What You Must Know To Master Options Trading

Thousands of small retail traders are making a living, and some a fortune, from trading options and you are eager to take a shot at it too, aren't you? So, what are some of the things you must know in order to master options trading?

What are stocks and shares and how they work

Stock options are derivatives of shares. This means that you need to know what shares are in the first place in order to understand the role of options and how options work. In fact, you will need to be a master of stock and shares behavior before you could be a master of options trading because options are merely tools that help you exploit these stock and shares behavior profitably.

What options are

Sounds like common sense but most options traders start out thinking options are just "another stock" which you simply buy low and sell high. Those who jump into their first options trade like this usually get a shock of their lives when they either realize that options don't quite move the way they expect them to move and don't quite behave the way they expect them to behave. Knowing how options work and what their underlying mechanisms are, the logic behind call and put options are the basic knowledge all master options traders need.

Options strategies

The real magic of options trading lies not in simply buying call options for stocks expected to go up or buying put options for stocks expected to go down. The real magic of options trading lie in the universe of options strategies which allows you to profit not only from an upwards or downwards market but even in a neutral or volatile one. You probably won't be able to learn, practice and master each and every of the hundreds of options strategies but you should have at least one or two options strategies of each class that you are totally familiar with and have paper traded so that you have a weapon for each market condition.

Technical Analysis

Technical analysis is particularly important for options trading as it is through technical analysis that you can make trend analysis in order to know what class of options strategy to apply in the first place. Technical analysis is extremely important in options trading also due to the fact that entry and exit timing is extremely important in options trading where there is a fixed expiration. Technical analysis has been used over the decades as a tool for precision entry and exit and is now an important tool in options trading.

Options Greeks

Options Greeks are the mathematical components that define how a particular option would behave in response to factors such as changes in the price of the underlying stock, changes in volatility, changes in interest rate and time decay. An intimate understanding of all the options Greeks allows you to better understand and predict the behavior of an options position. It also allows you to make intricate adjustments to your options position in order to create a payoff profile that conforms to the exact predicted behavior of the price of the underlying asset.

Delta Neutral Trading

Delta neutral trading is the ability to tweak a position's delta status to a level that is zero or almost zero such that small volatilities in the price of the underlying asset do not affect the value of the overall position. When delta neutral trading is performed correctly, it could even be used as a hedge which profits no matter which direction the price of the underlying asset breaks out into next. This can only be achieved by a combination of call options, put options, the underlying asset and even futures. Different situations require a different approach to delta neutral hedging and that is why it takes a strong knowledge in all of these instruments in order to do delta neutral trading well.