Option trading strategies

When we are talking about option trading, we usually talks about short term trading. Short term trading means we will rely heavily on technical analysis. Technical is based on price history. Those history is reflected through charts. Technical analysis tells us when price will likely to move. Chart pattern in technical analysis is used because we assume that trend tend to repeat itself.

Chart pattern is a formation on stock chart which shows signs of future price movements. It shows the relation between price and time. There are many types of charts like line chart which only shows closing price, bar charts which shows high, low, opening, and closing price.

There are a lot of chart patterns that you can learn and there are so many of them. You might hear about these pattern: Hanging man, Shotting star, Inverted hammer, Bullish and Bearish Engulfing, Bearish and Bearish Harami, Pearsing Line, Dark cloud, Abondoned Baby, Three White Soldiers and Three Black Crows. If not don't worry, I don't know much about them too. I don't use them. It's like having lots of weapon, so much that we don't know which to use. I really more on support and resistance line.

Support is a price level that the price of a stock will tend to stop going down and resistance is a price level that the price will tend to stop going up. When the price breaks the support line, it usually will go lower, and when price breaks the resistance line, it will usually go higher. Most of the breaks out are for real, but you should also watch out false break out.

In addition, you also needs to learn about chart indicators like Williams %R, MACD, the Relative Strength Index (RSI), Stochastics and Fibonacci Retracement Lines to help you in your trading decisions. These indicators will act as confirmation for your trading.

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Option Strategies

An option is a contract giving the buyer the right to buy or sell an underlying asset like stock at a fixed price on or before a certain expiration date. Remember this is a right and not obligation. There are basically two types of option contracts: Call options and Put options. A Call gives the buyer the right to buy the underlying asset, while a Put gives the buyer the right to sell the underlying asset.

The basic strategy for option trading is call and put. When you believe that a stock if going to be up, buy call option. But if you believe the price will go down, buy put option.

You can create advanced option strategy by combining the two basic option contract. For example you can create a new option strategy by buying one put option and selling another put option with different expiration date and strike price. Each strategies will have different characteristic, so you need to understand the profit and loss probability of a combination.

There are also option strategy that can generate income. This happens when you are selling an option contract at higher price and buy another option contract at lower price. For example you can sell a put option for $100 and buy another put option for $80, making $20 profit. The most popular income option strategy are Iron Condor. It is constructed by combining Bull Put Spread and Bear Call Spread. Bull Put Spread is constructed by selling an in-the-money (ITM) put option (higher price) and buying an out-of-the-money (OTM) put option (lower price) on the same stock with the same expiration date. While Bear Call Spread is constructed by selling an in-the-money (ITM) call option (higher price) and buying an out-of-the-money (OTM) call option (lower price) on the same stock with the same expiration date. With Iron Condors you don't have to guess the direction of a stock. This strategy is mostly used when we have a neutral outlook of a stock.

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Make money with iron condor

Most option strategies are are centered around making the right call on the direction of a stock. This approach relies on the accuracy of guessing the direction of the stock. Thus the chances of profiting are low. By using a combination of Bull and Bear Credit Spread, an Iron Condor position can be created. It will have minimal risk and higher probability of success. With Iron Condor, you don’t need to guess the direction of stock. This strategy is mostly used when we have a neutral outlook on the movement of the options underlying security. It’s a good idea to implement this strategy on security (stock) with low volatility, because their price tend not to move much.
Iron Condors is usually used by traders who seek income from their trading capital. They will construct the posistion so that it will still profit for a much more price movement. For example if the current price is $40, instead of creating a position where it will profit when the price moves up/down $10 (price between $30 – $50), a trader can create a position where he can still profit when the price moves up/down $20 (price between $20 – $60).
By using this strategy, trader would generate monthly income.
Since it is from a combination of bull put spread and a bear call spread, you need to understand them first. The bull put spread is implemented by selling an in-the-money (ITM) put option (has higher price) and buying an out-of-the-money (OTM) put option (has lower price) on the same underlying stock with the same expiration date. While the bear call spread strategy is implemented by selling an in-the-money (ITM) call option (has higherice) and buying an out-of-the-money (OTM) call option (has lower price) on the same underlying stock with the same expiration date. Both bull put spread and bear call spread has limited profit and risk.
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