As an options trader, you have to quickly learn what I consider the most successful options trading strategy: Patience.
Yes, options trading is a short-term game, and when you time it right, you can see some very large returns. But you still have to be patient.
Analysis allows me to be patient
I combine chart analysis with option probability odds/statistics. This is a formidable duo that not only gives me a view of what is happening now, but also what I can expect in the future. My timeframe is very short – two weeks to two months. By analyzing chart patterns and then a trade, I have the confidence to be patient once I put on a trade.
I am what many consider a swing or position trader. I wait for a trade to fulfill a price move or reach a specific price. The trades may not (and usually do not) get off to a fast start. My trade ideas are mostly at-the-money plays with very little speculation (other than a small percentage out-of-the money). I am not looking for a huge move to ensure my trades pay off.
This approach is particularly smart in the current market conditions. The low VIX means options are cheap right now; the expectation for market movement is quite small; and we are in an ideal stock picker’s environment. I don’t have to go too far out on the risk curve to make a decent return.
Two examples of this successful options trading strategy
Recently, I had a play on Netflix. I bought the Dec 190 call at 8.40, because the stock was flirting with the 20 ma and 50 ma, two areas of strong support. Naturally, the option lost some value (this was all time decay; at the time Netflix was trading at 179 or so).
There was nothing wrong, the stock just had not moved yet! I took more time, giving me a wider berth to be wrong for a short period of time. My patience paid off. The stock bolted higher, and I ended up selling this option last week at 15.2. My successful options trading strategy worked beautifully.
Sometimes I don’t have a big payoff, but I use the same strategy to cut my losses. When I put on a trade, and see a drop in the price after a couple of days, I don’t immediately cut bait and move on. I will analyze what’s happening more carefully.
First, I look at the chart. If I see a breakdown, it’s time to exit. This happened last week on a Celgene trade. I bought the Nov 140 calls at 4.25. After falling through the bollinger bands and closing near lows, it was time to cut and leave. (You can see this move on the chart below.)
No, I did not bank a big win. But I still consider this a great example of my successful options trading strategy. I was able to cut my losses and get out before things got worse.
I hear from many traders who tight with their stops. Taking a 10-20% gain is nice, but are you leaving money on the table? Remember, you have “options with options”. Don’t give up your leverage – look at the charts for guidance.
If you’d like to learn more about this successful options trading strategy and analyzing charts, consider scheduling a one-on-one coaching/mentoring session with me. Email me for more information – bob @ explosiveoptions dot net.
Copyright: antonioguillem / 123RF Stock Photo