Most successful option trading strategy

10 Traits Of A Successful Options Trader.

Options are one of the most versatile instruments in the financial markets. They are flexible in that they allow you to leverage your position to boost returns, manage risk by using them for hedging, or to make profit from upside, downside and sideways movement in the market.

Despite its many benefits, options trading carries substantial risk of loss, and it is very speculative in nature. It's not for everyone and not everyone can become a successful options trader. Like any other business, becoming a successful options trader requires a certain skillset, personality type and attitude. This article will help you understand the 10 must-have characteristics that you need to become successful at options trading. (From picking the right type of stock to setting stop-losses, learn how to trade wisely)

[If you're interested in going beyond just 10 must-have characteristics and skills, and learning tried and true options strategies used by professional, check out Investopedia Academy's Options Trading Course. With on demand video trainings and classes, you'll have access to the knowledge to put the odds in your favor with options.]

Numeracy - Keep Sharpening Your Quantitative Skills.

Options are high-risk instruments, and it is important for traders to recognize how much risk they have at any point in time. What is the maximum downside of the trade? What is the implicit or explicit position with respect to volatility? How much of my capital is allocated to the trade? These are some of the questions that traders will always have to keep in their minds. Traders also need to take appropriate measures to control the risk. In particular, if you are a short-term options trader, you will regularly come across loss-making trades. For example, if you hold a position overnight, your bet may go bad because of adverse news. At any time, you need to be able to minimize the risk of your positions. Some traders do so by limiting their trade size and diversifying into many different trades so that not all their eggs are in the same basket. An options trader also has to be an excellent money manager. They need to use their capital wisely. For example, it wouldn't be wise to block 90% of your capital in a single trade. Whatever the strategy you adopt, risk management and money management cannot be ignored. (Risk is inseparable from return. For more, see Measuring And Managing Investment Risk. )

2. Be good with numbers:

While trading in options, you are always dealing with numbers. What's the implied volatility? Is the option in the money, or out of the money? What's the breakeven of the trade? Options traders are always answering these questions. They also refer to option Greeks, such as the delta, gamma, vega and theta of their options trades. For example, a trader would want to know if his trade is short gamma. It is important for the traders to be able to easily calculate and interpret numbers. You don't need to be a rocket scientist, but you should train as an aspiring "quant jock." (Understanding price influences on options positions requires learning delta, theta, vega and gamma. For more, see Getting To Know The "Greeks." )

Behavioral – Develop the Right Attitude.

To become successful, the options traders must practice discipline. Doing extensive research, identifying opportunities, setting up the right trade, forming and sticking to a strategy, setting up goals, and forming an exit strategy are all part of the discipline. A simple example of deviating from the discipline is to go with the advice of the herd. Never trust an opinion without doing your own research. You can't skip your homework and blame the herd for your losses. Instead, you must devise an independent trading strategy that works for your situation.

Patience is one quality that all options traders have. Patient investors are willing to wait for the market to provide the right opportunity, rather than trying to make a big win on every market movement. You will often see traders sitting idle and just watching the market, waiting for the perfect timing to enter or exit a trade. The same is not the case with amateur traders. They are impatient, unable to control their emotions, and they will be quick to enter and exit trades.

5. Match your trading style with your personality:

Each trader has a different personality; therefore, each trader should adopt a trading style that suits his or her traits. Some traders may be good at day trading, where they buy and sell options several times during the day in order to make small profits. Others may be more comfortable with position trading, where they form trading strategies to take advantage of unique opportunities, such as time decay and volatility. And others may be more comfortable with swing trading, where traders make bets on price movement over periods lasting five to 30 days. (For related reading, see The Importance Of Time Value In Options Trading. )

Learning – Become an Active Learner.

6. Read and understand news:

It is crucial for traders to be able to interpret the news, separate hype from reality, and make appropriate decisions based on this knowledge. You will find many traders who will be eager to put their capital in an option with promising news, and the next day they will move on to the next big news. This distracts them from identifying bigger trends in the market. Most successful traders will be honest with themselves and make sound personal decisions, rather than just going by the top stories in the news.

