Craft Your Own Strategy with Active Options Trading
To craft your own options strategy, start with your market view (up, down, or sideways), your risk tolerance, and your time frame, then choose the structure that fits: buying calls or puts for a directional view, covered calls or cash-secured puts for income, and vertical spreads to cap both risk and reward. Check each position's Greeks (delta, gamma, theta) and the level of implied volatility before you trade. Options can lose value quickly, and this article is educational, not trading advice.
Understanding Options and Volatility Index
Options trading starts with understanding calls and puts and how to combine them for the outcome you want. Call options grant the holder the right to purchase an asset, while put options grant the right to sell the asset for a specified strike price. This means that trades can be made in both directions, providing the flexibility to make money in rising or declining markets. Buying puts is one way to profit from a decline without short selling the stock.
A volatility index, such as the Cboe VIX, measures the market's expected volatility over the next 30 days, calculated from current S&P 500 option prices. It is often read as a gauge of fear or complacency in the market. By monitoring the Volatility index, traders can better time their trades and adjust their strategies accordingly.
Making the Right Strategy For You
Options trading involves the use of techniques such as spreads, hedging, leverage, and technical analysis. It is important to select a strategy that works best for individual investment style, risk tolerance, and goals. For example, if a trader is looking for a more aggressive strategy, they may use strategies such as selling naked calls and taking on more leverage. On the other hand, if a trader is more conservative, they may employ strategies such as covered calls, vertical spreads, and using less or no leverage.
When constructing a strategy, it is important to understand the ‘Greeks’, which are metrics used to measure the sensitivity of an option to the underlying stock price. Knowing the delta, gamma and theta of an option can allow a trader to make more informed choices when constructing their strategy.
Making Use of Active Trading Platforms
With the advancement of online platforms, active traders no longer have to sit in front of multiple screens and frantically trade options. Many platforms allow traders to quickly analyze markets, place orders, monitor positions and manage risks in real-time.
MarketXLS is an Excel and Google Sheets add-in that returns option chains, option prices, and Greeks as formulas, for example =QM_GetOptionChain("AAPL") and =QM_GetOptionQuotesAndGreeks("AAPL"), so you can model a strategy's risk and payoff in a spreadsheet. Options data is end-of-day on the Standard plan and real-time on the Advanced and Business plans. The free Options Profit Calculator charts a strategy's profit and loss. Beginners can start with the Investing 101 guide.
Final Word
An options strategy should match your market view, risk tolerance, and time frame, and every position should have a defined maximum loss you can accept. Spreadsheet tools such as MarketXLS help you analyze prices, Greeks, and payoffs before you place a trade with your broker.
Here are some templates that you can use to create your own models
Relevant blogs that you can read to learn more about the topic
How To Find The Most Active Options (Marketxls’S Option Scanner)
Best Options To Buy (Use Marketxls For Research)
Open Interest Analysis (Explained With Examples)
Options Trading for Passive Income