When you sit down and think about it, there are only Two Faces of Options Trading. It seems much more complicated at the beginning because all the language comes pouring at you like a firehouse. But it doesn’t need to be that way.
Today I am going to cover the two Big Faces of Options trading. We’ll talk about how they look and the part each one plays in the overall scheme of things.
By the end of this post, you will appreciate the ease with which you can approach trading from now on.
The Two Faces of Options Trading
The first face of Options Trading
The first face looks ominous. There is the big market staring at you from your computer screen. It has numerous flashing lights and thousands of numbers changing in milliseconds. And all of it seems very mysterious.
But, when you get right down to the nutty gritty, your sole purpose as a new trader is to put on a low risk trade. Even if you are planning to trade Apple, Tesla, or Amazon, you can still pare it down and limit the risk.
We have talked before about simple defined risk trades such as the call and put vertical. These have limited risk and limited reward of course/ But so what. You aren’t Warren Buffet with a huge shoe box of cash. You are just beginning, and you need to trade today so you can trade tomorrow.
So, the first face is is the trade. It is the place where you decide the underlying to trade. You decide the strike price(s) and the expiration month. In the beginning you need to look at the contract, the volatility and all the parameters you need to think about to build the trade. We’ve covered this ground before and you can read about these metrics here.
We can call this first face the trade face. It is the point in time when we place the trade.
The second face is everything that comes next
Whereas the first stage is the part that has all the givens. The place where you fill in the blanks on the order ticket.
But the second face always seems to be the scary face. You look at it and ask what I do now question. I know. It seems overwhelming. But it really isn’t. Let’s talk a little about that second scary face.
Anyone who has been following me for any length of time will know that my trades are set up in a window of 45-60 days to expiration. This is the optimal time in which to let the probabilities play out. The research supports this time frame as the period when the greatest amount of time decay occurs.
We want to manage our trade at the 21-day make. If the volatility in the underlying is still high, then there is still opportunity in the trade and rolling out to the next cycle could be the optimal decision.
If on or before 21 DTE we have made 50% of our max profit, we close the trade. We stare down the face and pull the trigger. Trade over. On to a new one. And that’s about as scary as it gets. There are a few nuances to this last part but nothing to be worried about.
I hope you can see the scary faces of Options trading are really nothing more than breaking a trade down into its two main sides and dealing with each one at a time.
So, there you have it. First you just stare down the trade face and next you do the trade management face. Don’t get all hung up on the minutiae. Just be sure to stay small and define your risk. This way you can come back to the well repeatedly and feel confident that you will grow in your knowledge and experience.