7. Learn from losses:

The Chicago Board of Trade recently reported that 90% of options traders make losses. What separates successful traders from average ones is that successful traders are able to learn from their losses and implement what they learn in their trading strategies. (For related reading, see Options Trading Strategies: Understanding Position Delta. )

8. Be an active learner:

The financial markets are constantly changing and evolving; you need to have a clear understanding of what's happening and how it all works. By becoming an active learner, you will not only become good at your current trading strategies, but you will also be able to identify newer opportunities that others might not see or that they may pass over.

Administrative – Develop the Right Routine.

9. Plan your trades:

An options trader who plans is more likely to succeed than one who flies on instinct and feel. If you don't have a plan, you will place random trades, and consequently, you'll be directionless. On the other hand, if you have a plan, you are more likely to stick to it. You will be clear about what your goals are and how you plan to achieve them. You will also know how to cover your losses or when to book profits. You can see how the plan has worked (or not worked) for you. All these steps are essential to developing a strong trading strategy.

10. Maintain records:

Most successful options traders keep diligent records of their trades. Maintaining proper trade records is an essential habit that can help you avoid making costly decisions. The history of your trade records also provides a wealth of information that can help you improve your odds of success. (For related reading, see Make Better Options Trades With The Average Monthly Range. )

Top options traders get a thrill from scouting and watching their trades. Sure, it's great to see a pick come out on top, but much like sports fans, options traders enjoy watching the whole game unfold, not just finding out the final score. These characteristics will not guarantee your success in the options trading world, but they will definitely increase your chances at it.

Most Profitable Options Strategy.

With over 40 different variations on techniques to trade options, it is pretty hard to decide which is the most profitable options strategy. Most traders, be they day traders or option traders, try to develop a trading plan that will at minimum beat the broader stock market, and there are hundreds of opinions about which is the best approach. Option trading offers huge profit potential, and so is very attractive, but at the same time, many traders have lost very heavily when they launch into the world of options . There are plenty of forum posts that state how dangerous options trading can be, and how bad it is to trade derivatives. Sometimes it seems that the only people making any kind of profit are those that sell options trading advisory services via a newsletter or website, and even their results are often disappointing. So, this then leads to two questions: is options trading really profitable, and secondly, if so, what is the most profitable options strategy?

Is Options Trading Profitable?

The truth? Yes, it can be. The leverage potential provided by options, which gives you the right to control large blocks of stock, is significantly greater than the potential of simple stock trading. If you are able to harness the power of this leverage, you can make huge amounts of profit from fairly small moves in the underlying stock price. With other strategies, you can make money if the stock goes down, and you can use yet another strategy to make money in a stagnant market. The problem with some (but not all) of the strategies is that you can lose a lot of money very quickly. In fact, if you make the wrong play, you can lose 100% of your investment within a couple of hours!

What is the Most Profitable Options Strategy?

Most options traders are introduced to the very simple to understand, and easy to implement, concept of buying calls (for an ascending market) or buying puts (for a descending market). As well as being simple to understand and apply, these two strategies have the potential to make fierce profit gains. It is possible to make returns of 100% or better within a couple of days or even hours of making the trade. So, for sheer magnitude of profit, this can be the most profitable strategy. However, it is also highly possible to lose 100% of your investment just as quickly! Even though websites and advisory services who market this technique will show these kind of spectacular results occasionally, it is more often true that they usually gain less than 50% per trade, and they have a large percentage of trades that go wrong! If you have one trade that loses 100%, you need at least five trades making 20% or more in order to recoup your investment. Very few traders are able to make these kinds of winners on a regular basis. The reason is that in order to be successful at this strategy, you need to have excellent technical analysis skills so that you can accurately predict a market move and the timing of the move. It is possible, but it requires years of experience and a raft of technical analysis tools that you can understand and use effectively.

Selling Puts and Credit Spreads.

Two recent academic studies* have shown that the most consistently profitable strategies are selling puts or selling credit spreads. Although the absolute magnitude of profit is less than that from buying calls and puts, the profit is regular and consistent, in the range of 7-12% per month on the whole portfolio. The strategies are reasonably simple, requiring a very basic level of technical analysis, and the percentage of winners is much higher (80% or more, with the right trading plan). Overall, the most profitable options strategy is that of selling puts . It is a little limited, in that it works best in an upward market, although even selling ITM puts for very long term contracts (6 months out or more) can make excellent returns because of the effect of time decay, whichever way the market turns. Selling credit spreads takes advantage of both upward and downward trends in the market, and the margin requirements are smaller, making it easier for the smaller investor to start. Even Iron Condors (basically two opposite standing credit spreads) make good returns in a stagnant market.

