As a beginning Options trader finding the Best Trade Mechanics will save you alot of time and frustration.
You may be starting with a small account so being selective and staying mechanical is essential. Today I want you to think about your directional assumption, finding liquid underlyings, choosing your risk via strategies and entering the trade.
Find a Liquid Underlying
Liquidity is king when it comes to Options Trading.
We want options prices with narrow bid/ask spreads and high options volume and open interest. We want to know that there is a large interest in the underlying so we can get the best prices and be confident we can get in and out of a trade without difficulty.
Some trading platforms are better than others in providing this kind of information.
I have found the Tastyworks platform to be the best in this category for ease of use and simplicity. Their platform has a handy four star meter and an array of watchlists that show the most highly liquid stocks.
Form an Assumption
Forming an assumption means picking the direction you believe the underlying may take, You don’t need to be “right”. But choosing is very important.
Over time your ability to get better at direction will improve. But it isn’t the biggest part of Options Trading decisions..
When forming an assumptions you want to pick a direction and consider such points as
- Desired delta risk
- High Implied Volatility
Choose your Risk with a Stratergy
As a beginning traders you want to be smart. Look to choose your risk by implementing a defined risk strategy. There are many strategies, but the better ones for new traders are:
- Short spreads
- Long Spreads
- Iron Condors
- Covered Calls
- Poor Man’s Covered Call
Review and Send
This is where a straightforward approach comes in handy. It doesn’t need to be complicated.
Be sure to check that your strategy matches with you directional assumption. If you are Bullish on the underlying, don’t put on a short call vertical spread,etc.
Double check your inputs.
Press review and send. This double safeguard helps you to think slowly when entering a trade.
The foundation of good trading is built on good mechanics. When you have repeatable steps on what to trade you build consistency into your decision making process.
Also following a step by step mechanical process helps take the guesswork out of picking the best stocks to trade.
These mechanical steps can be used whether you trade stocks, commodities, futures or bitcoin. It’s always the same.