What are Options Trading Systems?
Before I started to write this post I did a quick search on the Internet to see if there was any information available about options trading. I was stunned to see that not much was written on the topic. Seriously! There are hundreds upon hundreds of brokerage firms and trading companies that would love to sell their system. Unfortunately, very few people can describe the actual features of an options trading program.
An options trading platform is a method to generate buy/sell signals using stock analysis. The system can use any type and combination of technical and fundamental analysis. Options trading systems could focus on changes to the underlying stock prices, volatility, time decay or unusual buy/sell behavior, or a combination. It’s basically a list that must be met before trades will be entered. If all the conditions are met, a signal is given to buy or not. Different criteria apply to each type. Each trading system model has its own set of criteria, regardless of whether you are looking for long calls, covered call, bear spreads or selling naked options. A trading system for option trading that is trustworthy will help you identify and eliminate false signals, and increase your confidence about entry and exit.
What’s the Value of Options Trading Systems?
Options market is extremely complex. Trading options without a system can be likened to building a house without a blueprint. You can lose your profits due to volatility, stock movement and time. It is important to keep track of all these variables. It is easy for emotions to influence market movements. It is possible to manage your normal and natural emotions with a system. How often have your watched trades go bust as soon as you place an order? Are you pondering whether or no to purchase a stock? A structured plan is vital to making sound and objective trading choices. If you have a solid system in place, your trading executions will be as efficient and smooth as a computer.
Benefits of an Options Trading System
leverage – Trading opportunities give you account leverage on stock markets. Options give you the ability to own hundreds or thousands of stocks at a fraction if the stock’s price. An option may offer a 100 percent gain if the stock price drops by 5-10%. In your trading, you should focus on percentage gains and not dollar amounts. It is a paradigm shift that is necessary to create a trading system that is profitable.
Objectivity: A good system for options trading is one that relies on specific criteria to trigger buy and/or sell signals. It removes all subjectivity and second guessing from your trading so that you can focus on the key factors that create explosive trades.
Flexibility– Options traders almost all agree that you have flexibility when trading. It is easy to make money in options markets by trading short-term positions. Strategies for overnight gains can be built using weekly options and earnings events. There are many ways to profit from any market condition, including range bound or trending.
protection – A trading strategy for options that takes into account current market conditions and can act as an insurance against other investments. This is a common way to use protective puts.
risk – The best options trading system reduces risk in two ways. First, cost. The price of options can be very lower than that of buying the same amount stock. The stop option is the second. A well-designed system can reduce losses quickly and keep them in check.
A trading system can be created by any Option Trader
You must have multiple options strategies in your trading system. This includes iron condors. Broken wing butterflies. Calendar spreads. Back ratios. Straddles, strangles. Collared. This may seem like a complicated language at first, but you will learn more about the vocabulary as you go. Take it apart and make it yours. Each term has its own application to help you make money in specific market conditions. These terms can be learned at your own pace so that you can improve and build your options trading strategy.
The more tools you have, the better you’ll be able to react to changes in market conditions. Trading would become easy if everything was the same. A trading plan is a blueprint that will help you develop your options trading platform. Begin with a basic trading system. Then, refine it to determine your trading criteria. Finally, fine tune your system. It takes time and experience in order to develop a system that generates consistent profits. You can make your own software for automated trades once you are happy with the parameters.
Five Steps To Get Started with an Options Trade System
Choose a strategy. You can choose any strategy you like to get started building a program. To get started, buying puts and calls is the best way. Learn more about prices and how they move so you can improve your trading. Covered calls, protective puts and long equity position positions can be a good next step. You will generate cash flow monthly or every other week and it is an easy way to increase your account’s efficiency.
Trade Now that you have outlined the fundamentals of your strategy it is time to trade. Start with small amounts, such as one or two contracts. Keep detailed records of each transaction. You should include information about the underlying stock price at time of option purchase/sale. Your records can help you evaluate your progress and pinpoint areas where you need to improve. You will see an improvement in your statistics if you add new trading rules to your system. If you don’t see an improvement in your statistics, it is time to reevaluate the criteria.
Evaluate: Evaluate your success and failures. The amount of trading you do will affect the frequency of your analyses. It is important to have a weekly or monthly analysis if your trading activity is active. You can compare your losses with your profits. You can narrow down the key components that make a trade a winner and refine your criteria to increase your executions. Even though it can be painful, you should also analyze your mistakes. Adjust your criteria so you don’t make the same mistakes. Analyzing and learning from your mistakes is just the same as studying your success in trades.
Adjust There’s no shame in making mistakes. This is part and parcel of trading. The shame lies in not being able to see your mistakes and making the same mistakes over and over again. You are sure to fail at trading if you continue feeding your ego and justifying the weakness with excuses. Acknowledging your blind spots, and making adjustments can help keep your system in line to the changing market conditions. It sounds so easy but it requires persistence and discipline.
Learn. A trading system is dynamic. Keep your mind engaged by learning. The more you learn about options trading and the stock markets, the more successful you will be. If the options trading system could be compared to a tic-tac–toe system, then all of us would be wealthy. Options trading isn’t as boring and frustrating as you might think. Every day you learn something new, and it will be absorbed into your options trading system. I do.