Sometimes in a long bull market trend, like what we’ve been experiencing, it is easy to overlook protecting options trades and stock portfolios against downside moves. It is easy to get complacent whenever you see the market shake off any negative news and maybe only with a pause it goes back up, but eventually the market will have a correction. Of course one of the best ways to protect yourself is to have some protective measures on ahead of time so that you are not scrambling to protect yourself once the move is in play. In my mind one of the best ways to do this is to consider purchasing long verticals or long calls in the VIX options two to three months out in time. Considering VIX options currently in late May or early June would be attractive. What I like to do is wait for a day whenever the VIX pulls back a bit and then look at buying options at 2 to 3 points out of the money and a few more points out of the money. For example if the VIX is at 11, you may want to consider buying 13 call options and also calls at maybe 17 or 18. I think that those are all attractive levels to look at to protect yourself. You will see that the VIX moves very quickly whenever the market makes down moves and often you have many chances to be profitable in these options on the market pullback, particularly a quick one, and you can do this by either purchasing long calls or long call verticals, your choice. Of course long call verticals can lower the cost of the trade but with slightly more brokerage fees.
When you do strategies on option plays such as butterflies or calendars, you can also consider buying an out of the money put below a position to protect yourself if the market makes a quick pullback. Once the down move is underway look for an opportunity for a slight pause or pullback in the VIX to make your entry. You can still protect yourself even on some slight spikes, and this was just a few of the ways you can give yourself some peace of mind against the coming downtrend or a quick bearish market moves. We at Sheridan Options Mentoring are prepared to help with this and further developing your options trading business.
Where to start? This is often the question many beginners of option trading ask. I’ve listed here five tips that will set you on the correct path to profitable option trading.
1. Understand how options work and move. There are many free online resources that you can use to learn about options and how they work. It is fundamental that you understand they are derivatives of another product and how that underlying product’s price movement affects the movement of the options you’ve bought or sold.
A solid understanding of the exponential benefits and dangers of trading options is key.
2. Volatility. Understanding how volatility works and how it affects the pricing of your options is very important. Volatility is really the main driver of option pricing besides the options in the money premium and time premium. Entering and exiting a trade as well as choosing what strategy to use all revolves around your understanding of volatility.
3. Know your underlying product. Whether you’re buying or selling options on an index or a stock, it is imperative that you understand the underlying, how it moves and what news may be coming to affect its price movement. Study the stock or index for news that you feel will make it move hard in one direction or another or non-directionally. That requires an understanding of what the drivers of the stock’s pricing are.
4. Setting reasonable goals. Once you know the options and the underlying that you are trading it is important to set reasonable trading goals. How much money can I reasonably make? How much risk do I want to take ? How does this affect my overall account? These are all questions that you need to answer before you begin trading options strategies.
5. Have a plan. Nothing is more important in any kind of trading than having a good plan. When will I enter? When will I exit? Profit goals and adjustment plans. How will I manage it whether it goes for or against me are all fundamental components of a good plan.
At Sheridan mentoring, every day we work with traders to help them develop these skills. Please take all these tips and apply them to your options trading business.
When you are “bullish” a stock, it is your opinion that the stock is going to go up in price. While you could simply buy the stock, it is often more expensive than using a bullish options trading strategy. You can have a lot more leverage, meaning more potential reward with spending less money using options by simply buying the stock. There are many options strategies to employ when you have a bullish sentiment.
One option strategy you can use, is to buy a call on the stock above where it is currently trading. If the stock trades higher and goes through the call strike by more than you paid in premium you will be profitable. You could also use a call vertical. The call vertical is when you buy a call at a lower strike then you sell a call at a strike two or more higher. By doing this you still get the advantage when the price goes through the strike but you decrease your cost by selling a further out call. Of course the further out call will cap your gains at the strike you sold, but this is a simple method to reduce the cost/risk whenever you buy a call vertical. Another bullish strategy is to sell a put vertical. Meaning you sell the put closer to the money and buy another further away from the money as a spread. If the price of the stock stays the same or goes higher, you make money. If the price declines you would have to close or adjust the trade.
When and how you buy these different option strategies and how to manage them is what we teach at Sheridan mentoring every day. With our options education you can learn to take your sentiments whether bullish or bearish and know how you can use options and the leverage they afford, to your best advantage.