Stock Option Trading Strategy (2024)

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Which Stock Option Trading Strategy Works Best?

The best stock option trading strategyis one with a high degree of certainty for consistent profits. Toachieve this, you should be prepared to accept a profit level that isless than the maximum potential.

This is vital.

There is a saying amongtraders that "greedy pigs end up in the bacon factory" and there is nogreater temptation when your positions are profitable than to want tosqueeze as much as possible out of them before closing out. In manycases, this is where profits turn to losses.

If you can master the artof taking some profit at the right time and then moving on, you have a far greater chance of success. But for this approach to work over the long term, you need an options trading strategy that has a proven success rate.

If you're taking small profits on many positions, a large loss on just one of them will send you back into negative territory.

Understanding risk vs reward ratios, along with profit probabilities, is crucial.

A Directional or Non-Directional Stock Option Trading Strategy?

Next thing to consider is which strategy best fits your preferredtrading style. Do you have time and inclination to watch your computerscreen all day, or is your lifestyle better suited to just checking yourpositions for a few minutes at the end of each trading day?

When you place directional trades, this means you have a viewwhich way the price action of the underlying is about to move. Yourstrategy might be simply to purchase calls or puts with target profitsand stop losses.

But many a trader has been "stopped out" due to marketvolatility just before their options positions then took off in theiranticipated direction. It takes a certain mindset devoid of emotion toaccept these situations in the belief that it will all average out to anoverall profit.

Directional plays also include swing trading techniques, following the trend while staying alert to potential reversal signals, usingdebit spreads, credit spreads and some ratio spreads.

Because they rely upon a view of future market direction, there is agreater degree of uncertainty associated with such trades andconsequently, less chance of profits.

A more effective stock option trading strategy may be to use Non-Directional positions.

The options straddle and the amazing Victory Spreads are examples of this.

However, there are some great range trading strategiesthat are also non-directional in the sense that they only require theunderlying stock to remain within a predetermined trading range for afew weeks in order to realize a profit. You can explore these on the option trading strategies page.

The beauty of range trading strategies, is that profits accrue ona daily basis from what is known as "theta" or "time decay".

There isan optimum time to put these on and you should also be prepared toadjust your positions should the price of the underlying come too closeto either of your range boundaries.

When you set up these positionscorrectly, your daily profit accrual is guaranteed. It then simplybecomes a matter of when you choose to close out for a profit.

All thisis explained fully in the Trading Pro System videos. Once you have seen these and other associated educational material, you won't see option trading the same way again!

Advanced Stock Option Trading and Techniques

If the above all seems "ho-hum" to you, then you might be qualified to consider more advanced options trading strategies. These include arbitrage trading opportunities.

Arbitrage trading is a technique whereby two different financial instruments are traded as one pair, with the understanding that during a given period, the profits on one will outclass any potential losses on the other.

This pairing could take the form of options positions on two different indexes which consistently move in a certain relationship to one another.

Or it could involve an options position in combination with either a futures or spot forex position. The arbitrage profits here, come from the difference in how options are valued in comparison with the price action of the underlying.

The advanced concept of arbitrage trading is covered in great detail, in the Near Riskless Trading course.

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