To Trade or Not to Trade Options
01/18/2016 8:00 am EST
Options trading can increase leverage and enable traders to position themselves for large moves with a limited amount of capital, so Fred Oltarsh, at Options Strategy Network, outlines the essential factors to consider before establishing an options position.
There are multitudes of reasons to trade options contracts. Usually the culmination of making the trade involves numerous factors. Five reasons to make a trade can be met conversely with a million reasons to skip a trade. The following, however, are essential factors to consider before establishing an options position.
Market Bias: if one has a strong market bias (one could consider a volatility bias as well) then it makes determining whether to establish an options position much easier. Whether one’s inclination is due to fundamentals, charts, or a combination of both, options trading can increase leverage and enable traders to position themselves for large moves with a limited amount of capital. There are numerous options strategies which can meet one’s need for establishing an options position to meet a directional bias. Without a directional or volatility bias, however, staying on the sidelines is a good idea.
Liquidity and Expense: if one has determined that they would like to establish a position, one should be sure that the market they are trading has adequate liquidity and that the commissions/expenses are reasonable. SPY (SPDR S&P 500 ETF) is a perfect example of a liquidly traded product. However, depending upon the strategy, commissions can become a large percentage of the relative cost of the trade. For example, if one were to purchase a $100 option in a one cent wide market and the commission was $1.50 then the commission to get in would be 1.5%. That is pretty reasonable. When markets are wider and traders give up edge, establishing positions can become an expensive proposition. Liquidity and expenses are amongst the most overlooked factors in trading stocks, options, and futures.
The Right Option Strategy: once a trader has established a market bias and determined that liquidity exists and the expenses of the trade are reasonable, one should be sure that the chosen strategy is appropriate for one’s trading goals. To read the entire article click here…
By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network