Your first Option Trade

First Trade is your first option trade

What did we consider when we made our first trade? We trade options because they have better odds to realize a profit than with stocks. You have to look for the right  opportunities and have to decide whether we buy or sell options. We also look at other factors as Volume, liquidity, Implied Volatility, and Probability of Profit before we enter a trade.

We want to trade only liquid options. These are options which are easy to sell and to buy. To find these we searched for stocks that has options. We selected around 50 stocks We entered them on our watch list and followed them closely. Just to get an idea how they perform under different market conditions. We know that as we stick to the most liquid products, we only will have to give up a little edge when getting in and out of our trades.

 

Better odds with selling options

If you buy and option you only can make a profit if you are right about the direction as well as on the magnitude of the move. The big question is, How fast will the market move to reach your target? Will it take 3 days or 6 months? In the world of options trading just one day can make the difference between profits and losses.

Therefore we like to be on the other side. We like to sell premium. You will receive a credit when you sell an option.  If the stock price doesn’t move much the option price will decrease. The option has less time value we say. Then you can buy the option back for a lower price.
If the stocks moves away of the strike price, the option value will drop. Does it move towards your strike it only cost your money if it is above the strike price plus the premium you have received.

Be consistent and stay small

It is much more likely that you make a profit with selling options than with buying options. Of course you start small. You trade options which are derived from cheap stocks and you don’t trade a lot of contracts per trade.

You might see more than one opportunity in which you want to trade options on. Set up positions with the same amount of capital for each trade. Trading in smaller equal sized chunks can help you to be a successful trader.

You are ready to make your first trade. You just have learned that selling an option provides you the highest probability of success.

 

First trade is selling put why?

You want to Sell a naked put when you expect the stock will rise. When you sell a put, you are anticipating that the stock price will go higher. Your are bullish and expect that the stock price will rice.

You have the same expectation when you buy a call option. The difference, however, is that people who are buying calls have to deal with time decay. The stock price needs to go up enough to cover the time value in order to make a profit.

 

 

Conclusion for making your First Trade

You are ready to make your first trade. You were looking on stocks which you have entered on your watch list and has high volume. Then you found a stock you like to trade. It moves a lot, because it’s volatility high you can sell it for a fat premium. You choose option with has the ability of around 68% being out of the money. To reduce the risk you are considering to buy a further out of the money option.

 

 

 

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Originally posted 2014-01-19 15:25:05.

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