The most crucial thing in trading is to have a successful strategy, which means that you should make money when you open an options trade, which means that you can do the same again when you close the trade. If not, your account will go backwards or sideways or even down.
This is all the more important in options because you are trading high-risk instruments.
Options can be complex, but it does not mean that you cannot trade them successfully if you follow some simple rules. If everyone could do this, there would be no point in an options exchange where everyone could post their trades for other traders to close. The buying and selling of options is serious business, with many billions of dollars changing hands each day around the globe. This article looks at two successful strategies for trading options in Australia today.
You can use many strategies in options trading, but it is helpful to start with the high-probability trade. It’s not because this strategy will make you rich overnight. It will allow you to get used to opening and closing trades at the right time so that you do not get wiped out on your first attempt or leave yourself open if there are still more opportunities for experienced traders.
This strategy involves buying calls when the stock price goes up by a relatively small amount. It has a low risk compared with other options because if things change quickly, all you need to do is close your position without any additional loss. Also, even if you bought an option at $6 and the stock drops to $5, there is still no need to close the trade, which means that you will give yourself more time for the price of your shares to go up again.
The covered call
The covered call is another good strategy for beginners, and it works like this: you buy an option and then sell one of the same types and on the same stock. This way, if the price of your shares does not go up by much, then you close both positions, and you make a small profit. If they increase in value, only your long position will be closed at whatever price it reaches. The short position should add to your initial costs to give you a modest profit when all closed. And if the price goes down, both options will also be closed quickly without any additional loss or effort.
On average, this strategy should work well so that you can meet your objectives with greater ease than other kinds of options trading. If you are a beginner and want to ease yourself into the market, this is one of the best strategies you can use. You open an account with an Australian-based broker, like Saxo Bank, and learn to buy and sell your first options.
The iron butterfly
This strategy is a little more complex, and it requires you to have an existing portfolio of shares. It uses four different positions: one long position and three short positions using calls or puts depending on whether you think the stock price will go up or down. The long position should offset some of your risk exposure because it opens before opening the other three positions.
The best way to use this type of trade is to buy call options; however, if none are available at attractive prices, you can use put options instead. You would do this by buying one call and two puts with the same expiration date and underlying share. Then you close all three contracts at different times as they expire – but not all at the same time.
This is another complicated strategy that you should not use if you are a beginner. It reflects the stock price based on an index, interest rates or currency types; then, four positions are opened using calls and puts. It requires that you first decide which direction the price of your underlying asset will go before opening any trades.
The condor is only used when there is limited volatility in the market for your assets, so it can be challenging to make money successfully compared with other types of options trading strategies.