How to Trade Options
How to Trade Options using Candlestick Trading Strategies
When trading options, there are several trading strategies that you can use. In today’s article we focus on those strategies that require the use of candlestick analysis. We discuss the buy strangle and the buy straddle as valuable options trading techniques.
The buy strangle is used when buying a call option and a put option on the same asset. It requires the same strike price and expiration date on the asset as well. A buy strangle might be used when a stock is on the brink of an unpredictable breakout move where the direction is unknown or at times when there is low volatility. When using this strategy there is limited risk. Decay is a factor that investors must take into account however it is eliminated by creating a position before the breakout and by quickly selling the option on the wrong side. The actual purchase price will also cost more since both the call and put are purchased on the same options. What can happen is the option can fail to break out before the expiration date of the call and the put and the options trader will lose money on the purchases.
The buy straddle strategy is also used when buying a call option and a put option on the same asset. You find that it too requires the same strike price and expiration date on the asset and it also might be used in the same circumstances as the buy strangle. When there is a breakout but the direction is unknown and when there is low stock volatility is also when this strategy may be used. Like the strategy above there is also limited risk. The risks of the buy straddle are the same of the risks associated with the buy strangle.
There are many more strategies you will come across as you learn to trade options. It is important to have comprehensive knowledge of options as well as the trading strategies used while trading.
Simple options strategies provide a tremendous source of income when the right trading strategy is applied to the correct price move. These simple trading techniques will be demonstrated thoroughly during the Candlestick Forum Option Trading program on October 17 and 18th. If you would like to learn how to dramatically increase your income while at the same time reducing your risk, take advantage of the trading knowledge that has been applied to over 20 years of candlestick application. Click here for more information.
Market Direction: It is often asked, "Which option trading strategy is the best?" The answer is very simple. There is not a best option trading strategy. Successful option trading is a function of analyzing the most strongest and powerful price moves. Then putting on the proper option trading strategy on that trade. Most investors learn fun and exciting option trade strategies and then try to apply that strategy to a trade. That is not the method for successful option trading. There will be times when buying calls is the appropriate trade strategy. There will be times when placing a simple bullish call spread is much more advisable. Then there will also be times when selling a put spread makes more sense.
Options strategies are a secondary concern when putting on an option trade. The first parameter for a successful option trade lies in identifying powerful price moves. Candlestick analysis provides the trading format to identify the strong moves. Candlestick signals and patterns are the primary indicators. The reason signals and patterns are recognized is because of their historic results. There is expected results that are occur after witnessing signals/patterns in the appropriate conditions of a trend. There is one more high profit element that greatly enhances the power of a price move. The gap up!
A candlestick signal or pattern followed by a gap up in price is your best friend. Analyze the psychology behind this situation. The candlestick signal or pattern is a recognized formation that has proven itself to be profitable throughout the centuries. Otherwise we would not be looking at them today. They project expected results. A gap up in price from those formations provides simple logical information. A candlestick reversal signal at the bottom of a downtrend indicates the selling may have stopped. A gap up in price the next day confirms the change of investor sentiment and also demonstrates the new investor sentiment has great strength behind it. The gap up in price illustrates buyers enthusiastically want to get back into the stock. This is exactly what a candlestick investor should be looking for. A candlestick buy signal followed by great enthusiasm to get into that position. That not only reveals a high probability that a reversal of the trend has occurred but also implies the next uptrend may be a very strong one.
The NETC is a good illustration of a change of investor sentiment followed by a gap up in price. Late September shows a Doji at the end of a declining channel, followed by a gap up that started an uptrend that has remained consistently bullish. This chart scenario performs with a high degree of probability. Gap ups occurring in the proper places provides an investor with valuable information. What may have been acting as a resistance level previously is now not a concern when the price gaps up through that level.
NETC
As illustrated in the MBFI chart, a gap up through the resistance level indicated that resistance level was not going to persist anymore. There is now a new dynamic in the a stock price. Price gaps and the candlestick signals are your best friends. The combination makes it very clear what is occurring in investor sentiment. Knowing the results of candlestick signals/patterns followed by a gap up in price makes for profitable stock trades and extremely profitable option trades.
MBFI
Candlestick analysis provides one major factor. Timing! Timing becomes very important in option trading. Utilize this knowledge to make your trading much more successful.
DOW
Chat session Tonight 8 pm ET - Learn how to correlate the correct option strategy with the correct price move. Click here for instructions.
Candlestick Option Trading training - This weekend, October 17 and 18th, learn the simple strategies that are most profitable for specific candlestick price moves. This beginning/intermediate option trading course allows an investor to take advantage of information built into candlestick signals and patterns. Do not miss this opportunity to learn how to make big profits by simplifying option trading strategies. Click here for details.
Good investing,
The Candlestick Forum Team