Options Strategies At All-Time Highs
Options trading for beginners with the market at all-time highs opens up many possibilities. Most of the major indexes reached record highs in the past week, giving options traders a reason to celebrate. Options trading in a sideways market is typically more difficult than in a directional market, but there are still a few important rules for an investor to remember before they just go out and blindly by calls in a bullish market.
Strong stocks in strong sectors
No matter what the market condition is an investor will always want to remember that every good option trade first starts with a good stock trade. The best way to have a good stock trade is to follow a clear set of defined rules. Starting out trades by looking for Market trends and following the big picture is the first way to find good opportunities. Once a strong opportunity has been found only then should an options trade be considered. The simplest thing to do foremost options Traders would be to Simply by a call as a replacement for a stock if the trade is a short-term opportunity. If an investor is looking for a longer-term play, it might make sense to evaluate other strategies including covered calls, or cash-secured puts.
Options trading open interest
One of the challenges with options trading is having enough open interest. Sometimes a growth stock that has strong momentum may not have enough retail interest to have a high number of open interest contracts. This will lead to wider bid-ask spreads. A wider bid-ask spread makes it more difficult to realize a profit. A good role of thumb is to look at a bid-ask spread being less than ten percent of the option premium. Many times options trading beginners will forget to look at this criteria and leave money on the table. When the market is at all-time highs it gets tempting for an investor to overlook this critical role as the fear of missing out takes over.
Have multiple strategies to deploy
In options trading think of the strategies you know as tools in a toolbox. If the only too you have is a hammer every problem has to be a nail. If all you can do is buy calls then your strategy will only be effective in a bullish environment with low volatility. Knowing more strategies that are effective in multiple volatility environments will give an options trading beginner a leg up. Simple verticle spreads can often times negate the effect of volatility in your trade. A simple vertical spread consists of buying one option and selling another with a different strike price in the same month.
