The Secret to Successful Options Trading
I pondered as a kid why it is so difficult to make money on the stock market. After all, can you not just buy something and sell it for a little more?
Now I’m finding a great many people try to read into options trading much more than they need to. They seem to think there is some kind of magic to it. Stocks, being the underlying asset for options, only go up or down, usually in both directions on any given day. And they move that way many times during the day. I cannot ever recall a popular stock standing still all day. Our preferred stock, SPDR S&P 500 ETF Trust (SPY), is very forgiving and delivers even if you initially get the direction wrong. Just buy it and put it up for sale for a little more. Take the profit and do it again.
Sure, sounds simple, doesn’t it?
Truth is, we are hindered by our own perceptions of where we see the market headed. We believe the stock will move in a certain direction, so we act on that intuition. If it turns on us, we’re quick to take a loss if we don’t see immediate results. Yet had we waited long enough, we likely would have made a profit.
Try this little back test: buy at market open either direction “at the money” options on SPY, three to nine days until expiration. Then see if/when it would have delivered a scant 5% gain. In all likelihood, it would have paid off fairly soon, even if it went against you at first. Trade both directions with calls and puts, setting a 5% gain from the opening bell, using the average price to buy in the first two minutes of trading.
The trick is to remove all emotions from your trades. Emotions belong in your love life, not the stock market. Only trade with modest funds that will not adversely affect your lifestyle, should the inevitable happen. After all, your investment will always be in a state of flux until you sell. Ebbs and flows. Once in a rare moment, an outlier event moves the market completely against you, pulling down. It happens. The key, however, is to take small gains along the way, ride the wave as you can but prepare to exit your position when you are happy with the returns. Not every trade needs to be a double-digit percentage gain. If you’re looking for home runs, consider that some of the greatest baseball players also hold the record for striking out the most. It’s the singles and doubles that will ultimately win the game.
All that said, if you can put the odds in your favor by studying the fundamentals, married to your technicals, you will likely fare much better. And that is where we come in. Jon Johnson and I use our combined 42-plus years of market experience to deliver you the most likely trades using key indicators, exclusively found with DayTradeSPY. We interpret the propensity of market direction using our unique combination of exponential moving averages, chart patterns, support and resistance, Fibonacci, Andrews Pitchfork and more. We anticipate moves from a fundamental basis, combined with technicals to provide high probability trades. And that, friends, is the secret to successful options trading. Maybe it wasn’t so much that I was naïve in my youthful market musings. Maybe I was actually onto something.
The secret — summarized:
- Figure out the broader term market direction.
- Using shorter-term technical indicators, enter on breakouts.
- Buy “at-the-money” options with three to nine days until expiration.
- Immediately put them up for sale with your modest gain.
- Sit back and let the market work its magic.
You’re welcome.
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Create great trades!
Hugh
