There are many option trading approaches. My analysis starts with the market. Almost 75% of all stocks follow the market. Get the market direction wrong when you are trading stock options and you will fail on three out of four trades. Next, my attention is focused on the underlying stock.
Before you can become a good option trader, you have to become a good stock trader. I have developed a proprietary scanner that narrows 25,000 stocks down to 400 stocks everyday. The results are categorized into high probability trading setups and I flip through the results using my pattern recognition skills. When I’m trading stock options, I look for momentum and I use options to leverage the opportunity. Once I have narrowed my list down to 20 stocks (both bullish and bearish), I conduct extensive fundamental analysis.
Finally, I evaluate the pricing to determine if there is an option trading opportunity. Sometimes the option markets are too ill-liquid and I have to take a position in the underlying stock.
Before you start trading stock options, you must identify an edge. I find relative strength and weakness within the market. If I am on the wrong side of the market, but I’m in the right stock, and I can mitigate my option trading losses because the stock is resilient. Sometimes, I can even make money. When I’m on the right side of the market and I’m in the right stock, my option trading profits rocket. Trading stock options is challenging, make sure you have a systematic approach.