The Best Strategies For Using Trading Options To Leverage Underlying Stock Price
When you first dip your toes into the stock market, it’s like learning a different language. Perhaps, that’s why 42% of Americans don’t own stock.
Despite the barriers and gaps in trading impeding segments of the population, more people are participating than ever. Boundaries are continually being knocked down because of the internet and its wealth of information.
For instance, a resource like Sniper Trades could never have existed a decade or two ago–even as internet use became more prevalent. Only through the ongoing advancement of digital technology have people realized its true power. Thus, the world wide web has created a paradigm shift in the stock market.
Unlike in decades past–when getting involved in stocks required all manner of cloak-and-dagger maneuvering–access to trading is at everyone’s fingertips in 2023.
Namely, automatic order execution and electronic markets have resulted in the following benefits for individuals looking to start trading:
- Reduced fees.
- Increased transparency.
- More information.
- Improved market efficiency.
In other words, these are good times for anyone with trading aspirations. People who’d have previously never gotten a fair shake have the opportunity to grow their wealth and solidify their futures.
We should point out that trading and investing haven’t suddenly gotten easier. The complexities still exist. Rather, you now have more avenues to learn and get involved–but learning and getting involved remain filled with challenges.
After all, the stock market isn’t cut and dry. You don’t simply hand over some money and expect it to pay out at a later date. There are layers–and as you peel back those layers, you create more puzzles that require more pieces.
This preamble brings us to derivative trading–a potentially critical component of your budding portfolio. Specifically, the above paragraphs lead into the options trading tips we’ll provide in this article.
What Is Options Trading And Why Could It Be An Ideal Strategy For You?
This advice will be primarily for people dipping their toes into the options trading waters. Thus, it’s catered to beginners and novices (not necessarily investment beginners, but those just getting their feet wet with options).
Nonetheless, it always helps more seasoned investors to brush up on their core fundamentals to remain sharp.
So–we’ll start by breaking down the basics of options trading before getting into our suggestions. Those with a fundamental grasp of options can skip to our option trading best strategy list below.
Without further adieu, let’s proceed:
An option is a speculative investment–or a bet–on whether an asset’s price will be lower or higher on a specific future date. These tradable contracts don’t require anyone to purchase the given asset.
We’ll use Nifty 50 options as an example. Nifty 50 is the benchmark stock index that funcitions as a stand-in for India’s entire stock market. The available options allow investors to speculate on the index’s future direction.
Below, we’ll delve into some key terms you’ll need to know before following our options trading tips:
An option’s value is derived from other assets. With stock options, the option contract’s value hinges on the stock price in question.
Call And Put Options.
Call options enable investors to purchase a security at a set price by a specific date. Put options are the other end of the deal, allowing investors to sell a security at a given price and date.
The Strike Price And Expiration Date.
The strike price is the set price you agree to when calling or putting. When trading, you have until the contract’s agreed-upon expiration date to exercise an option at the strike price.
The purchasing price of an option is the premium. It’s derived by weighing the price and values of the underlying security.
Intrinsic And Extrinsic Values.
Intrinsic value is the difference between the underlying asset’s strike price and current price in an option contract. Alternatively, extrinsic value involves factors that affect the premium but go beyond the intrinsic value’s scope (e.g., the length of time that the option is good).
In-The-Money And Out-The Money.
These terms are relatively self-explanatory. In-the-money means a security is profitable, and out-the-money means unprofitable. The applicable term will depend on the security’s price and the remaining time before expiration.
With stock options, the underlying asset is the actual stock.
Say you have a stock option to buy 150 shares of Company X at 150$. In this instance, the underlying asset is Company X’s stock.
Underlying assets (or underlying stocks) help calculate an option’s value until expiration.
Why Should You Start (Or Continue) Trading Options?
You may be reading our option trading best strategy article because you’re struggling to turn a profit. That’s okay! Trading is always a learning process.
Plus, you’ve come to the right place to hone your skills.
Are you having doubts about whether options trading is for you? Let us quell those concerns with reasons to stick with options and develop your knowledge base.
Options Are Cost-Efficient.
One of the more attractive features of options is their leveraging power. Investors can procure an options position that resembles a stock position while saving money.
Say you purchase 200 shares of a stock worth $80.
You’d have to pay $16,000–a lot of money for vast portions of the population.
Conversely, purchasing two $20 calls (at 100 shares per contract) would yield a $4,000 outlay. The calculation is 2 contracts x 100 shares/contract x $20 market price. This way, you’d save $12,000 compared to buying the stock itself.
Note that you’d need to invest in a strategically sound option to mirror the stock price–but following our options trading tips will help you do just that.
Options Can Be Risk Averse Compared To Conventional Stock Trading.
Buying options isn’t always risk averse compared to owning equities. However, following the option trading best strategy tips below will make it less risky.
Options don’t require as much financial commitment as equities. They’re also somewhat impervious to the impacts of gap openings (which can be catastrophic).
