by Andy Chambers
Let’s look at how an options trader decides which of the many different strategies to use. The most important element in trading options is your ‘outlook’ on the particular market you’re about to trade. If your outlook is ‘bullish’, then you’ll need to create a bullish strategy. If it’s ‘bearish’, you’ll need to create a bearish strategy. And of course, if your outlook is ‘neutral’, it’s possible to create an options strategy that will profit if the market remains neutral. If you haven’t got a clue as to the direction of a market, don’t trade.
There are many possibilities, here are just a few:
In addition to the above, we could add…
If you are expecting a big move but you’re not exactly sure if the move will be up or down, then buy straddles, strangles or combinations.
When looking at your charts, only you can tell.
For our purposes, we always have an opinion as to the direction of a particular market. One of the most important factors involved in forming our opinion is an analysis of historical data. Let’s look at an example, the chart below was constructed by using 24 years of data.
In looking at this chart, if our goal was to benefit from an increase in the price of Oil, our best opportunities would likely come from mid-February through mid-September. Similarly, from early October through early December, our ‘outlook’ would be ‘bearish’ and opposed to ‘bullish’.