How to Use Options Strategy in Your Trading

Introduction to Options Strategy

As a trader, profitability is the most important thing for you. Without profits, then you are not able to sustain your account for long. You want to make sustainable profits for a long period of time.

Making very huge profits is not sustainable because it puts you in a position of high risk and high reward.

As a trader, you need to have the knowledge of various trading strategies; this will help you make money in periods of uncertainties.

One way of achieving this is by combining options strategy in your trading.

#1 – What Are Options?

Options in trading is a common trading strategy among many traders and investors. An option gives you the obligation (but not a right) to buy or sell an item/share.

For instance, assume you are a lemon farmer and we are a lemonade maker. We profit more when the price of one lemon is $1. We do our analysis and conclude that in a month’s time, the price of a lemon will be $3. To reduce our risks, We promise to buy the lemon for $1.

We also pay you a premium for that option. In the next one month, if the price of the lemon is $3, then we will have the option to buy the lemon for just a dollar. As a seller, you will have two benefits:

  • You have the premium
  • You are guaranteed of a market for your lemons.

Remember, we have an option not to buy the lemon. In a nutshell, this is what options are. It works in all areas of the market.

#2 – Forecasting

To be successful with your options strategy, you need to be good at forecasting. You should be able to tell the direction a certain item will trade at in a given period of time.

As a day trader, you should be able to tell how the price of your instruments will be.

For instance, as an oil trader, you need to have a good idea of how the oil will move within a given period of time. A good example is what happened a some times earlier: OPEC agreed to an oil freeze which was also supported by Russia, and Oil prices went up.

As a wise oil trader, you should have forecasted that the upward trend won’t last a long time because of how OPEC and other oil producers work. You also need to be good at technical analysis. Technical analysis enables you to use various technical indicators to predict future movements. By combining both technical, fundamental, and sentimental analysis, you will be at a good position to predict how the price will move.

You also need to understand that there is no perfect way of predicting. This will help you reduce your risk exposure.

#3 – Binary Options

There are many types of options strategy that you can take advantage of . One of the most common type of options is Binary Options.

In these types of options, the concept is the same. You take an instrument, such as a currency pair and then predict whether it will move up or down at the expiry period. If it goes your way, then you will make the money but if goes against you, you will lose the entire trade.

Binary Options gives you an opportunity to trade options with a short expiry period. Some brokers even have expiry times of less than 60 seconds.

As a trader, you should avoid very short timelines. This is because no one can predict the direction of an asset in the next 30 seconds. Even in a bullish environment, the financial instruments move up and down all the time.

Also, you should take time learning the best binary options strategies before you put your money into it.

Options Strategy – Useful Links

  • Learn more about options strategy on Investopedia
  • Read more about options strategy on CBOE

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