Are you ready to get back on track with trading options in 2021 and 2022?
Or maybe you’re an experienced trader that wants to revisit some basic concepts?
You may already know some options trading mistakes you should avoid, but what about things you can do to increase the probability of being consistently profitable while trading options?
Read on to find out the top tips for trading options profitably in 2021!
Trade Small
Make sure your trades are small. As an options trader, it may be tempting to use all your buying power, especially when trading naked options.
Using all your buying power is an extremely risky approach.
Before you know it, a few bad trades can wipe out months of profits.
Since options use significantly less buying power when compared to buying shares of the underlying security, the general tendency is to overtrade and trade more contracts than you should.
By doing this, you’re increasing your risk of being placed into a margin call if the trade does not go your way.
Would you like more tips on how to trade options profitably in 2022?
Choose Stock Options with High Liquidity
As an options trader, you should choose high quality, liquid, underlyings, and make sure the spread between the bid and ask is small.
The illiquidity of your stock options can affect the profitability of your trading strategy because there may be significant slippage when trading and it may be difficult to roll / manage an illiquid underlying.
The true power of options lies in its leverage, flexibility and control to set up positions so that you create a high probability of profit.
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Sell Both OTM Puts and Calls
Novice options traders are sometimes way too focused on how to make money trading.
They tend to sell strikes that are too close to the current market price of the underlying stock.
Additionally, novice traders tend to trade puts, or calls, but rarely both.
It’s best to trade BOTH puts AND calls.
If you believe that a position is oversold, then it may be best to sell a put.
If you believe a position is overbought, then it may be best to fade that move and sell an OTM call option.
As long as the stock price stays within a certain price range (above the OTM put and below the OTM call option strike prices), the options seller will be able to reap maximum profits.
For 1 put option and 1 call option, the maximum profit will be 100 x (net credit received from selling the OTM options).
Even so, David Jaffee does not recommend selling both puts and calls at the same time.
Instead, he believes it’s best to sell a put only when the stock is oversold, and a call only when a stock is overbought.
If the stock price ventures beyond the strike price range, there’s still a breakeven price range that will allow the seller to make a profit.
Any movement beyond the breakeven price range will result in losses.
How can you minimize the risk of this strategy?
Always choose strike prices that are far out of the money when selling options so that you have an adequate safety net.
Are you looking to make 2021 and 2022 a success?
Conclusion
If you’ve started options trading on your own, you’ll realize that there are some strategies that are more profitable than others.
Trading small, choosing options with high liquidity, and selling OTM puts and calls are all part of David Jaffee’s simple options trading strategy that can help you win up to 98% of your trades.
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