To play the market, an immediate decision must be made: will you make long-term or short-term investments? Long-option plays should turn a profit, so those investing here must play long options and avoid the range-bound futures market, the short-term swing trading option. Keep it in mind: one should never play a market where the stop loss ratio is less than 2:1.
That is to say, there should be at least twice as much to gain as there is to lose; any ratio smaller than 2:1 in risk and reward will decimate your money account in the long run. It is possible to be rewarded when sticking to this method of risk/reward ratios. You only need to have one winning trade for every two losses with a trading system that has a hit ratio higher than 50%. This results in very profitable trading.
Keep to the TARDA risk management formula to be successful in this endeavor: TARDA stands for Transfer, Avoid, Reduce, Distribute, and Assumed. Transfer trades to others by exiting positions. Avoid risk by not entering the market at inappropriate times. Reduce risk through stop-loss orders. And assume risk by either not entering or entering a position assuming lost profit opportunity risk. Profit can be made by applying long options, short options, or futures within a range bound market.
Option spread offers the potential of increasing one’s success. Large institutions have much stock they need to move quickly. This is known as overstocking. Individual traders are able to move the short-term stocks quickly, much to the pleasure of those institutions. Individuals are able to buy at a discount without the major competition of advanced traders who use technical analysis for stocks and short-term price momentum.
However, there is a disadvantage of swing trading with options compared to futures contracts: profit is limited, dependent on trade structure. The best money-making strategies include knowing how to manage money, controlling the amount of risk, employing an exit point and stop losses. In some cases, an experience trader will say all that and advise that sometimes the profits need to run in order to cut losses.
Options can also be aggressive, but aggressive option spread trading is overridden with transaction costs, ranging from execution costs to commission fees paid to the executing broker. Logically, if the price of an object drops below the initial entering point, you’ve lost money. However, if it’s well above, you’ve made a profit. The swing, high or low, should not be close to the entry point. Wait until the loss or reward point has moved away.
If the trade is stopped, it may result in the trade being closed out since the trader didn’t allow enough room for the trade to move. Like the stock market, when a stock is popular it becomes worth more. If there are more buyers available to defend a price level, willing to put their money forth, then that stock will stay above the normal level. However, if the sellers exit the level, often then the price level will drop, a fundamental of change.