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14 June 2020 by

Tips for Picking the Best Options To Trade

Options are capable of being used to implement a wide selection of trading strategies. They can range from simple sells and buys to complicated spreads such as condors and butterflies. To add to that options can be found on a broad range of currencies, stocks, and futures contracts. Usually for each asset you will find many strike prices as well as expiration dates. This can pose a great challenge to making a selection. Reason being you will find so many options hence have a hard time making your choice. Below are tips to guide you with your option to trade selection.

The commencing point for any kind of investment is the investment goal. And a great example is options trading. Look into the objective that you wish to achieve with your option trade. You may have a considerable position in a stock. And all you want is to hedge the risk of a potential downside. That gives a good illustration of an investment goal. An objective has a crucial role to play. This is attributed to the fact that with an objective you are bound to be on track always. You get to properly focus on whatever it is that you want.

Secondly, it is crucial that you know what the risk-reward payoff is. This is supposed to be dependent on the appetite that you have for risk. You should not risk going for aggressive strategies when you know very well that you are very conservative. A good example is writing puts. Or purchasing a huge amount of OTM. Every option strategy that you come across is with a properly defined risk and reward profile included. Hence ensure that you are with a good understanding of it.

The other consideration you should make is implied volatility. Implied volatility is seen as one of the most vital determinants of the price of any option. Hence you need to properly research on the implied volatility level for any option that you are considering. With an implied volatility level you get to know if the rest of the traders’ plans about a stock. High implied volatility is going to make the premiums go up. This makes writing an option that is very attractive.

To end with, you need to identify events. Events are in two wide categories. Namely, market wide events and stock specific ones. Those that greatly impact the market are the market wide events. For instance, economic data releases. Stock specific events conversely entail product launches and spin offs.

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