- Jan 22, 2009
The Art of Option Trading
In options trading the infamous adage "There is more than one way to skin a cat" holds true. Many traders choose to ignore technical or charting tools and focus on market fundamentals. Yet others look strictly at chart formations to construct trades. Regardless of the market analysis tools used, we have found that traders can increase their odds of success by becoming familiar with option strategies other than buying outright calls or puts.
Over the next several chapters we outline and analyze many of the commonly used option strategies. We offer our opinion on when each strategy should be used and the manner in which we recommend using them. Additionally, we cover the associated risks and rewards of each of the differing approaches. As you will find, our interpretation of risk may be different than what you might find in alternative literature. For instance, in our opinion limited risk is not necessarily synonymous with less risk. In fact, in most cases limited risk, although it provides a cap to potential losses, may create a scenario in which your probability of loss is extremely great.
Each of the option trading styles mentioned throughout this text may or may not be appropriate for your risk tolerance. It is our goal to provide you with the information that you need to skew the odds away from the market insiders and toward you as a retail trader. Remember, roughly three out of four independent speculators walk away from the futures and options market with less money than he came with. However, only you can decide whether any of these trading methods are suitable for you and your piece of mind.