Before sitting down to write this post, I thought I would search the Internet to see what information existed on options trading systems. I was shocked to find that there was barely anything posted on the subject. Seriously! There are hundreds of websites, brokerage firms, and trading services that want to sell you their system. The reality is that very few are able to describe what an options trading system actually is.
At its core, an options trading system is a method of generating buy and sell signals through a tested method of stock analysis. The system can be based on any type of option strategy and includes both fundamental and technical analysis. Options trading systems might focus on changes in underlying stock price, volatility, time decay, unusual buy/sell activity, or a combination of these elements. Essentially, it is a checklist of criteria that must be met before trades are entered. When all conditions are met, a signal to buy or sell is generated. The criteria are different for each type of option trading strategy. Whether it is long calls, covered calls, bear spreads, or selling naked index options, each has its own trading system model. An option trading system that is worth its salt will help you weed out false signals and build your confidence in entries and exits.
How Important is an Options Trading System?
The options market is very complex. Trading options without a system is like building a house without a blueprint. Volatility, time and stock movement can all affect your profitability. BTP ai minimi storici You need to be cognizant of each of these variables. It is easy to be swayed by emotion when the market is moving. Having a system helps to control your reaction to those very natural and normal emotions. How often have you sat and watched a trade lose money the instant your buy order filled? Or, have you ever watched a stock skyrocket in price while you are pondering over whether or not to buy it? Having a structured plan in place is crucial to make sound and objective trading decisions. By creating and following a good system, you can hone your trading executions to be as emotionless and automatic as a computer.
Advantages of an Options Trading System
Leverage – Trading options gives your account leverage on the stock market. With options, you can control hundreds or thousands of shares of stock at a fraction of the price of the stock itself. A five to ten percent change in the price of a stock can equate to a gain of one hundred percent or more in an option. Try to focus on percentage gains versus dollar amount gains in your trading. It requires a fundamental shift in conventional thinking, but it is crucial to managing a successful trading system.
Objectivity – A good options trading system is based on measurable criteria that trigger buy and sell signals. It takes the subjectivity and second guessing out of your trading so you can focus on preset factors that make for an explosive trade.
Flexibility – Nearly all options traders will tell you that options allow for flexibility in your trading. Opportunities in the options market make it incredibly easy to profit from short-term positions. With earnings events and weekly options, you can build strategies for overnight gains with clearly defined risk. There are a several ways to profit in any kind of market condition from trending to range bound.
Protection – An options trading system based on the appropriate strategy for prevailing market conditions can act as a hedge against other investments. Protective puts are commonly used this way.
Risk – A good options trading system limits risk in two important ways. The first way is cost. The price of options is very low compared to buying the same amount of stock. The second way is related to stops. A good system will cut losses quickly and keep them small.