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4 Ways to Create Conservative Options Trading

By  Mar 22, 2012

Topics: Finance & Investing

Options traders are always hungry for new, valuable sources for information. If you are a conservative investor who wants to learn how to create appropriate trades within your risk profile, and how to use options as a portfolio management tool, here are four suggestions for you:

1. Define “conservative” trading. What does this mean to you? Does it mean taking no risks at all and settling for smaller returns? Or do you expect more from the trades you set up. I have a definition of “conservative” that I like to use in my own trading. It is: “a strategy or series of strategies designed to increase income while reducing risk.”

2. Use fundamental and technical analysis in coordination with probability and volatility. To many options traders, analysis is of no interest. It is in the venue of stock selection, but options trading does not benefit from fundamental or technical analysis. I disagree. The best way to pick options strategies in a conservative manner is to base selection on probability and volatility, and also restricted to underlyings meeting both fundamental and technical criteria.

3. Decide on appropriate strategies and selection criteria. Don’t overlook the isolation of specific strategies. For many, the only truly conservative strategy is covered call writing, but the more I study the question of risk, the more I realize that there are many more strategies. It’s not just the attribute of an option position, but where and when you decide to enter, adjust and exit that define whether or not you are meeting the conservative standard.

4. Find good sources for more information. Options trading demands that you keep up with news and even rumors, not only for the options market but for all financial markets on which options can be traded. I highly recommend that whether you are experienced with options or you want to learn more about them, check out a new LinkedIn site, Options Conservative Investing which is specifically designed to address the philosophy that combines conservative ideals with higher than average income.

Michael C. Thomsett (thomsett@conservativetrade.com) is author of FT Press’s “Options Trading for the Conservative Investor.” He is an instructor with the New York Institute of Finance. He teaches five  courses: “Swing Trading with Options,” “The Amazing World of Options,” “Synthetic Options Strategies”, “Options timing and dividend income strategies,” and “Using candlestick reversal and continuation patterns to improve timing.”  He is also an investing and options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com