A Beginner's Guide to Options Trading Strategies

Focus: OPTIONS

For the benefit of all newbies still learning about options, Fred Oltarsh at Options Strategy Network breaks down what he believes any options trading analysis must begin with and offers a number of strategies to consider.

Options trading provides the opportunity to profit from numerous scenarios. Given a market bias, Options Strategy Network can usually devise an options trading strategy that is compelling for the trader and mentor. We teach that analytical skill during our mentoring sessions and there are a few examples below.

Any options trading analysis must begin with an evaluation of implied versus historical volatility. This analysis provides the foundation for determining where options trading opportunities may exist. The next step is to review the implied volatility skew. The direction of the skew is a strong indicator of what type of trading strategy might be most effective given one's market bias. Options trading strategies are varied, but here are a few one may consider.

Multitudes of options traders consider selling premium a strategy that has the greatest chance of profitability. There are certainly times when one wants to be short volatility, but the risk:reward ratio of the strategy is often difficult to comprehend. In the latest move in both stocks and crude oil, those with a short options strategy typically experienced tremendous losses. Many hedge funds with excellent trading records found that their use of leverage was disastrous.