Key steps before executing option strategy

Futures and options are the major types of stock derivatives traded in a share market. Options trader is very well versed with the options strategies and its benefits. Options have multiple strategies tailor made for each trader, namely Stock Options strategies, Index options strategies. Simultaneously, the Greeks Options strategies give you a way to measure the theoretical exposure of an option or option strategy to the various risks it is exposed to. A very straightforward strategy might simply be the buying or selling of a single option; however, option strategies often refer to a combination of simultaneous buying and or selling of options.

Option trading can be done in a variety of ways. Hedging, speculation, and arbitrage are all possible with options. Understand the popular options trading strategies among the options traders, and how to step in to execute these strategies.

You can Start Options trading right now by

• Opening an options trading account

• Picking the options to buy or sell

• Predicting the option strike price

• Determining the option time frame

These are all the basic steps you need to go through to become one of the options traders, But what makes you one of the best.

Let’s go through in detail.

Overview of the Steps in Trading Options

Outlook, Planning, Entry, and Exit are the four essential steps in the process of trading options for directional speculation. Using various outright or options spreads tactics, directional speculating involves profiting from an upwards, downwards, neutral, or volatile outlook on the underlying asset. These options trading stages assume that you are familiar with the fundamentals of options trading.

Step 1: Outlook

A typical option strategy involves the purchase / selling of at least 2-3 different options (with different strikes and / or time to expiry. One very key step to execute the options strategy is to analyze and understand the behavior of a certain option strategy by drawing its Profit / Loss graph.

He can monitor whether a stock is moving up or down. In options trading, however, the more particular your viewpoint, the better you'll be able to apply an options strategy that fits that unique view, resulting in a higher return on investment.

In options trading, there are three major components to creating an outlook: direction, price target, and time span.

Direction

Not only can you earn from an upwards or downwards move in options trading, but you can also earn from sideways and several directions at the same time. Investors can monitor the direction to make money by betting on the direction of the market. The more exact and precise your viewpoint is while trading options, the better your return on investment will be.

Price Target

A price objective lets you understand the point at which selling the stock will you a profit. In options trading, if you have an appropriate price goal means you have a better chance of making a profit. They say, having a price objective isn't necessary while trading options, but if you do, you'll be able to earn a bigger profit.

Time Span

The main difference between trading options and stocks is the difference of expirations. Options have set expiration dates, but equities can be held indefinitely. Because options have set expiration dates and a variety of expiration dates to select from, you can maximise your return on investment by avoiding purchasing more expensive options with longer expiration dates than necessary if you know how long it will take the stock to reach your price objective.

As you can see from the examples above, you will get much better returns when trading options when your outlook is precise and accurate.

Step 2: Planning

After you have your directional, price target and time span outlook figured out, it is time to plan for trade. Planning for the trade involves deciding what options strategy and how much money to use. As such, there are two main components in the planning phase; Choice of Options Strategy and Capital Commitment.

Choice of Options Strategy

There are hundreds of countless possible combination using options. All options strategies serve specific outlooks which is why the outlook phase is so important. A clear and specific outlook is very necessary to choose from the number of options strategies enabled.

The options strategy that you choose must also be governed by your understanding and expertise in the options strategy that you select. All options strategies need to be practised through paper trading and thoroughly understood before apply real money to them.

Capital Commitment

It’s a very important aspect of options strategy to have an advance decision of maximum loss that you can afford in one before choosing a strategy that keeps its maximum loss within that limit. This is the capital you are ready to commit in the trade.

Step 3: Entry

After planning your outlook and planning your trade, it is time to make an entry. If you are using a multi-leg options strategy such as the Bull Call Spread, most brokers would allow you to put it on as a single simultaneous order by filling out an order form with all the options involved in the position or you could choose to "Leg" into the position by finding the best timing on your own to enter on each option involved in the position. Legging takes experience and if improperly done, could nullify the possible profits of the position, therefore, make sure you practise legging on your virtual trading platform before going real.

After you have entered the position, you should also set a stop loss point for your position in accordance to your outlook based on either stock price (using contingent or conditional orders) or options price. If you are trading only with money you can afford to lose and is willing to undertake the possibility of a full loss, you could go without a stop loss point. For instance, if I wish to lose no more than Rs.1000 per trade out of a Rs.10,000 fund, I would simply buy options only with Rs.100 and let the position run to profit or full loss.

Step 4: Exit

Eventually, all options positions have to be exited in one of 4 ways; Exercise, Assignment, Roll Forward or Close.

Exercising means exercising your right to buy or short the underlying stock voluntarily if you decide eventually to hold a position directly on the underlying stock for the longer term.

Assignment means options that you are short on are being exercised by whoever bought those options and you too end up with a position in the underlying stock or your stocks being called away from your account in the case of writing call options.

Roll forward means closing your expiring options and opening further month ones in order to remain invested.

Close is simply to Sell to Close long options positions that you hold or Buy to Close short ones.

Options research will help you identify potential option investments and trading ideas with easy access to pre-defined screens, analysis tools, and daily commentary from experts.