3 Key Strategies To Use When Trading Stock Options

One of the most critical, and I mean critical things to be aware of when trading options is choosing the right underlying stock for that particular option strategy. In a previous article I covered selling naked puts and covered calls. 

3 Key Strategies To Use When Trading Stock Options

Now I'm going to talk about three strategies to use to help choose the right underlying stock.

Selling puts and calls is a waiting game. This strategy works best with stocks that do not move a lot. In other words, stocks that are somewhat non-volatile.

• Stock must have an Options Chain 

There must be options available for that stock. Not all stocks have options, so options strategies cannot be applied to all stocks. 

The first step in selecting an underlying stock is to choose a stock that has an options chain. This can be verified easily enough by looking at the quote detail on any stock and selecting "chain" or "options chain." By selecting this for a particular stock, you can see a list of put options and call options by month and in some cases years (LEAPs) for expiration dates. 

You will also be able to view the different strike prices available for a particular stock. You can get this information on any stock site such as MSN, NASDAQ or similar sites. Once you have a list of stocks with options move on to the next step.

• Technical Analysis

Most stock prices follow a certain pattern over time. People that are proficient in technical analysis can study these chart patterns and try to predict or anticipate the price movement of a stock.

Technical Analysis

Past performance does not guarantee future success and stop losses are in place to address this. That being said, this tool is extremely powerful in predicting the future price patterns of a stock when applied properly and with discipline. 

Use technical analysis to identify stocks that are moving in tight ranges (not choppy) and ideally flat or slightly trendig upward. Looking for rising trendlines and channels will be particularly useful. 

This should significantly narrow down your list from step 1. Lastly, apply technical analysis to the major indices such as the DOW Jones, NASDAQ, and S&P. Stocks tend to follow the direction of the market. Your chances of success will be much higher if you apply your strategy in line with the market direction.

Technical analysis alone will greatly increase your chances of picking the right underlying stock for your options strategy.

• Fundamental analysis.

This type of analysis involves looking at the financials of a particular stock. This involves things such as sales, income, debt to earnings, price to earnings, market cap, etc.

Fundamental analysis vs Tecnical analysis

Once you have narrowed down your list from methods one and two, further narrow down your list by choosing stocks with a strong balance sheet. Look for strong earnings, low debt, low price to earnings (P/E) and positive news about the company such as new products, etc.

There is not much more to say on this strategy other than that you need to choose the right healthy underlying stocks for your options strategy.

In summary, options trading involves choosing the right underlying stock. This process can be made simple by first finding stocks that have an options chain, then applying technical analysis to find the right price pattern. Lastly, use fundamental analysis to narrow down this list to your master stocklist. Look for proper entry points and choose your option strike price based on these points.

Article Source: http://www.streetarticles.com/retirement-planning/3-key-strategies-to-use-when-trading-stock-options

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