Price Action for Options Trading

One Simple Tip To Improve Your Options Trading

Options trading is risky. This is what you hear about all the time. However, above all, Options Trading is STRESSFUL! Yes, most beginners lose money in options trading not because they cannot choose the correct stocks (most professionals cannot consistently get the correct stocks too!) but because they cannot handle the stress that comes with options trading and then crack and make all the wrong moves.

Are you one of them?

Have you ever bought a bunch of call options for a few stocks and then have your account value go down 30% to 40% overnight just because the stock vibrated in the wrong direction? What did you do? Your emotions got fired up and you decided to do the clever thing and executed your stop loss policy just to see the stock go back in the expected direction a few days later, denying you hundreds of percent in profit.

Yes, options trading is leverage and therefore is volatile! It is not strange to see your account value go down drastically especially during the first couple of days due to the often much wider bid ask spread of options and time decay should the stock move against you. So, how can anyone make money through directional trades?

One simple tip: Watch the Price Action of the stock and not your account value!

Price action means the change in price of your stock and whether or not its chart formation still conforms to your initial expectation. Watching the price action of the stock and not your account value keeps you objective when trading options. In the example above, when your account value go down 30% or 40%, you would instantly panic if you are going by nothing but your account value. However, if you are going by the Price Action of the stock, you might see that this small pullback does not compromise the initial setup of the stock and that its trend is still stable and decide to hold on. You will identify areas of support and resistance on the stock’s price chart itself in order to determine when to sell the stock options. By doing so, you will be able to make more winning trades than losing ones over time if your entry setup is reliable.

Yes, directional options trading for leverage is all about the Price Action of the stock! If the stock moves, the options will too and you will make money. If you allow the volatility of your options position and its impact on your account value hit your emotional buttons, you will always find yourself selling out of winning trades with a loss. Adhere to this one simple tip and you will improve your options trading performance!