In Conclusion..

When looking for the most profitable options strategy, do not look at the magnitude of profit. Rather, look at factors such as risk of loss, the technical analysis requirements, and the potential to develop a safe, reliable trading plan that generates regular monthly or even weekly income. and then leave it to the power of compounding!

Doran, James S. and Fodor, Andy, Is There Money to Be Made Investing in Options? A Historical Perspective (December 8, 2006). Available at SSRN: ssrn/abstract=873639 or dx. doi. org/10.2139/ssrn.873639.

AN ANALYSIS OF INDEX OPTION WRITING FOR LIQUID ENHANCED RISK-ADJUSTED RETURNS. January 2012. Asset Consulting Group.

Ever wondered what is the most profitable options strategy? To be sure, it is a controversial questions. But, in my infinite genius, I have finally figured it out. and here it is. for free!

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The 5 Most Effective Weekly Options Trading Strategies.

In Part 1 of The Weekly Options Mastery Report we discuss The 5 Most Effective Options Trading Strategies intelligent traders are using to generate weekly profits (read below). Stay tuned for Part 2 where we discuss how to easily and efficiently identify attractive weekly options trade candidates every day…

Weekly options provide traders with the flexibility to implement short-term trading strategies without paying the extra time value premium inherent in the more traditional monthly expiration options. Thus traders can now more cost-effectively trade one-day events such as earnings, investor presentations, and product introductions. Flexibility is nice and all, but you are probably asking yourself, what specific strategies should I use to generate weekly profits from weekly options? Well I’m so glad you asked; let’s take a look now at 5 Most Popular Weekly Options Trading Strategies:

1. Covered Weekly Calls : Looking to generate some extra premium income in your portfolio? Well look no further, I have the strategy for you: Weekly Options Covered Calls. In essence, what you are looking to do in this strategy to is to sell weekly call options against existing stock holdings (covered calls) or purchase shares and simultaneously sell weekly call options against the new stock holding (buy-write). The weekly expiration of the sold call options allow you to collect additional income on your position, similar to a dividend but paying out each week. Over time the covered call strategy has outperformed simple buy-and-hold strategies, providing greater returns with two-thirds the volatility. However if shares of the underlying move meaningfully higher and through the sold strike, your return will likely be lower than if you didn’t sell the calls (though still positive. ). We use this unique trading tool to screen for potential weekly covered call candidates and post a sampling of our trades each week so stay tuned.

2. Because of the exponentially high time decay in weekly options, most traders prefer to sell weekly options and understandably so. In the covered call strategy highlighted above traders are able to collect the rapid time decay by selling the weekly calls against a long stock position. Selling naked puts, in theory (put-call parity) is equivalent to a buy-write strategy though skew and margin requirements alter the picture a bit. I guess what I’m trying to say is, all things being equal I’d prefer to sell weekly options, however there are times when I’d like to purchase weekly options for the potential to experience larger, potentially uncapped gains. Under these circumstances I recommend purchasing deep-in-the-money (DITM) weekly options . Focusing on DITM weekly options, options with a delta in excess of.

80% you can effectively limit the rapid time decay in the long weekly option as the high delta causes the long weekly option position to act move like stock (delta of 0.80 means the option will move $0.80 for every $1.00 move in the underlying). This is a phenomenal way to take advantage of option leverage and limit decay.

3. Credit spreads are popular because they allow traders to sell upside (call spreads) or downside (put spreads) levels with a locked-in risk-reward from the trade outset. For instance say you believe stock XYZ will not move above the $80 level over the next week and you’d like to express this thesis in the form of weekly options. One way to do this is to simply sell the $80 weekly call option. Unfortunately without the underlying stock, this weekly call option sale would require a substantial amount of margin within your portfolio, as the maximum potential loss on the trade is theoretically infinite. However, you can reduce the max potential loss and margin requirement by simply purchasing a higher strike call (i. e. $85) to hedge your short weekly call position. You would then be short the $80-$85 weekly call spread in XYZ, having collected net premium with a max loss potential of the strike width ($85-$80) – (collected premium).

