Master Options Trading Step by Step

Welcome to Options Owl. When I started trading options, I paid a high fee (in four figures) to attend an options training class and left with extremely basic options knowledge and three basic strategies. Over time, I learned that there is a lot of information out on the internet, but it is difficult to understand, and an entire industry teaches people how to trade. I am an adult educator myself so I have nothing against training but there is a need to provide facts and explain these in simple language for anyone just starting out or simply curious about options trading.

Master Options Trading Step by Step

Our goal is to learn and master the fundamentals. While options trading is complex and there are many terminologies and hundreds of scenarios and strategies, our goal is to learn the basics and then master these so we are confident of applying these fundamentals to achieve our goals.

Three Core Fundamental Focus 

Trading can be as complex as you want it to be. The goal is to know what are the key fundamentals and keep it simple. I will focus on the following three core fundamental focus areas.

• Options Fundamentals
• Charting Fundamentals
• Core Options Strategies

Now, let’s take a look at each core area.

Options Fundamentals

If you are you are new to options trading, you might feel overwhelmed by the jargons and complexities. But fear not, because we’re here to guide you through the fundamentals of options trading.

What Are Options?

In simple terms, an option is a contract that gives you the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specific time frame.

These underlying assets can range from stocks and commodities to currencies and indices.

Types of Options

There are two types of options: calls and puts. A call option gives you the right to buy the underlying asset at a specified price (known as the strike price) before a certain expiration date, while a put option gives you the right to sell the asset at the strike price within the expiration period.

Leverage

One of the key advantages of options trading is leverage. With options, you can control a larger position with a smaller amount of capital compared to buying or selling the underlying asset directly.

This can amplify your potential returns, but it also increases your risk, so it’s important to understand how to manage your positions effectively.

Premiums

Another important concept to grasp is the idea of option premiums. The price of an option is determined by various factors, including the price of the underlying asset, the strike price, the time until expiration, and market volatility. The premium is the amount you pay to buy an option or receive to sell an option.

When getting started with options trading, it’s crucial to educate yourself and develop a solid understanding of the basics. Take the time to learn about different strategies, risk management techniques, and market analysis methods. Practice with paper trading or small positions to gain experience without risking large amounts of capital.

Remember, options trading can be complex, but with dedication and discipline, you can become a successful trader. Stay patient, stay informed, and always be willing to adapt and learn from your experiences. Happy trading!

Charting Fundamentals

Charting plays a crucial role in options trading, providing traders with valuable insights into market trends, price movements, and potential entry and exit points.

Whether you’re a beginner or an experienced trader, understanding the fundamentals of charting is essential for making informed decisions and maximizing profits in the options market.

The following are the key fundamental charting knowledge and skills you will learn and master over time.

Types of Charts

There are various types of charts used in options trading, with the most common ones being line charts, bar charts, and candlestick charts. Each type has its advantages, but candlestick charts are widely preferred for their ability to display price action patterns and trends effectively.

Time Frames

Different time frames, such as daily, weekly, or intraday, provide different perspectives on price movements. Longer time frames are useful for identifying major trends, while shorter time frames help traders pinpoint entry and exit points for shorter-term trades.

Support and Resistance Levels

Support and resistance levels are key price levels where buying or selling pressure is expected to be significant. These levels are identified by connecting significant price highs and lows on the chart and can help traders determine potential reversal points or breakout opportunities.

Trendlines

Trend lines are diagonal lines drawn on a chart to connect consecutive highs or lows. They provide visual cues about the direction of the trend and can be used to identify potential trend reversals or continuation patterns.

Indicators

Technical indicators, such as moving averages, RSI (Relative Strength Index), MACD (Moving Average Convergence Divergence), and Bollinger Bands, are mathematical calculations applied to price data to help traders analyze market conditions and make trading decisions.

Volume

Volume is an essential component of chart analysis, representing the number of shares or contracts traded during a specific period. Increasing volume often confirms the validity of a price move, while decreasing volume may signal a lack of conviction in the market.

Patterns

Chart patterns, such as triangles, head and shoulders, flags, and pennants, offer valuable insights into potential future price movements based on historical price action. Recognizing and understanding these patterns can help traders anticipate market behavior and plan their trades accordingly.

By mastering the fundamentals of charting, options traders can gain a competitive edge in the market and improve their trading performance. Remember to combine technical analysis with fundamental analysis and risk management principles to develop a well-rounded trading strategy.

Core Options Strategies

We will begin by focusing on a few core option strategies, you can build a solid foundation for your trading journey. Let’s explore some essential strategies that every beginner should know:

Covered Call

The covered call strategy involves selling a call option on a stock that you already own. This strategy generates income from the premium received for selling the call, while also providing downside protection from the stock you own. It’s a great way for beginners to generate additional income from their stock holdings.

Long Call

The long call strategy is a bullish strategy where you buy call options on a stock you believe will increase in price. By purchasing call options, you have the right to buy the stock at a predetermined price (strike price) within a specific timeframe (expiration date). This strategy offers unlimited profit potential if the stock price rises above the strike price before expiration.

Long Put

The long put strategy is a bearish strategy where you buy put options on a stock you believe will decrease in price. Put options give you the right to sell the stock at a predetermined price (strike price) within a specific timeframe (expiration date). This strategy allows you to profit from a decline in the stock price and provides downside protection for your portfolio.

Protective Put

The protective put strategy, also known as a married put, involves buying a put option on a stock you own to protect against potential downside risk. If the stock price declines, the put option will increase in value, offsetting losses in the stock position. This strategy is ideal for protecting gains in a bullish market or hedging against potential losses.

Cash-secured Put

The cash-secured put strategy involves selling put options on a stock you wouldn’t mind owning at a lower price. By selling put options, you collect premium income upfront. If the stock price remains above the strike price at expiration, you keep the premium as profit. If the stock price falls below the strike price, you may be obligated to buy the stock at the strike price, but at a lower cost basis because of the premium received.

These core option strategies provide a solid starting point for beginners to explore the world of options trading. Remember to thoroughly understand each strategy, consider your risk tolerance and investment goals, and always practice proper risk management. With time and experience, you’ll gain confidence in implementing these strategies and navigating the options market successfully.

References

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