how do people decide what options strategy to use?

C

chiefraven

i know there's strategies for each type of market... depending on your view and bullish/bearishness.

for example for moderately bullish market, there's bull call spread, bull put spread... etc etc

and there's like 12 strategies for LONGS, 12 strategies for short.... 12 strategies for neutral market..... (12 is of course just a number i used, some have more, some have less)

But say you are in a moderate bullish market and you know you want to pick a strategy for a moderately bullish market... and there's like 4-5 strategies taht fit that category.... how do you decide which one to use?

do people and firms usually just use their software to calculate everything out for them and pick the one that will produce the best result?

ps. anyone know of a good options trading forum or chat room?
 
Quote from chiefraven:


But say you are in a moderate bullish market and you know you want to pick a strategy for a moderately bullish market... and there's like 4-5 strategies taht fit that category.... how do you decide which one to use?

do people and firms usually just use their software to calculate everything out for them and pick the one that will produce the best result?

ps. anyone know of a good options trading forum or chat room?
More...

The only way to 'decide' rather than guess which one to use is to understand options, how they work, and how to use them. To blindly adopt a strategy because someone on a forum tells you do do so would be very foolish.


You are in the best forum. Have a little patience. Look through older threads. for information

***There is no 'best' strategy. Don't believe anyone who tells you otherwise. A great deal depends on your objective, tolerance for risk, and investment objectives. How can anyone decide those things for you?

If you make a directional trade (bullish or bearish), you must have an idea where you expect the underlying stock or index to move.

There is no point in buying a 45/50 call spread if you believe the stock is going to rally from 38 to 42.

You must also have a time frame in mind. No one can make that judgment for you. If you expect the move to occur before the end of October, then the correct expiration to choose is NOV, not Sep and not Oct.

There is a whole lot more to options trading than just picking a 'good spread for a moderately bullish outlook.'

If that's not enough, you must consider risk and reward potential. Do you want to sell an OTM put spread and have a high probability of earning $50 (risking $450), or would you prefer to buy a call spread, risking $200 to make $300?

Decisions decision, decisions.

Suggestion: Learn about options first. Trade later.

Understand how options work. How else can you decide on a strategy to trade?

Mark
http://blog.mdwoptions.com/options_for_rookies/
 
Good advice from Mark.

Of course there's volatility too... where it is and your best guess of where it's going. That can have a major bearing on selection of strategy.
 
well i was wondering how firms trade options... or perhaps a proprietary trading firm. i understand that if you're just a beginner starting out and still learning about options... that people would generally pick one strategy to learn and test out. or perhaps find one they are comfortable with.... but what about firms?

i mean for a moderately bullish market, there's multiple strategies ... for example.. bull call spread, bull put spread... etc etc... but since there are multiple strategies for each market sentiment. how do people determine what's better ? eventhough there's like 4-5 strategies generally used for that type of market?
 
Options are complex so there's no short answer. But I'll try :)

Each option strategy has a somewhat unique risk/reward profile. Apart from utilizing those that are in your comfort zone, you also need to use those that fit your ability.

If you're good at picking 5-10 pt moves, you want something that captures that gain (long options rather than capped upside/downside verticals, ATM calendars, etc.).

If you're really good at picking smaller moves you might favor ITM verus OTM longs.

If you're good at picking range bound then you might favor ATM calendars, etc.

If you're good at identifying IV levels such as post earnings announcement, you'd want something that captures IV contraction.

Etc.
Etc.
Etc.


And if you can't identify squat, there 's always the games at Pogo.com :D
 
all those strategies can be profitable or unprofitable. The thing that separates rather it's profitable or unprofitable is the trader that trades it.

Each firm or trader decides what type of trade they like, and trades that trade/strategy. (at least successful ones).

You have to figure out what you're willing to accept risk to reward wise, find a strategy that suits that and trade the bullish variety in a bull market and the bearish variety in a bear market and the range bound variety in the range bound market.

But what you can handle is the most important part.
 
If you think a stock is going bullish I'de check the IV first and if it's low enough, offering you a good risk/reward ratio I'de just purchase a few calls on it.

Theres a few great low IV stocks I've found where the risk is pennies on the dollar. Buy a couple puts, buy a couple calls for dirt cheap, give it some time to move, and cash in big when it rallies.
 
Better to build a portfolio of greeks IMO (1st and 2nd order) than trying to pick out all the different strategies from one another
 
Quote from chiefraven:

well i was wondering how firms trade options... or perhaps a proprietary trading firm. i understand that if you're just a beginner starting out and still learning about options... that people would generally pick one strategy to learn and test out. or perhaps find one they are comfortable with.... but what about firms?

i mean for a moderately bullish market, there's multiple strategies ... for example.. bull call spread, bull put spread... etc etc... but since there are multiple strategies for each market sentiment. how do people determine what's better ? eventhough there's like 4-5 strategies generally used for that type of market?
More...


Modestly short delta, modestly long vega, theta positive.
 
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