Basic Options Trading Techniques

Now that you have some experience with options trading, let's review some of the key techniques traders can use.

  • The Trend is Your Friend: Anyone who follows the trend will buy when prices are rising or short sell when they drop. Remember our tips from “How to Start Trading Options?” Stock goes up = buy calls; stock goes down = buy puts. This is done on the assumption that prices that have been rising or falling steadily and will continue to do so.

  • Trading the news: This advice is pretty simple but sometimes some stocks are already “priced in” before reports are released. Investors using this strategy will buy when good news is announced or short sell when there's bad news. This can lead to greater volatility, which can lead to higher profits or losses.

  • Contrarian investing: This strategy assumes a rise in prices will reverse and drop. The contrarian buys during a fall or short sells during a rise, with the expectation that the trend will change. It’s tricky to predict what is the actual “bottom” or major bounce levels, so use this technique sparingly when you are confident in your abilities to execute.

  • Scalping: This is a style by which a speculator exploits small price gaps created by the bid-ask spread. This technique normally involves entering and exiting a position quickly—within minutes or even seconds. Scalping can be your best friend if you’re a novice trader, you’re in and out within seconds and then you can go on about your day.

With enough experience, you can use these techniques to improve your overall performance to become a consistent trader. It takes time, skills, and discipline. Sticking to techniques as stated above can help you create a potentially profitable trading strategy in a favorable market.