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Market AnalysisTechniquesTechnical Analysis versus Fundamental Analysis has been discussed as an all or nothing proposition. Either you subscribe to one or the other, but astute option traders use both technical and fundamental analysis. You may see a great chart pattern that technical analysis suggest that the markets going up in a big way but fundamental analysis shows that the company isn't making any money and sales are falling. In this case you shouldn't buy this call options on such an underlying. Technical analysis is simply a tool to confirm other fundamental data and other information's such as statistics to allow an edge on a give options trade.
Options AreAbout Volatility
Options are best defined as a financial instrument that represents the volatility of of a given underlying. The way options are priced and how option prices changes is a function of volatility. Volatility is created by movement in the price of the underlying. More price movement equals more volatility. More volatility equals higher option prices and the converse of that is also true. This fact is important because volatility is the risk that the stock represents .Volatility is measured by Vega which is defined by the theoretical value of an option when volatility changes 1.00%. In other words you get what you pay for when you buy or sell an option. Cheap options have a less likelihood of expiring in the money while expensive options have the highest likelihood. Some sell cheap options with little chance of the option expiring in the money, but if it does the losses can be enormous. A buyer of cheap options is playing a long shot but if the option expires in the money, they will be big winners.
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Options can be successfully traded for a living by accepting the probabilities of option trading and understanding the distribution between winning and losing trades. This "understanding" manifest itself in money management. Successful traders profit on 60-70% of trades, but this modest winning percentage coupled with money management makes for excellent profitability. It's funny to hear claims of 100% returns in 2 weeks or no losing trades in 5 years and so on ... Don't believe it. Part of this may be semantics but it is usually stated in a way to mislead us so we'll buy whatever newsletter or software is being hawked at the moment. Let me give you an example of "semantics". You can get a 100% return with any given option in 2 weeks, but how many of the other stock option positions in the portfolio are losing money? If you have 4 out of 5 stock option positions losing money, a single 100% winning stock option trade will likely still make you a loser. Option trading can be greatly simplified by understanding chart patterns (technical analysis) and being aware of prevailing market conditions. Market conditions should be analyzed using data from United States Government. Avoid opinions and commentary as these inputs will complicate the facts. Trade as a business with confidence. Make money if the market goes up or down. Approach the market with no opinion. Why not learn how to trade like the pro's do in a easy to understand video format. Watch the videos of actual options trades being put on.
Options trading explained with 3 fundamental trading pillars : Trading Psychology Trading Method Money Management
Trading Options allow the 3 pillars to be applied with the least amount of mental contortions. While Options provide excellent leverage (allot of bang for your buck), it still allows you to place many orders in different underlying with multiple contracts. This allows you to accept trading probabilities in an actionable way. When you buy 3 or 4 options you accept that 1 or maybe 2 of your stock option trades are probabilistically going to fail requiring you to take a small loss. This acceptance is the "trading psychology" required to be consistently profitable to pay your mortgage every month. Multiple contracts allow for scaling out of winning or losing positions allowing good "money management". Losing positions should be scaled out quickly if not supported by price action and volume of the underlying. Should the trade work, you still have exposure to the trade as you only scaled out and didn't exit. The best option trades usually profit soon after the trade is put on.
The best aspect of trading options for a Living is that it can be boring. The worst time to make trading (money) decisions can be when the markets are open. Emotion will affect your ability to make sound money decisions resulting in loss profitability or losses, which is why 90% of traders fail. A successful "trading method" for trading options can be done end of day or before market open. When the financial markets open, it's time to enter positions that were planned while the markets were closed. It's also time to take profits or losses on current positions as an option trade demands. Option traders are somewhat like a farmers. Crops of " options" are planted when conditions are right. Options that aren't growing are weeded out while options that are growing are taken to market and sold at a profit. The objective is not for a single crop to make you rich but a fertile farm that produces fruit consistently.thank you for reading options trading explained.
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To trade options for a living you need to learn multiple profitable techniques. There are times when the market is in a strong trend which will allow you to simply buy calls or puts and wait for them to profit. However, as is often the case, the markets will have no clear trend and will trade sideways requiring more complex strategies like iron condors that are suited for neutral markets. It's not necessary to study every options strategy, but you will need to have an option strategy for trending and sideways market conditions.
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