Learn the Modern and Simpler Approach to Options Trading
For many Retail
Traders, trading options may seem intimidating. This is because most traders
are using the outdated 1990’s style options strategies, indicators, and
theories.
The Options Market
like the Stock Market, has undergone massive internal structural changes in the
past couple of years. The giant Buy Side Institutions in prior years used Hedge
Funds for mitigating and hedging the risk of stocks in a downtrend. However
that all ended with the 2008 banking debacle, and the massive losses most
Mutual and Pension Funds took as the mortgage backed Securities collapsed.
In recent years the
Options Markets has had a surge of activity, and huge growth as the Buy Side
Institutions with Dark Pool alternative trading systems started using options
instead of Hedge Funds. For Retail Traders this is great news. It means that
trading options is more liquid, with lowering spreads and reducing risk.
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It also means old
style indicators such as "Put to Call Ratios" no longer work. Why?
Because the giant Buy Side Institutions are buying puts as insurance against
the downside risk, and they expect the puts to expire worthless. Assuming a high
Put to Call Ratio means the Options Market thinks stocks are going down is
wrong. Most Retail Option Traders do not know this fact. A high Put Ratio only
means Institutions are buying insurance policies against higher risk stock
trades. They are speculating that the market will continue going up but want to
hedge their higher risk.
A huge advantage now
available to Retail Traders who are trading Options using StockCharts are
the changes to options pricing models.
Recently an
exhaustive analysis was done on the Black-Scholes Model which proved
empirically that this pricing model was intrinsically flawed, and increased
risk for Options Traders who used it as a basis for option prices.
Since then the
Professional side of the market has created new pricing models.This has had an
unexpected result for the majority of options contracts.The option value now
closely follows the stock price, eliminating the problematic variances that
were present with older style pricing models.
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For Retail Traders
who are trading Options using StockCharts this is a huge benefit. Previously
Options Traders struggled with learning the Greeks, Implied Volatility which
has also been proven to be seriously flawed, as well as other outdated options
indicators.
Now the modern
approach to trading options is simply to find a stock to trade using the stock
chart, then applying all the information from that stock chart to selecting the
option contract.
This takes 80% of the
work out of trading options and dramatically reduces risk. Everything you need
to trade the option is in your charts. Using StockCharts for trading options
eliminates the guesswork, confusion, frustration, and work thereby making
trading options simple and easy.
The chart example
below for was a stock TechniTrader Students were studying to learn the best way
to take advantage of the slower paced price action out of a bottom.
A sideways action
formed which was a typical Platform. A compression pattern formed on the lower
range of this Platform and a High Frequency Trader gap followed as indicated by
the red arrow.
Options Traders who
were watching this stock had a potential entry at the high of the Platform.
Based on the chart, the timeframe for holding the option was 3 months. This was
based on the chart information. The strike would normally be set at the high of
a Platform, with conditional orders contingent upon the stock action. This
insures the option trade does not occur unless the stock moves up.
By using Technical
Analysis of the stock, Options Traders would be able to enter earlier and earn
higher profits while lowering trade risk. This was a Position Traders Premium
Style Options Trade using a simple At-the-Money ATM on a long call. Basic yes,
but highly profitable.
Summary
Trading Options does
not have to be complicated. In fact the Professionals who make the highest
income from trading options use simple one leg strategies, rather than complex
multi leg strategies. This is because they use stock charts as their basis for trading
the option contract.
Success in trading
Options using StockCharts comes from knowing the proper strike price,
time duration of the hold, risk factors, and potential profit gains which all
come from the StockChart. This is how Professionals trade options in the modern
Options Market. With new pricing models being used on the Professional side,
the option follows the stock. Therefore your StockCharts are critical to
successful options trading.
TechniTrader is
"The Gold Standard in Stock Market Education." Go to the
TechniTrader.com Learning Center and watch a wide variety of webinars, chart
examples in this Learning Center are TC2000.com charts. Experience for yourself
the excellence of TechniTrader education.
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Trade
Wisely,
Martha
Stokes CMT
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.