You might know absolutely everything there is to know about options trading, but unless you are able to put that knowledge to use, make good decisions about what trades to make, and when you are unlikely to make much money. The hardest part of planning each individual trade, probably, is choosing which strategy to use.
This is especially true if you are relatively new to trading options, or if you don’t have a broad understanding of the different strategies that can be used. Even experienced traders can sometimes struggle to determine what the best strategy to use is, although it's fair to say that the more options trading experience you gain the easier such decisions become.
In reality, there's actually no such thing as the right strategy. There are many factors to take into consideration, and a strategy that might be suitable in one situation could be completely inappropriate for a different set of circumstances. A lot also depends on the individual too, because what is right for one trader might not be right for another.
We would never claim to be able to tell you exactly which strategy you should be using for any situation, but we can offer advice on how you can make that decision yourself. On this page, we look at a number of the considerations you need to be taking into account.
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If you are relatively new to trading options, then we would suggest that you spend some time working out the best strategy to use each and every time you enter a new position. As you become more experienced, you will have a better idea about how each strategy works and the process for making a decision should become more straightforward for you.
If you want to be truly successful at options trading, consistently making money, maximizing your potential profits and limiting your potential losses, then being able to accurately predict price movements of financial instruments is unlikely to be enough by itself.
If you can do this, and buy and sell options based on those financial instruments accordingly, then there is of course money to be made. However, to make the most out of your predictions and control your exposure to risk at the same time you really need to be able to choose the most appropriate strategy for any given situation.
Unfortunately, there's no single best way to decide what that might be and you need to take many factors into account. We should also point out that you don’t have to use a pre-determined strategy and you can always develop your own. However, we would suggest that you only start developing your own once you have been trading for a while and been reasonably successful.
As a very general rule, we would advise beginners to stick to the more basic strategies, but that still leaves plenty of choice. As you get more experienced, you will almost certainly want to consider some of the more advanced and complex ones, giving you even more to choose from.
The best advice we can give is that you learn as much as you can about the most commonly used options trading strategies, and try and get a good idea of how each of them works and their advantages and disadvantages. Then, whenever you identify an opportunity, you'll be able to determine which strategy is the most suitable based on your outlook and your own personal circumstances and objectives.
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