A Beginner's Guide to Options Trading Strategies

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. When analyzing the value of selling options, one should consider the implied versus historical volatility, fundamental factors-which may surprisingly come into play-and whether there is significant chance for a breakout on a chart. By analyzing these factors, one will potentially reduce their risk substantially.

At Options Strategy Network, our focus is not on vanilla short options. Our goal is to establish an options trading strategy which provides an inherent statistical advantage to the trade. By using the Black Scholes (or similar options pricing model) as a guide, we take one's bias and develop a strategy a trader or fund can be comfortable with. To read the entire article click here.

By Fred Oltarsh, Proprietary Trader and Editor, Options Strategy Network