Many traders like to use more sophisticated options strategies in their trading but many times the simple call options trade is the most appropriate trade for the market condition. Follow the following steps to increase your probability to profit from call option trading.
Determine that the cost of the underlying instrument is going up. Trading call option is a directional strategy. This means you’ve got to pick the meaning of the market, and, with a view to profit the market should move up. There are many different ways to anticipate upward market movement. Some people respond to good market news and some use fundamental data such as increasing earnings per share, increasing dividend yield, increasing revenue, etc. Some use chart patterns that indicate upward market movement such as double bottom, ascending triangle, reverse head and shoulder, and upside price breakout. Some use other systems such as Elliot waves, and systems which use combinations of price patterns and other indicators.
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Determine the target of the price movement. The system that you use to indicate an upward price movement should also indicate a target price for the movement.
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Anticipate the time for the underlying price to go to your target price. How long do you hope to the underlying instruments price to go to the target price? This is important to identify the expiration of the call options you wish to trade.
Look at options chain. Bring out the options chains to see the quotes and other relevant data. Nowadays, real time options chains are easily accessible through the internet. You can also call your broker to put this information.
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 on the basis of time you expect the price to move. Unless you’re using a trading system which trades options near their expiration, normally you would want to buy call options with expiration that is slightly longer than the anticipated time. This is to reduce the impact of time decay. This is very important because time decay can cause your call options to lose in value.
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. High Delta and high Gamma can get you a higher and faster profit when the underlying instrument’s price moves up. When you’re buying options, low Vega is very important. Low Vega means cheaper options and when Vega increases, you make profits even though the underlying price doesn’t move. Low Vega is associated with low volatility and quiet market. And low Theta means the call option makes smaller loses due to time decay. If you’re a longer term trader, you can choose out-of-the-money call options. These options have smaller delta but they’re cheaper. If you’re a shorter term trader, you would prefer at-the-money or in-the-money call options as they can give you faster and higher profits due to higher Delta and Gamma.