4. Out-of-the-Money (OTM) : Otherwise known as “lottery tickets”, traders at times like to purchase way out of the money weekly options in hopes that a tiny investment could yield enormous returns. It happens, don’t get me wrong, but this strategy generally entails weeks and weeks of small losses and ideally a huge win to make up for the cumulative losses. The “lottery ticket” strategy is oftentimes used in cases of M&A speculation, FDA Announcements, and outsized earnings predictions.

5. Weekly Options Calendar Spreads : The Options Trading Signals guys do a pretty good job of covering calendar spreads in the Profitable Options Strategies report but here’s a nice summary of the weekly options calendar spread strategy from a recent OTS report:

One of the new opportunities presented by the arrival of these recently available weekly options is the ability to trade what I call “hit and run” calendar spreads. Remember that a calendar spread is a two-legged spread constructed by selling a shorter dated option and buying a longer dated option. The profit engine is the relatively faster decay of time premium in the shorter dated option.

Calendar spreads reliably achieve their maximum profitability at the expiration Friday afternoon of the short leg when price of the underlying is at the strike price. Prior to the recent availability of these weekly options, calendar spreads were typically constructed with around 30 days to expiration in the short leg.

In these classically constructed calendars, risks are two:

1. Movement of price of the underlying beyond the limits of profitability.

2. Volatility crush of the longer dated option which the trader owns.

Hit and run calendars differ in risk somewhat. Volatility moves rarely occur at anywhere close to the rapid pace of price movement. Because of this characteristic, the primary risk in these short duration calendars is price of the underlying. The occasional occurrence of spiked volatility in the short option significantly increases the probability of profitability as the elevated volatility decays to zero at expiration.

One of the very liquid underlyings that has actively traded options is AMZN. At mid day August 29, AMZN was at $205.50 and continuing to trend higher from a basing pattern. A quick look at the options board showed the weekly 210 strike option, having 4 days of life left and consisting entirely of time (extrinsic) premium, was trading at a volatility of 42.9% while the September monthly option I would buy had a volatility of 41.6%.

This situation is called a positive volatility skew and increases the probability of a successful trade. I entered the trade and owned the resulting P&L graph:

I continued to monitor the price, knowing that movement beyond the bounds of my range of profitability would necessitate action. By mid day on August 31, 48 hours into the trade, the upper limit of profitability was being approached as shown below:

Because price action remained strong and the upper breakeven point was threatened, I chose to add an additional calendar spread to form a double calendar. This action required commitment of additional capital and resulted in raising the upper BE point from 218 to a little over 220 as shown below. Hit and run calendars must be aggressively managed; there is no time to recover from unexpected price movement.

Shortly after adding the additional calendar spread, AMZN retraced some of its recent run up and neither BE point of the calendar was threatened. I closed the trade late Friday afternoon. The indication to exit the trade was the erosion of the time premium of the options I was short to minimal levels.

The results of the trade were a return of 67.5% on maximum allowable managed capital risk and a return of 10.6% on committed capital. If the second calendar had not been needed to control risk, the returns would have been substantially higher.

This is just one example of the use of options in a structured position to control capital risk and return significant profit with minimal position management. Such opportunities routinely exist for the knowledgeable options trader.

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10 Options Strategies to Know.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

10 Options Strategies To Know.

Too often, traders jump into the options game with little or no understanding of how many options strategies are available to limit their risk and maximize return. With a little bit of effort, however, traders can learn how to take advantage of the flexibility and full power of options as a trading vehicle. With this in mind, we've put together this slide show, which we hope will shorten the learning curve and point you in the right direction.

1. Covered Call.

Aside from purchasing a naked call option, you can also engage in a basic covered call or buy-write strategy. In this strategy, you would purchase the assets outright, and simultaneously write (or sell) a call option on those same assets. Your volume of assets owned should be equivalent to the number of assets underlying the call option. Investors will often use this position when they have a short-term position and a neutral opinion on the assets, and are looking to generate additional profits (through receipt of the call premium), or protect against a potential decline in the underlying asset's value. (For more insight, read Covered Call Strategies For A Falling Market.)

