My Number One Trading Strategy, Revealed - Investing Shortcuts

My Number One Trading Strategy, Revealed

By January 16, 2019Trading
trading strategy

When used properly, options have many benefits over buying or selling stock shares. Less capital required and potentially greater returns make option purchases the choice for smart money traders.

A deep in-the-money call or put will act like the underlying at a lower cost than trading the stock.

The Options Way: Unlimited Upside Potential with Absolutely Limited Risk

A long option can provide the staying power for a market upswing. More importantly, the maximum risk is the premium paid.

One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares. Now that’s the power of leverage.

Choosing an option can sometimes be a daunting task with all of the choices and expiration months and strikes. Simply put, traders want to buy a high-probability option that has enough time to be right.

The option strike price is the level at which you have the right to buy without any obligation to do so. In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss.

There are two rules options traders need to follow to be successful.

Rule One: Choose an option with 70%+ probability.

The Delta is a measurement of how well the option reacts to movement in the underlying security.

It is important to buy options that pay off from only a modest price move. There is no need to ONLY make money on the massive price explosion.

Any trade has a fifty/fifty chance of success. Buying in-the-money options increase that probability.

That Delta also approximates the odds that the option will be in-the-money at expiration.

Buying better options are more expensive, but they are worth it — the chances of success are mathematically superior to buying cheap, long shot out-of-the-money lottery tickets that rarely ever pay off.

With a stock trading at $15.00, for example, an in-the-money $13.00 strike trading at $2.50 option currently has $2.00 in real or intrinsic value. The difference is the time value of the option.

Rule Two: Buy more time until expiration than you may need.

Time is an investor’s greatest asset when you have completely limited the exposure risks.

Traders often buy too little time for the trade to develop. Nothing’s more frustrating than being right but only after the option has expired prematurely to the market move.

The power of the payoff sees the option position gain 50% with just a 5% to 10% move in the underlying stock.

The combination of a high-probability play, and buying enough time to be right, make the stock substitution strategy a favorite trading tactic.

Alan Knuckman

Author Alan Knuckman

Alan Knuckman is the Founder and Chief Market Strategist for a subscription trading service for his inner circle members. He has over 25 years of market experience that began in the pits of the Chicago Board of Trade as a runner and progressed to a Treasury Bond speculator. Each trading day Alan is the video host of the Morning Market Stir from the CME Group and the Pre Market Pulse on CBOEtv. He is also a frequent financial commentator appearing on television regularly with CNBC, CNN, Bloomberg, and Fox Business Network.

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