Options spread trading is simpler, easier and less terrifying than most people believe. All you need is some elementary understanding of the options spreads and a discipline to follow few basic strategies.
During recent months, I have written and published more than two dozen articles on stockinvestor.com about options spread trading. I tried to explain which traits every successful spread trader needs, how to identify market trends, which trading strategy to use and how to control risk. My hope in writing these articles was that you will be able to take them, learn from them and begin trading.
There are guides available for options trading that someone with a PhD in mathematics might have a tough time following. Yet, those guides cannot assure you of any greater level of profitability then the simple information I provided in this series of articles.
None of the methods I have explained are unique, nor did I invent any of them. The origin of technical analysis goes back many years and even includes analyzing how the stars, the sun and the moon affect the stock market. I chose to stick with more easily discerned technical patterns.
I tried virtually all of the systems out there before I came back full circle to the simplest methodologies that seemed to work just as well or even better than the more complicated systems that I tried.
A notable example of a well-known but extremely complicated trading system is the Elliott wave principle. I studied the Elliott wave principle and attempted to use it. However, I found out that even the experts had two or three variations on every wave. That level of confusion made the Elliott wave theory unworkable for me as a trading indicator.
Simplicity is key
Instead of complicated analysis, you need only to identify the trends and look for a confirmation between the short-term trend lines, long-term trend lines and sometimes volume. This information is often more than enough to push your trading confidence above the 55% level I like to see. Even most of the successful traders do not trade profitably at more than 55% probability on a regular basis. They still are able to make their millions, or billions in some cases, because they let their winners run.
There are just a few basic concepts that you need to understand. You must analyze the market from a technical perspective for short-term trades, choose the right strategy that matches the market trend and follow your trade plan. Your trade plans must state clearly what would bounce you out of the trade and how long you expect to be in it, as well as estimate your profit and loss potentials. If you follow this simple regimen, you will be amazed at your potential for executing consistently profitable trades.
The dream of every option trader, as my goal was when I started out, is to create a part-time income from relatively little work done by trading the markets with options. That dream is entirely within your grasp if you follow the solid principles I have laid out.
My one warning for anyone jumping into trading for the first time is that it is better not to trade then to trade without establishing the odds in your favor.
I cannot emphasize enough that overtrading is a hallmark trait of a trader who is heading down a slippery slope to losing a lot of money. To trade profitably, you must be like a sniper. You are not taking aim at every potential opportunity, but rather carefully setting yourself up to make the most of the few selected opportunities.
While there are no certainties in options spread trading, you can use a few simple tactics and strategies to minimize your risk exposure and maximize your probability of a successful trade. If you do this every time on small trades and repeat the process frequently over an extended period, you will have an excellent chance to generate a steady income from options spread trading.
Billy Williams is an author and a 25-year veteran trader. For a free strategy guide, “Fundamentals for the Aspiring Trader”, and to learn more about profitable trading, go to www.stockoptionsystem.com.