As Head Mentor at WiseTraders, I am often asked by my students “What is your favorite options strategy?”.
I teach many option strategies but in practice I only trade a very select few, with my focus being on simplicity.
Understanding and picking the right strategy for your temperament, risk tolerance, age and experience is far more important than sophistication for the sake of vanity.
For the novice, options at first glance might seem complicated. But they really don’t have to be.
Thinking back to your own trading – remember your first introduction to charts, indicators and all the different patterns … At first glance they too might have all seemed rather complicated.
It’s a road well travelled … we’ve all been there, and it’s a similar journey with options.
The good news is that you can focus on the simplest strategies which all but eliminate the most common complications associated with options.
You can apply them irrespective of your account size or experience level, so let’s start with the simplest of them all …
My favorite options strategy: long call
The long call is:
- Easy to understand (it rises in value when the underlying stock rises).
A bullish strategy, with uncapped upside potential and limited risk.
Much less expensive to trade than the underlying stock.
A leveraged instrument, giving you enhanced returns when you get it right.
Keep it simple
Choosing the right options is imperative.
Given that any single option carries with it various choices for strike price and expiration, it is vital to choose one that confers the optimal balance between risk and opportunity.
For example a short term out-of-the-money option is very cheap, has bags of leverage, but is also very risky for the buyer.
A very long term very deep in-the-money option is much more pricey, has far less leverage, and is far less risky to the buyer.
Somewhere in between is the goldilocks zone that confers enough leverage to make it worthwhile, and enough safety so that you haven’t just bought the equivalent of vapourware.
With these qualities you can focus on the right stock selection process, knowing that buying the correct option will reward you more for being right, without causing too much damage if you got the stock selection wrong.
Our stock selection process revolves around following big money in and out, meaning our stock selection is highly effective. Coupled with the right options strategy we have seen accounts escalate, even in 2022.
Education
I always recommend that my students practice with a virtual trade account.
In a demo account you can look to achieve a decent sample size of closed trades, say 25-30 and analyse your performance.
Also you can make mistakes that won’t cost you any real money and be able to formulate a plan to correct those mistakes going forward (very important).
Conclusion
Options are a wonderful investment tool that can help you achieve windfall profits, limit your risk or protect your assets.
The long call is the easiest strategy to learn and trade. It simply goes up if/when the underlying stock goes up.
Take the time to understand what you’re doing first (there are risks involved in all option strategies). It’s not rocket science, but it is important to know which strategies will suit your needs best.
If you are new to options, start with long calls first. Make sure you have a good grasp of how the strategy works (education/mentoring can be a big help) before moving on to more advanced strategies.
For many traders, simple long calls and puts is enough, especially if they are good at picking the underlying assets. This is what you should aim for.
For others, long calls and puts is just the start of a fascinating and lucrative journey into an amazing asset class.
Glenn