Tips To Make Better Options Trades
Tips To Make Better Options Trades
Buying options by the traders is always being considered while keeping the focus on the premium paid rather than the potential returns. Whereas this is important information in terms of making a calculated trade, many options traders tend to lose sight of the probability of the market reaching and exceeding its position's strike. The average monthly range of the market number provides perspective on two important elements of an options trade: whether volatility is expanding or contracting and whether the market has a chance of reaching and exceeding the breakeven point of the position.
What Is The Probability?
It is commonly said that the majority of options expire worthless. If that is a true statement and you are trading a position that is long premium (i.e. buying a call or a put), you need the market to have a chance of reaching a price that will make your option position profitable. When considering an option position, it is important to consider if it is probable that the market will reach that point. Just because the premium paid is cheap or under priced does not make the trade a good one, especially if the market has little or no probability of reaching that goal.
Calculate the Average Monthly Range
To calculate the average monthly range, all you need is access to reliable historical prices. For any stock, you can get historical open, high, low and closing prices for a given date range. This will give you all the key numbers that will be used in the calculation - the high and the low for each trading day. To calculate this average for a given period of time, subtract the low from the high for each month to get that month's range. For the time frame, add up each month's range and divide by the number of months.
Select a Time Period
Generally, it pays to look at a time frame of twice the length of the option position you are considering, and then break this up into two separate blocks of time. For example, if the option you are considering has three months of time to expiration, look at the average monthly range of the last three months, the three months prior to that and the last six months.
Apply the Strategy
Generally, an Option Strategy involves the simultaneous purchase and/or sale of different option contracts, also known as an Option Combination. There are such a wide variety of option strategies that use multiple legs as their structure, however, even a one legged (Long Call Option) can be viewed as an option strategy. That is, if a trader thought that Coca Cola's share price was going to increase over the next month a simple way to profit from this move while limiting his/her risk is to buy a call option. Of course, s/he could also sell a put option. If the market price of an option contract implies that it is 50% more expensive than the historical prices for the same characteristics, then you may decide against buying into this option and hence make a move to sell it instead.
Words of Caution
In certain markets and at certain times, by using the average monthly range to choose options strikes, we may find that the implied volatility has pushed the option premiums to unreasonable levels. This causes smaller traders to buy strikes that are too far out of the money, simply because they want to be in a given market and have limited capital. In these cases, the use of the average monthly range should be telling you to either avoid that market, or to use a strategy that can get you closer to the current market price, such as a debit spread (bull call spread or bear put spread).
The Debit Spread
In certain market conditions, the debit spread gives the investor a limited risk position and gets closer to the current market than buying an option outright. In exchange, the investor sacrifices unlimited gains for a limited, but defined, maximum gain. This is often a favorable tradeoff, and will keep the investor grounded in the reality of what the market is more likely to do. The advantage of unlimited gains is normally only effective if the market were to make a rare historic move.
Option trading is still one of the safest methods of trading although it considered risky by many. Although, there are credit ratings of different firms based on the liquidity of options. Being an underlying asset, buyer of the option gains the right, but not the obligation. In India, the biggest player in options trading is National Stock Exchange and Bombay Stock Exchange. Since options listed in NSE & BSE separately, it results in tough competition from each other. Exchange having more volume will have more liquidity. So keep these things in mind while trading in Options. Eben Pagan's 3 Simple Tips to Increase Conversions and Make More Money Online People from all the regions can participate in online gambling SEO techniques: For your online presence Online For Some Authentic Websites Selling Dasuquin MSM Find the right way to make money online Enjoy and Watch Soul Surfer Online – 2011 Watch Titanic Online How do lazy people get richer and richer by making money online? How Can You Watch Water for Elephants Online – 2011 Earn money online for a beginner like me Watch Chicago Bulls vs Atlanta Hawks Live Online NBA Links Play Casinos online THe Chatroom based Online Therapy