2. Married Put.

In a married put strategy, an investor who purchases (or currently owns) a particular asset (such as shares), simultaneously purchases a put option for an equivalent number of shares. Investors will use this strategy when they are bullish on the asset's price and wish to protect themselves against potential short-term losses. This strategy essentially functions like an insurance policy, and establishes a floor should the asset's price plunge dramatically. (For more on using this strategy, see Married Puts: A Protective Relationship . )

3. Bull Call Spread.

In a bull call spread strategy, an investor will simultaneously buy call options at a specific strike price and sell the same number of calls at a higher strike price. Both call options will have the same expiration month and underlying asset. This type of vertical spread strategy is often used when an investor is bullish and expects a moderate rise in the price of the underlying asset. (To learn more, read Vertical Bull and Bear Credit Spreads.)

4. Bear Put Spread.

The bear put spread strategy is another form of vertical spread​ like the bull call spread. In this strategy, the investor will simultaneously purchase put options at a specific strike price and sell the same number of puts at a lower strike price. Both options would be for the same underlying asset and have the same expiration date. This method is used when the trader is bearish and expects the underlying asset's price to decline. It offers both limited gains and limited losses. (For more on this strategy, read Bear Put Spreads: A Roaring Alternative To Short Selling.)

Investopedia Academy "Options for Beginners"

Now that you've learned a few different options strategies, if you're ready to take the next step and learn to:

Improve flexibility in your portfolio by adding options Approach Calls as down-payments, and Puts as insurance Interpret expiration dates, and distinguish intrinsic value from time value Calculate breakevens and risk management Explore advanced concepts such as spreads, straddles, and strangles.

5. Protective Collar.

A protective collar strategy is performed by purchasing an out-of-the-money put option and writing an out-of-the-money call option at the same time, for the same underlying asset (such as shares). This strategy is often used by investors after a long position in a stock has experienced substantial gains. In this way, investors can lock in profits without selling their shares. (For more on these types of strategies, see Don't Forget Your Protective Collar and How a Protective Collar Works.)

6. Long Straddle.

A long straddle options strategy is when an investor purchases both a call and put option with the same strike price, underlying asset and expiration date simultaneously. An investor will often use this strategy when he or she believes the price of the underlying asset will move significantly, but is unsure of which direction the move will take. This strategy allows the investor to maintain unlimited gains, while the loss is limited to the cost of both options contracts. (For more, read Straddle Strategy A Simple Approach To Market Neutral . )

7. Long Strangle.

In a long strangle options strategy, the investor purchases a call and put option with the same maturity and underlying asset, but with different strike prices. The put strike price will typically be below the strike price of the call option, and both options will be out of the money. An investor who uses this strategy believes the underlying asset's price will experience a large movement, but is unsure of which direction the move will take. Losses are limited to the costs of both options; strangles will typically be less expensive than straddles because the options are purchased out of the money. (For more, see Get A Strong Hold On Profit With Strangles.)

8. Butterfly Spread.

All the strategies up to this point have required a combination of two different positions or contracts. In a butterfly spread options strategy, an investor will combine both a bull spread strategy and a bear spread strategy, and use three different strike prices. For example, one type of butterfly spread involves purchasing one call (put) option at the lowest (highest) strike price, while selling two call (put) options at a higher (lower) strike price, and then one last call (put) option at an even higher (lower) strike price. (For more on this strategy, read Setting Profit Traps With Butterfly Spreads . )

9. Iron Condor.

An even more interesting strategy is the iron condor. In this strategy, the investor simultaneously holds a long and short position in two different strangle strategies. The iron condor is a fairly complex strategy that definitely requires time to learn, and practice to master. (We recommend reading more about this strategy in Take Flight With An Iron Condor, Should You Flock To Iron Condors? and try the strategy for yourself (risk-free!) using the Investopedia Simulator.)

10. Iron Butterfly.

The final options strategy we will demonstrate here is the iron butterfly. In this strategy, an investor will combine either a long or short straddle with the simultaneous purchase or sale of a strangle. Although similar to a butterfly spread, this strategy differs because it uses both calls and puts, as opposed to one or the other. Profit and loss are both limited within a specific range, depending on the strike prices of the options used. Investors will often use out-of-the-money options in an effort to cut costs while limiting risk. (To learn more, read What is an Iron Butterfly Option Strategy?)