Options trading provides tremendous leverage versus stock trading, but you still need to choose high-probability trades (at least if you want to sleep well at night and grow your portfolio).
Even with the leverage of options on your side, options traders who want to stay in the game over the long-term need to choose high-probability trades.
I define a high-probability trade as one that is both likely to work in my favor AND work over a long period of time.
Sometimes a high-probability trade has a short timeline – days instead of weeks. For example, if a chart is showing that momentum is strong and pushing up the stock’s price quickly, I may be able to bank a nice win sooner quickly.
This makes sense, right? Why gamble your money if you are not likely to win?
Do not rely on an option’s leverage to for winning trades
Well, some options traders rely on the leverage that options provide, which is a recipe for disaster.
Why do options provide such tremendous leverage over other investment vehicles?
- When you buy one option, you control 100 shares of the underlying asset (an equity, ETF, commodity, etc.).
- That one option is relatively inexpensive compared to the stock price.
- The option’s value moves at a significantly faster rate than the underlying asset. For example, the stock might move 2% in value, but the option could move 200% in value.
For a relatively small investment, you can reap tremendous profits.
Always choose a high-probability trade
A higher probability trade can also continue working in your favor even if conditions change. Maybe the underlying stock goes nowhere for a bit of time and the decay factor starts to kick in.
Perhaps the stock moves lower before it moves higher. The signals you rely on still point to a move higher, so you stay with the trade longer and let it play out.
If you’re curious, I use a combination of fundamental and technical analysis to find high-probability trades, criteria like technical buy signals, relative strength, past performance, and earnings-related data. You may have your own criteria. Use the signals that work best for you.
It may seem ridiculous to choose a low-probability trade. Might as well hit the roulette table!
However, some traders are convinced a trade is going to work out and deliver massive profits. I’m guessing those traders are desperate for a win, any win, because big wins on low probability trades work out so rarely.
Trading options is not the easiest way to make money. Grab every advantage you can, starting with choosing high-probability trades.