With options, you have a more dependable type of hedge. Thus, they can be a more risk-averse approach than stocks.
Stocks often have a stop-loss order applied to protect their position to prevent losses below a specified price. This gets complicated and risky because stop orders occur when the stock trades below or at the order’s predetermined limit.
Options Offer Better Potential Returns.
Fine-tuning your options trading strategy (which you can do by following our insightful options trading tips) offers superior returns to conventional stocks. The math is straightforward. You’re investing less while making the same profit, meaning you receive a higher percentage return.
Options Are A More Strategic And Versatile Trading Approach.
Options offer multiple ways to recreate other positions (or synthetic positions).
Synthetic positions offer investors several alternatives to reach identical investment goals.
While advanced, synthetic positions aren’t the only alternative presented by options, bringing us to the topic of shorts and puts.
For context, shorting is when you borrow a security from your brokerage with the assumption that the price will fall. You’d then sell it on the open market. Many brokers don’t allow shorting due to its prohibitive cost margins because of the inability to pay the downside.
However, brokers are always willing to let investors purchase puts. Puts remove the obligation to sell a stock at a given price in the future but still give you the right to sell. This feature is a considerable boon provided by options trading.
Also, when using options, investors can participate in the “third dimension” of the market. You can trade stock movements, the passage of time, and volatility movements.
Generally, stocks–beyond a select few–don’t move significantly. Even the select few stocks that move do so rarely. Fortunately, options also allow you to take advantage of stagnation.
Option Trading Best Strategy Tips.
Here’s the meat of our article–our options trading tips. Follow these insights and perspectives, and you’ll be well on your way to bolstering your portfolio.
View Options As Extensions Of Stocks.
All traders sometimes face confusion when deciding to sell or hold onto a security. It goes part and parcel with trading–not that this commonality makes this scenario any less daunting.
Fortunately, options can be your trading floatation device in otherwise murky waters. The flexibility offered by options can keep you afloat–if not thriving–during trade snafus.
Consider these factors:
When you trade stocks exclusively, you’re limited to buying stocks to initiate bullish exposure.
You’re also restricted to bearish exposure when shorting stocks.
Success in these areas requires your accurate guess of a stock’s direction. You wouldn’t be alone if all this “guessing” made you squeamish.
In this context, options live up to their name. They provide investors and traders with (you guessed it) options.
Options empower you to bet short or long with far less capital expenditure and risk exposure.
Does this mean options should be your only trading tool? Probably not.
Diversity is the spice of life, and keeping well-rounded in your approach is always a best practice. Still, options can be a highly lucrative stock trading extension–and tool–that can bring your investment ideas into a profitable reality.
Use Options To Stack The Deck In Your Favor.
Options enable you to execute trades with a profit probability of 50% and over–as long as your strategy is on point.
Conversely, trading only in stocks doesn’t offer this wiggle room. You must increase long positions in stock if you intend to profit from them. Shorting requires the stock to go down for you to profit. Either way, you’re facing a 50% result.
On the other hand, options–when utilized appropriately–yield profits if the stock falls slightly, stays stagnant, or rises.
Warren Buffet is one example of someone who stacks the deck in his favor through his investments. Unsurprisingly, he’s known as one of the world’s most prominent options users.
Leverage The Fear And Greed Of Others To Profit Off Of Options Trading.
Sometimes, a stock’s outlook is grim enough for a seasoned options trader to try and leverage the risk-reward tradeoff.
When trades go against a general consensus, it can shift the odds in favor of an options trader. Keeping that notion in mind, news, market noise, and many other external factors can cause a shift in stock price. Then, the price returns to where it was before the commotion.
You can capitalize on these events by exercising options. Discover lucrative trade setups through careful maneuverings where the greed and fear of potential trade partners work to your benefit.
Be sure to calculate the possible outcomes of trading options in these scenarios. When opportunities for failure are few and far between, it’s time to make your move.
Patience is your most vital asset when aiming to profit from market volatility. Undoubtedly, you may not end up on the winning end of an individual trade. Still, by searching for these specific scenarios where your position is the most profitable, you’ll end up ahead long-term.
Be mindful that investing is about the big picture. Focus more on “houses” than specific “players,” and you’ll maintain a consistent trading edge.
Use Options To Enhance Your Portfolio.
Adding more risks isn’t always the best way to improve your portfolio. To that point, you’ll often find that using options to cut down on risk while adding income is the special sauce your portfolio needs.
Reducing risks isn’t typically possible when only trading stocks.
That said, your portfolio might not need to be improved and may not need to reduce risk. Still, remaining vigilant and attentive to scenarios that could bolster your portfolio is how to trade successfully in the long run.
Seeking every opportunity to make strategically-inclined bets will put you on a promising path. This statement holds true whether you’re focused on income, steady growth, or even short-term profits.
