Options Strike Price Mistakes (Video)

Options trading is my preferred choice of profiting from the markets and yes, options trading can be both rewarding and risky. While many traders jump in hoping for quick profits, successful options trading demands a much different approach.

By focusing on techniques like selecting the right strike prices and expiration dates, you’ll build a solid foundation for your trading journey. Let’s look at the key principles that separate profitable traders from those who struggle in the options market.

Video Highlights

• Select options with 20-40 days until expiration and focus on at-the-money strikes for optimal probability of success.
• Avoid cheap, out-of-the-money options and prioritize quality positions that align with your strategic objectives.
• Adapt trading strategies based on market volatility, targeting larger gains in volatile periods and smaller wins in calmer markets.
• Base trading decisions on clear price action signals and established market patterns while maintaining strict trading discipline.
• Implement precise entry points, profit targets, and stop-loss levels to manage risk and protect trading capital.

Key Principles for Selecting Profitable Options Trades

Three common mistakes prevent most traders from mastering options trading, with poor strike price selection being the biggest issue. You’ll see traders gravitating toward the cheapest options available, but this approach usually leads to disappointing results. Instead, focus on developing solid trading discipline and selecting high-quality strike prices that align with your strategy’s objectives.

When you’re looking to improve your options trading success, consider working with options that have 20 to 40 days until expiration. At-the-money options or those just one strike in or out of the money offer better chances of success, with probabilities of closing in the money ranging from 50% to 65%. That’s significantly better than out-of-the-money options, which only have about a 14% chance of success.

You’ll want to consider market conditions and volatility when planning your trades. During high volatility periods, you can look for larger gains, while in slower markets, it’s smart to target smaller, more consistent wins. Your trades should typically last between 1 and 20 days, and you’ll need exact entry points, targets, and stops to maintain discipline.

Short-term weekly options might seem attractive due to their low cost, but they’re often a trap for retail traders. The rapid time decay can quickly erode your investment, and you’ll need everything to go perfectly to make a profit. Instead, consider using at-the-money options, which might cost more upfront but offer better quality positions and reduced impact from time decay.

For example, while a $555 at-the-money put option might seem expensive compared to cheaper alternatives, it provides a much safer position. Recent trades using this approach have yielded impressive returns, like a 59% return on capital in just one week.

Remember to base your decisions on clear price action signals and established patterns in the market, and always adapt your strategy based on current market conditions.

Your Questions Answered

How Do You Adjust Option Strategies During Earnings Season?

During earnings season, you’ll want to adjust your strike prices further out to account for increased earnings volatility.

Consider choosing strikes that are at-the-money or slightly out-of-the-money with 20-40 days until expiration.

You’re better off making strike adjustments that give your trades more room to breathe, rather than trying to get too close to the current price.

This helps protect against sudden price swings.

What Role Does Implied Volatility Play in Determining Option Premiums?

Implied volatility directly impacts how much you’ll pay for options.

When implied volatility is high, you’ll find option premiums are more expensive because traders expect bigger price swings. Think of it like insurance – when there’s more uncertainty, premiums go up.

During earnings season or major market events, you’ll often see implied volatility spike, driving up option costs. That’s why it’s important to check volatility levels before making trades.

When Should Traders Consider Rolling Options to a Different Expiration Date?

You should consider rolling your options when they’re approaching 20-40 days until expiration and still have unrealized gains.

Don’t wait until the last minute – time decay accelerates in the final weeks.

When selecting a new expiration date, look for dates that give your trade enough time to develop while balancing the cost of longer-dated options.

If you’re profitable, rolling can help preserve gains and reduce time decay risk.

How Do You Protect Option Positions Against Sudden Market Gaps?

To protect against sudden market gaps, you’ll want to use multiple risk management strategies.

First, consider using stop-loss orders and position sizing to limit potential losses. Don’t risk more than 1-2% of your portfolio on any single trade.

You can also buy protective puts or create collar strategies to hedge your positions.

During high-volatility periods, reduce your position size and avoid holding options overnight when gap risks are highest.

What Are the Tax Implications of Frequent Options Trading?

When you trade options frequently, you’ll need to report each transaction on Form 8949.

Your profits will likely be taxed as short-term capital gains if held less than a year. These gains are taxed at your regular income tax rate, which is typically higher than long-term capital gains rates.

You’ll want to keep detailed records of all trades and consider working with a tax professional who understands option tax reporting.

This post originally appeared at NetPicks.

Category: Options Trading