Many traders like to use more sophisticated options strategies in their trading but many times the simple call options trade is the most suitable trade for the market condition. Follow the steps below to increase your probability to profit from call option trading.
Step 1
Determine that the price of the underlying instrument is going up. Trading call option is a directional strategy. This means you have to pick the direction of the market, and in order to profit the market should move up. There are many different ways to anticipate upward market movement.
Step 2
Determine the target price for the movement. The system that you use to indicate an upward price movement should also indicate a target price for the movement.
Step 3
Anticipate the time for the underlying price to move to your target price. How long do you expect the underlying instruments price to move to the target price? This is important to determine the expiration of the call options you want to trade.
Step 4
Look at options chain. Bring out the options chains to see the quotes and other relevant data. Nowadays, real time options chains are easily available through the internet. You can also call your broker to get this information.
Step 5
Narrow down to the exchange, and expiration date. If you trade online, determine the exchange you want your order to be submitted. Determine the appropriate expiration date based on the time you expect the price to move.
Step 6
Compare the Delta, Gamma, Vega and Theta for several strike prices of the same expiration. After you narrowed down your options chain to the specific exchange and specific expiration date, you look at the Greeks. Ideally you want to have high Delta, high Gamma, low Vega and low Theta.
Step 7
Evaluate your risk versus rewards based on your target price. You can also use a risk profile to help you make the evaluation. Calculate you breakeven point using this formula: breakeven = call strike + call premium.
Step 8
Look at the open interest and volume. It is better to trade in an active market so that you can buy and sell easily. Another reason is that you don’t lose a lot on the bid/ask spread.
Step 9
Choose the best call option with the highest probability for profits.
Step 10
Determine exit point and stop loss. Do this so that your emotions do not take over your decision making after you place in your trade.
Step 11
Place in your trade. Call your broker or key in your trade online.
Step 12
Watch the underlying instrument’s price movement and the option’s price reaction.
Step 13
Close your position. If you made a profit, close your position by either selling the call options that you bought or exercise the call option and sell the shares. If you made a loss, close your position by selling the call options.
Tips
- When you buy options, avoid buying when the volatility is high.
- If you are a longer term trader, you can choose out-of-the-money call options because they are cheaper.
- If you are a shorter term trader, you would prefer at-the-money or in-the-money call options because they can give you faster and higher profits.
Warnings
- Required Disclaimers: Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. The past performance of any trading system or methodology is not necessarily indicative of future results.
