There are countless options trading strategies, and you could spend hours watching YouTube videos and reading articles on how to trade options.
David Jaffee of BestStockStrategy.com makes it simple by breaking down the best options trading strategy for beginners and advanced traders.
Selling option premium offers a higher probability for profit, and you can earn a consistent profit selling options if you have the right risk management strategy.
Keep reading to learn which trading strategy is best.
Should You Buy or Sell Options?
When you sell options, you put the probability of profit in your favor.
If you sell options, you turn yourself into a casino or an insurance company, but when you buy options, you engage in a low probability trade.
Selling options provides the ability to have a very high win rate.
Every time you sell options, your expected probability of profit is over 50%.
If you choose your strike prices correctly, you can oftentimes win over 95% of your trades when selling options.
Even so, there are times when it's very important to BUY OPTIONS. You need to be contrarian and buy options during periods of complacency and low VIX so that you can reduce, and mitigate, portfolio volatility.
How to Minimize Risk with Options Trading
The best options trading strategy must include risk management.
David Jaffee has taught more than 1,500 students how to sell options and manage risk.
Instead of trading aggressively, David Jaffee encourages his students to practice patience and discipline.
His risk management strategy for trading options includes developing a watchlist, setting the right strike price and expiration date, trading small, selling options and also buying options.
Develop a Watchlist of Stocks
David Jaffee teaches his students how to develop a watch list of stocks to minimize risk when selling options.
Your watchlist should consist of market leaders and strong brands, like Amazon, Tesla, Microsoft, JP Morgan, as well as indices such as QQQ, SPY / SPX and SCHD.
Because market caps on these stocks are so high, you do not have to spend extra time researching them because almost all of the public information is priced into the current market price of the stock.
Learn Trading Ranges for Your Stocks
Once you have a watchlist in place, you need to get comfortable with the recent trading range of the underlying stock.
Learn where the stock has been trading over the past few months while giving more weight to the most recent trading range.
The more recent the trading range, the more important it is to factor into your decision.
This strategy will enable you to learn the 52-week high and understand when stocks are trading at the high end of their range, so you can decide whether to sell a put or call.
If you believe the underlying stock is oversold, you can sell a put. If you believe the underlying stock is overbought, you can sell a call.
Set Your Strike Price and Expiration Date
The expiration date of your call or put option impacts the premium collected by selling an option, and you have to understand both to become successful at trading options.
David Jaffee recommends selling an expiration about four to five weeks out while looking at the available premium on that specific strike price.
If you believe the available premium is enough to compensate you for your perception of the risk you are taking, then you should make the trade.
If you believe a stock is oversold, then you can sell a put option about 10% to 15% below the current market price of the underlying.
If you believe a stock is overbought, you can sell a call option and collect premium for making that trade.
During times when VIX is low, around 15, and VVIX is also low (below 80), it's important to buy put options to protect against future volatility and drawdowns.
Consider the VIX, Implied Volatility, and IVR
Once you’ve set your strike price and expiration date, you need to consider the VIX, implied volatility, and IVR on the specific underlying.
The VIX and VVIX measure the respective fear and panic that is present in the overall market.
You don’t want to enter a position only to see the VIX and VVIX rapidly expand because once you enter a new position, you are already committed.
The best thing you can do is sell option premium during periods of high implied volatility and during periods when the VIX and VVIX are relatively high.
VIX over 20 indicates that you are going to collect a substantial amount of premium.
When the VIX is below 20, you have to be more careful because you don’t want to open a new position and have that position show you a loss if the market pulls back in the near future.
It is important for options traders to familiarize themselves with VIX and VVIX to manage risk.
Don’t Trade Too Large
Some traders consider selling options to be risky because options are a leveraged product.
You don’t want to sell too many contracts only to see the market go against you where you'll be forced to close the position for a substantial loss.
David Jaffee teaches his students how to target earnings around 3% every month, trade very small, and leave 40% to 50% of your account as cash available for withdrawal.
This approach is different from many options trading courses that encourage aggressive trading.
Also, by purchasing options during periods of low volatility, you'll protect your portfolio against future pullbacks.
Reducing drawdowns is very important. In fact, I believe that reducing portfolio volatility is the MOST IMPORTANT goal, that way you don't lose your gains when the market corrects and your positions go against you.
Learn Successful Options Trading Strategies
Are you ready to learn which trading strategy is best?
Visit BestStockStrategy.com today and enroll in David Jaffee’s online options trading course.
The course contains comprehensive lessons where you can learn how to sell option premium for a profit and manage your risk when trading.
Frequently Asked Questions (FAQs)
Which Trading Strategy is Best?
Trading options is the best trading strategy, but because it uses leverage, it's also risky. It's important to sell options on stocks and indices that you want to own.
You should never sell naked options on stocks or indices that you do not want to own.
It's also a good idea to buy options during periods of complacency to protect your portfolio against future volatility.
Which Stock Market Trading Strategy is Most Profitable?
Trading options is the best trading strategy, but because it uses leverage, it's also risky. It's important to sell options on stocks and indices that you want to own.
You should never sell naked options on stocks or indices that you do not want to own.
It's also a good idea to buy options during periods of complacency to protect your portfolio against future volatility.
Where can I learn about the best stock market trading strategy?
You can learn about the best stock market trading strategy at https://BestStockStrategy.com and / or at https://YouTube.com/BestStockStrategy
What's the #1 rule, and most important rule, when trading in the stock market?
Don't lose money. We achieve this, when trading options, by purchasing options to protect our portfolio and reduce portfolio volatility.