Options Trading Strategies To Avoid For 2016

| December 11, 2015

Options Trading Strategies To Avoid For 2016

Hard to believe but 2016 is right around the corner.  While the financial markets don’t really care what calendar year it is, we as investors tend to like to group market conditions by the year.

For instance, 2015 will most likely be the year of tepid growth and higher volatility.  It was generally sideways trade this past year, except for the late August correction and subsequent rebound.

So what kind of year will 2016 be?  What sorts of options strategies are we going to focus on?  That’s a question for another time.  This time around, we’re going to look at what not to do.

So what options trading strategies should we avoid?

First take a look at this chart of the S&P 500 $SPX over the last year:

chart of $SPX performance for the last year

The chart of the S&P 500 shows what I was just discussing.  The index has mostly been trading in a fairly consistent, sideways range.  We had the big August selloff with the roughly 2 month recovery.  Now it looks like we’re right back to the range from earlier in the year.

Given the economic and geopolitical conditions worldwide, I believe we can expect more sideways action in 2016 with occasional bouts of higher volatility.

As such, one of the first things to avoid is being overly short volatility.  Yes, shorting volatility is a time-tested successful options strategy.  Still, you’ll need to be more careful over the next year than in past years given all the variables.

So what other options strategies should we consider? 

Related to the point above, 2016 could be a good year to actually buy options.  Now, that doesn’t mean you should ignore a good income strategy like covered calls.

(As a reminder, a covered call trade is selling a call against a long stock position.  The trade is maximized if the stock price is right at the short call strike upon expiration.  For a refresher on covered calls basics, follow the link.)

However, strategically buying underpriced calls and puts could be a successful strategy this year given the added volatility and choppiness.  As always, you’ll have to do your homework before making any trading decisions.  But, this should be a better year than most to be long options.

Finally, I would tend to avoid bullish strategies on oil and gold.  Oil’s supply glut means we’re not likely going to see a major increase in price this year.  And, as long as the dollar is super strong, gold isn’t going anywhere.

Of course, make sure you do your research before making any options trades.  And, don’t be afraid to alter your strategies when the facts change.

Yours in Profit,

Gordon Lewis
Options Trading Research

Note: Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

Tags: , , , ,

Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

Comments are closed.