The best options trading strategy is not a mystery.
Both beginner and advanced traders can learn how to be consistently profitable when selling options in a relatively short period of time.
In this article, David Jaffee of BestStockStrategy.com provides a summary of his options trading strategy.
This strategy should allow even beginner traders to win up to 98% of their trades.
Keep reading to learn options trading for dummies.
Should you buy or sell options?
When trading options, you can either buy options or sell them.
In general, David Jaffee prefers to sell options because selling options offers a higher probability of profit.
Depending on which options you sell, it’s not uncommon to win up to 98% of your trades.
When you buy options, your probability of profit is going to be much lower.
As a result, when you win, you are going to have to make significantly more money to compensate for the losing trades.
When you sell options, it’s similar to turning yourself into a casino or an insurance company.
The probabilities are in your favor when selling options, and you can better manage losing trades.
Beginner Options Trading Example
Around August 20, 2021, David Jaffee provided an example of options traders for beginners by focusing on Amazon.
At the time, Amazon’s 52-week high was about $3773 and the company reported earnings about three weeks prior.
After earnings were reported, Amazon stock fell about $230 and was trading around $3250.
As a result, Amazon was trading around $500 off its recent 52-week high.
In that situation, David Jaffee, who is frequently recognized as the #1 options trading coach, recommended selling put options on Amazon.
By selling an out of the money put option, you agree to buy stock, and collect premium, at a lower price than it is currently trading at.
You also get to choose which strike price you want to sell.
For example, if you agree to buy Amazon at $2900, then you will collect significantly more money than you will if you agree to buy Amazon at $2500 because you are agreeing to buy Amazon at a price that is $400 higher.
Learn How to Manage Risk When Trading Options
David Jaffee recommends selling options that are further out of the money because it reduces stress and mitigates the likelihood that the position will be challenged.
In the example above many people would prefer to sell the $2900 put option and receive about $15 per share, or $1500 per contract.
However, David Jaffee would feel much more comfortable selling the $2500 put option and collecting about $400 to $500 for every contract sold.
The reason for this is that the $2,500 strike will get challenged much less frequently. As a result, there is less stress when trading that option.
Which Stocks Should Beginners Trade?
David Jaffee keeps a small watchlist of about 15 stocks and gets comfortable with their trading ranges.
Once he recognizes that one of those stocks is trading at the low end of its range, he will then sell a put option.
If one of those stocks is trading at the high end of its range, David Jaffee will then sell a call option.
David Jaffee has taught this options trading strategy to more than 1,500 students, and many have found options trading success.
Call Options vs. Put Options for Beginners
With call options, David Jaffee recommends being more careful.
Call options have a higher probability of getting challenged because the market has a tendency to go up more than it goes down.
As a result, if you were to sell a put option that is about 10% to 15% out of the money, David Jaffee recommends selling a call option that is about 20% out of the money.
If that call option ends up getting challenged, you can feel more comfortable because that stock is likely to, eventually, pull back and fall below the strike price.
The velocity of risk is more to the downside than it is to the upside, which means that a stock might go up more than it goes down, however when it goes down, it tends to go down extremely rapidly.
When a stock is going up, it tends to make a “staircase” pattern where it goes up slowly. As a result, despite the call options getting challenged more frequently, call options also tend to be easier to manage.
There is a saying in the market that the bull takes the stairs up, but the bear jumps out the window.
That’s why when you sell a put, you are able to collect more premium than you are when you sell a call (because the velocity of risk is to the downside).
If you sell a call option, even if that position gets challenged, then as long as you keep rolling out that position and collecting more premium, you can feel confident that it’s just a matter of time before you make money in that position.
Learn How to Trade Options for Dummies
This article provides a superficial overview to options trading for beginners.
David Jaffee offers a comprehensive online options trading course that covers every aspect of options trading in-depth.
Both beginner and advanced traders can find success by implementing David Jaffee’s options trading strategy.
Visit BestStockStrategy.com to learn how to trade options for dummies and receive $400 of free options trading training materials.