Tuesday, October 25, 2011

Option Trading -The Profit Making Tactics

Here are some basic things you must do, if you want to make profit from option trading regularly.

Game Plan
Many option buyers purchase options that are at or in-the money. These options have much higher deltas and move much closer with the underlying stock or futures. There are serious disadvantages with these options.

Not only are they quite expensive, where several hundred or thousands of dollars are at stake, but one wrong move by the underlying stock or futures and the option price will collapse, losing you thousands of dollars.

Unlike stock, you do not usually have a second chance or the time for the stock price to come back. As a result, you need to create a game plan that provides you with some protection.

We could create Option Profit charts. The Profit charts is a Game Plan where if the underlying stock or futures price stays in the Profit charts, you stay in the option position, but if the underlying stock or futures leaves the charts, you immediately exit the position.

The advantage of this game plan is that you are only in the position for a maximum of three weeks and you have a very tight stop-loss.

You exit if the underlying stock or futures starts to move in the wrong direction. With such a strategy, you are in the position for a short time to avoid the danger of time decay of the option and a lot of loss in the option value.

 This strategy gives you the chance to exit if the underlying stock or futures moves in the wrong direction.

This game plan also counters the tendency of the option buyer to suffer from inertia. As an option buyer, as you already know, one of your greatest enemies is inertia. You need to be quick on the trigger when you take profits or cut losses. The Profit charts help you with the process.

Be Patient
One of the most important attributes of a professional option trader is patience, the patience to wait for the good trade and the patience to handle a lot of losses and wait for the big profits.

Most option investors will jump impetuously into option trades, looking for action rather than looking for sound trades. You need the patience to find an option play with a good risk-reward picture, and then you need the patience to wait for the profits! Few option buyers have this attribute.

Avoid Options Last Month
Avoid holding options in their last month before expiration. They depreciate at the fastest rate during that last month. In fact, in some cases the option premiums absolutely collapse.
One reason such depreciation may occur is because option investors write options the last month before expiration. Write options a day or two before the last month begins (expiration of the previous month).

Try to buy options with one month or less before expiration if they are extremely cheap and undervalued and if the underlying stock or futures price is close to the strike price.

DefensiveSteps That To Protect Your Portfolio

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