A successfully expanded portfolio is the product of consistency. As an effective options trader, the good times will keep rolling even when your portfolio is under pressure, never mind when it’s expanding.
Also, maintaining a clear head by remaining informed on when to use the appropriate tools is crucial, no matter the circumstances.
The kicker is that building a valuable toolkit is easier said than done. Yet, when you peel back the layers, you’ll find that options trading isn’t as complicated as it initially seems. Beginners can bone up and make intelligent moves quicker than they’d imagine.
Successful Options Trading Is A Product Of Patience.
View options trading as you do a major league baseball season. Each season is 162 games; the best teams usually top out at 100 wins (or even slightly less).
That means the top teams in the league–who are doing everything right–lose 62-plus times a year on average.
These teams look beyond the results of a single game. They understand that sound fundamentals and quality play will limit their losses and increase their wins. It won’t eliminate all losses. Nor will it ensure they only win.
Options are the same. You can’t win them all. What you can do is approach each trade with patience and thoughtfulness.
Being too aggressive–and impatient–means you’ll strike out more often than you hit a home run.
Conversely, practicing patience and waiting for your perfect pitch will yield more home runs. It’ll also produce more triples, doubles, singles, and walks. In other words, patient, strategically inclined trades will garner wins both big and small.
At the same time, you’ll still strike out from time to time–even with the best approach. You may even hit into double plays, and something (like an unforeseen catastrophe) might take away a sure hit.
Don’t get discouraged when things don’t go your way–even when you’ve done everything right. Maintain your confidence and patience, and you’ll continually increase your batting average while strikeouts will remain rare.
Always Have Your Exit Strategy In Mind.
When the term “exit” is applied to trading and investing, it has negative connotations. It seems like it only applies to escaping from a bad situation.
While it’s wise to have an exit strategy if things go south, you also want to have a way out when things go well.
Whether an exit is uphill or downhill, pre-selection is a must.
Note that exiting from stock options involves more than price targets. You should also apply a time frame since the expiration accelerates as it nears.
Say you’ve taken a long position or a put option, and the desired result hasn’t happened within your projected timeframe. In this instance, it’s time to exit and move on to another opportunity.
Despite the losing scenario in the above example, time decay works in your favor when selling without owning an option. When time decay decreases an option’s price, you can sell and hold onto the premium you receive.
There can be a downside to time decay. You can face substantial risk if the trade goes belly up.
Regardless, a plan to get out of every transaction will limit risks and losses. Don’t allow thirst for more profits to halt a beneficial trade. Nor should you stick with losers in hopes that it turns around.
A fledgling investment could turn around after your exit. Don’t let concerns about this unlikely outcome stop you from following your exit strategy. While there are occasions where profits are left on the table, sticking with a loser isn’t a high-percentage play.
Most often, you’ll find that following your exit strategy saves you from more significant losses. As such, it’s the behavior most conducive to lasting success as an options trader.
Trading Isn’t A Tool For Recovering Losses.
All the practical trading know-how in the world can be powerless in the gaping shadow of your emotions.
For instance, you could face all sorts of emotionally driven temptations when a trade doesn’t go your way. Then, suddenly, your personal trading rules might fly out the window.
In times of distress, you may find yourself trading the options you began with. From there, you could want to purchase more shares to lower the transaction’s net cost base. All we can say is to proceed with caution in these scenarios.
A trader’s success doesn’t need to depend on the stock market offering value. Since options are derivatives of stocks, the price moves differently than the underlying stock and has its own traits.
Yes–you can lower the entire position’s cost-per-contract base by doubling down when a deal goes wrong. Generally, though, such a move will drastically increase risk.
The reality is you’ll make moves that won’t work out. Don’t use this as a reason to go against the principles of strategic trading. Instead, take a deep breath, lick your proverbial wounds, cut your losses, close trades, and examine other potential options.
Trading options requires that you fully comprehend their dark side. Sure–you can enjoy high leverage for comparatively minimal capital. Still, it’ll only work for you in the long run if you know when to admit defeat instead of creating an even bigger catastrophe by holding on.
One Last Option Trading Best Strategy For Beginners And Veterans Alike: Sign Up With Sniper Trades.
Are you seeking resources to fine-tune your trading skill set? Do you want a leg up to give you an advantage as a retail trader, options trader, or any other type of trader?
If so, signing up with Sniper Trades could be a difference-making ingredient in your recipe for trading success.
We run the fastest-growing Discord group for traders, providing educational content, such as:
- Options flow interpretation.
- Technical and chart analysis.
- Macroeconomic interpretation.
- Account management.
- Trader psychology.
- Top strategies for getting in and out of positions.
We don’t want to pressure you to commit to any pricing plan. That’s why we offer our seven-day trial membership. Note that this is for you to test out our premium membership. Therefore, our discord channels will be set to view only.
Want to learn more about Sniper Trades and what we offer our clients? Contact us today with any questions, and we’ll be more than happy to answer.