How to avoid the trap that stops most stock traders from being profitable options trading

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Many successful stock traders have tried to make the switch to be profitable options trading “superstars”, but things just didn’t work out. The reason being, they typically brought the wrong game plan and process to the table.

Profitable Options Trading requires the ability to analyse stocks reasonably well, so you would think making the transition should be both straightforward and profitable, if you have had good success picking stocks! However, this is not always the case, and so beyond being able to analyse stocks, what else is needed?

Compare playing Checkers and Chess

Checkers or Draughts, enables the player to move in one direction, and is a little like trading shares in the traditional fashion. That is, you can only profit from a move up in the share prices (let’s put shorting stocks to one side for the moment).

However, by learning how to embrace options, you are effectively playing Chess instead, with strategies that can allow you to profit from a just about any set of circumstances – moves up in price, moves down in price, increases in volatility, falls in volatility, no movement at all in price and so on, and accessing this knowledge is the crux of profitable options trading.

Profitable Options Trading is a 3 Dimensional strategy

Adding to the move in the stock price, up or down, there are two (in fact there are more) critically important elements to consider; Time and Volatility.

Time is one element of trading that carries a guarantee!

That is that time always passes by! This can be an incredibly powerful ally for the right options strategy, or your worst nightmare, if you are in the wrong options strategy – the crux of this being whether you are a buyer or seller of options. As a seller of options, you want time to pass, you want the option to expire, you want to keep the premium. However, as a buyer, the opposite is the case, you don’t want time to pass – try stopping it!

One thing is even more important than time

And that is volatility. Volatility is a massively significant component in options pricing and therefore, your income or risk, when trading options. When selling options, paying attention to this can be the difference between a good and a great trade. Personally and professionally, this has really be a lucrative one for me, with trades in stocks such as Tesla and Fortescue Metals being two very good recent examples, of timing a sale of options in high and falling volatility, to really make over and above returns on those trades. Bare in mind of course, trading and investing does involve risk, hence why it is critically important to be educated on how to do this.

Knowing your outcome

Profitable options trading is not only lucrative but can provide incredible peace of mind, given there are a number of factors that can be clarified and locked in, using the instruments. The Maximum and Minimum profit, the level of Risk and the specific Time Frame, being just some of the key signposts that options can provide, when used correctly.

Learning how to read the signposts is pretty important

No different to driving a car, being able to understand what the signposts are and what they mean, can make a big difference in the outcome of your journey. Profitable Options Trading is no different. Learn how options really work and you can look forward to playing Chess instead of Checkers with your trading and investing activities and the competitive advantage that comes from that. Also, you can enjoy the considerable benefits that correctly applied options strategies can bring.

SOURCE :  ANDREW BAXTER

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