How to Trade Options for a Living

[Leth]

How to Trade Options for a Living
by Unknown Author

Option trading provides the advantage of flexibility that ordinary share trading does not. This is because options have so many more variables than just buying shares and selling for a profit - and you can use these variables to your advantage.

1. Firstly, you need to find a good charting package, so you can track the price of shares in a visual way. These days, a good broker will provide this, but if you're stuck, there are free versions out there, such as http://www.bigcharts.com or http://www.incrediblecharts.com etc.
2. The most important tool you'll then need, is the ability to draw parallel lines. This way, you can tell when a stock is "channeling". These channels can either be ascending, horizontal or descending. Ascending or descending channels will have differing slopes. Not all stocks channel, but many do. Find these.
3. The other thing you need to do, is to be able to draw horizontal lines that mark out "support" and "resistance" levels - where a stock has broken through or settled upon a given price mark.
4. From there, you look for shares that have options on them. Not all shares do, so you need to know these. Your broker, or stock exchange can provide you this information
5. You also need to be able to compare "daily" and "weekly" charts, to determine where a stock currently is in it's longer term direction. Draw parallel lines, if applicable, over the weekly charts.
6. From here, it is simply a matter of determining where a stock currently is within the channel. You may even have a "channel within a channel". You need to first determine the strength (slope) of the larger channel, then you can tell the reliability of the more immediate channel to "do it's thing".
7. If the channel is telling you the stock should rise, you want to buy call options with at least 45 days till expiry. If the signals are telling you the stock should fall, then you buy put options. The best places to buy are at the tops or bottoms of channels, but first wait for the "bounce" to validate your expectations. If the stock breaks through the channel, take an opposite position.
8. Options provide you with far more leverage than shares and are far safer than CFDs to trade. They give you the flexibility of holding an "each way" position if you like, because you can hold both call and put options for the same strike price and expiry date, or any variation thereof, at the same time.
9. Therefore your profits will be far greater than if you owned the stock and with much less capital risk.

-If the stock reaches the bottom of a channel, a good strategy is to buy an "out of the money" call option because you're expecting it to bounce upwards. But if it doesn't and continues falling, then you buy an "out of the money" put options and make a profit from that. This will usually cover your loss on the failed call option. Quite often, when the stock retraces or bounces back, you'll make a profit on the call options. The reverse applies for the top of a channel.

-Understanding option volatilty is worth it. You want to ensure that you're not paying too much for an option contract. Since the options market is only a market based on another market, but not rigidly linked to it in terms of price, you can find overpriced and underpriced options, especially when they're "out of the money". Beware of these.