call option at an even higher strike price.
  • Iron Condor Strategy – involves holding a long and a short position in two different strangle strategies.
  • Iron Butterfly Strategy – involves using a combination between either a long or short straddle strategy. At the same time, buy or sell a strangle strategy.

Now let’s turn our focus back to the most successful options strategy.

Let’s define the indicators you need for the best options trading strategy. And how to use stochastic indicator.

The only indicator needed is RSI or Relative Strength Index.

Options trading is constrained by the expiration date factor. So it’s important to select a technical indicator that is suitable for options trading. The RSI indicator is a momentum indicator which makes it the perfect candidate for options trading. This is because of its ability to detect overbought and oversold conditions in the market.

The RSI indicator’s location is on most FX trading platforms (MT4, TradingView). You will find it under the indicators library.

So, how does the RSI indicator really work?

The RSI uses a simple math formula to calculate the oscillator:

There is no need to go further into the math behind the RSI indicator. All we need to know is how to interpret the RSI oscillation. Basically, an RSI reading equal to or below 30 shows that the market is in oversold conditions. An RSI reading equal or above 70 shows the market is in overbought conditions. At the same time, a reading above 50 is considered bullish. On the other hand, a reading below 50 marks is considered bearish.

The preferred RSI indicator settings are the default settings with a 14 period.

Before we go any further, we always recommend taking a piece of paper and a pen and note the rules.

Let’s dive into the options trading tutorial….

Most Successful Options Strategy

(Rules for Buy Call Options)

Options Trading Tutorial Step #1: Wait 15-minutes after the stock market opens to establish your market bias.

The most successful options strategy isn’t focusing only on the price. But they also make use of the time element the same as we’re doing here.

The stock market opening price is usually the most important price. During the first minutes after the stock opening bell, we can note a lot of trading activity. This is because that’s the time when major investors are establishing their positions in the stock market.

Read Day Trading Price Action- Simple Price Action Strategy. You’ll learn about a strategy that isn’t restricted to the time element and focuses on price action. It’s one of the most comprehensive guides to successfully trade stocks or other assets by simply using price action.

Our team at Trading Strategy Guides wants to develop the best options trading strategy. In order to do that, we have to think smarter. We have to track how the smart money operates in the market.

The best options trading strategy will not keep you glued to the screen all day. You only have to know when the stock markets open.

The NYSE opens at 9:30 EST or 1:30 PM GMT time for those trading from Europe.

This brings us to the next step in our options trading tutorial…

Options Trading Tutorial Step #2: Make sure the 15-Minute candle after the opening bell (9:30 EST) is bullish.

As we have established earlier, we only want to trade in the direction where the smart money is. If we’re looking for buying Call Options opportunity we want to make sure smart money is buying after the open. Conversely, if we’re looking to buy Put Options we want to see sellers appear right after the opening bell.

Important Note*: If we have an opening gap up it means the buying power is even stronger and we should put more weight on this trade setup.

Options Trading Tutorial Step #3: Check if the RSI is above 50 level – This is a bullish momentum signal.

We use the RSI indicator for confirmation purpose only. We want to make sure that once we have identified the bullish price action the momentum behind the move is confirmed by the RSI indicator. We’re not concerned with overbought and oversold conditions because the market can stay in these conditions longer than you can stay solvent.

In the chart above, we can note the RSI is well above 50 during the first 15-minutes of trading. The price action is confirmed by the RSI momentum reading.

Now, let’s jump and define where exactly we want to enter our buy a Call option.

Options Trading Tutorial Step #4: Buy a Call option right at the opening of the second 15-minute candle after the opening bell.

Now, that we have confirmation that smart money is buying we don’t want to lose any more time and we want to buy a Call option right at the opening of the next 15-minute candle after the opening bell.

As easy as it sounds this strategy only requires you to put 15-minutes of your time each day. You’ll either get a signal or not, but in order to take advantage of the best options trading strategy, you need to exercise discipline and don’t take any trades if you don’t have any signal.

So at this point, our trade is running and in profit, but we still need to define when to exercise our call option and take profit.

Options Trading Tutorial Step #5: Choose the nearest expiration cycle. For day trading choose the weekly cycle.

When you buy a Call option you also have to settle an expiration date, as part of that contract.

You might be asking yourself how to choose the right expiration cycle?

Well, because we’re most likely going to sell our Call option the same day as we have purchased it, it’s more appropriate to choose the weekly cycle.

Time to switch our focus to the most important part: Where to take PROFITS and sell your Call Options?

Options Trading Tutorial Step #6: Take Profit and sell the Call Option as soon as you have two consecutive 15-minute bearish candles.

Knowing when to take profit is as important as knowing when to enter a trade. We want to get out of our position as soon as we see the sellers stepping in. We measure this by counting two consecutive bearish candles as a sign of bearish sentiment presence in the market.

You don’t want to exercise your long Call option because you don’t want to own those share stocks, you just want to make a quick profit.

Note** The above was an example of a buying Call option using the options trading tutorial. Use the exact same rules – but in reverse – for buying a Put option trade. In the figure below you can see an actual Buy Put Options example using the options trading tutorial.

We’ve applied the same Step #1 through Step#4 to help us establish our trading bias and identify the Buy Put Option trade and followed Step #5 through Step#6 to identify when to sell your Call option.

Selecting the Options Contract that’s Right for You

Now that you understand how to successfully trade options, you will want to know how to choose the contracts that are right for you. All options contracts will have some degree of risk. This is especially true when trading binary options. This is due to the fact that options can potentially be worthless on their expiration date. The risk of trading options can be managed.

When selecting options, keep the following things in mind:

  • Your personal level of risk tolerance
  • Your desired trading timeframe (day trading, long-term trading)
  • The volatility of each prospective asset
  • Past returns on options contracts

Options contracts also have high levels of implied volatility . During the first 30 minutes of trading, options contracts experience large changes in value. When volatility is high, both the level of risk and potential reward will be higher. During this time, your trading strategy will need to be much more active. Risk can be managed by issuing stop orders. It can also be managed by hedging your position and diversifying your positions.

Both call and put options can be very rewarding. In order to prepare yourself as an options trader, it will be a good idea to practice. Fortunately, Trading Strategy Guides makes it easy to hone your skills and enter new markets. Carefully combining the steps mentioned above can help you unlock the best options trading strategy.

Conclusion – Options Trading Tutorial

This is one of the most successful options strategies because when trading stocks, it’s important to have a good understanding of the market sentiment and how the big players are positioned in the market. Another important reason why this is the best options trading strategy is that you’re not required to be glued to the screen all day long.

Don’t forget also to read our Support and Resistance Zones – Road to Successful Trading one of the most comprehensive guides to successfully trade stocks or other assets by simply using support and resistance levels.

Thank you for reading!

Please leave a comment below if you have any questions on How to Trade Stock Options!

Also, please give this strategy a 5 star if you enjoyed it!

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