Trading Strategies: Researching New Options Positions

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Nov 24, 2021
Behailu Tekletsadik

Trading options can be a rewarding and exciting way to generate profit, hedge open positions, and participate in the markets.

However, what should you do when you don’t know what to trade next?

Many investors often find themselves in a position where they do not know what options to trade. They are either out of ideas or their current trades are consistently moving sideways.

Our goal here at Lantern is to enable investors and traders to make intelligent and educated trades, so today, we will discuss how to find inspiration and research for new options positions.

By the end of this article, you should have a good idea of where to begin and be well on your way to developing your next

Set Objectives

It’s essential to set clear objectives before you start any new trades, especially if you are developing new options positions that you may not be as experienced in:

Speculation

Options can be a great tool to speculate on dramatic price changes in underlying assets. If you believe a stock is going to appreciate quickly, buying call options may be a great way to capitalize on the price movement.

If you think that company is going to tank after missing earnings, buying puts will allow you to effectively short the stock without putting too much capital at rest.

Generating Income

Writing options enables you to receive a premium and generate income if the option you wrote expired worthless.

Generating income by selling options can be an effective strategy during periods of high implied volatility, and the premiums received can offset some of the costs of speculative long trades.

Hedging Other Open Positions

Options are a powerful hedging tool for other positions you may be holding but are afraid of short-term volatility.

For example, if you are long 2000 shares of XYZ Corporation, and you do not sink their upcoming earnings will meet analyst expectations, you could purchase put options that will appreciate if the stock price goes down.

Hedging positions with options can help mitigate losses and the effects of volatility.

Identify New Stocks or Industries

The next step and researching new options positions to trade is to identify new underlying assets or sectors that you are curious about.

If most of your options trades center on one vertical such as Automotive, tech, or pharma, you may be missing out on potentially lucrative trades by excluding other Market sectors.

Take some time to learn about a new market sector and some of the top companies that analysts and other researchers recommend.

This is a simple and Powerful methodology to gain exposure to new markets and develop new options trading strategies.

Build a Strategy

Once you identify the goals for your new trades and find some new asset classes to explore, it is time to develop a strategy.

Your strategy can be complex or straightforward, but you should have a thorough understanding of your risk tolerance, potential payoff, and timeline to execute.

Ask yourself questions like:

  • Are there any Market events that may impact my trade?
  • Is the underlying company anticipating any dramatic news?
  • Is my goal to be aggressive or conservative?

These questions will help you set parameters and go into new positions with a level head.

Define Risk Levels

How much risk are you comfortable with within this trade? Are you prepared for unlimited risk such as writing naked options, or are you okay with some rest as long as you don’t lose the entire premium?

Place Trades

Now it is time to place your trades. While options always have inherent risk, developing a strategy and researching new positions is a wonderful way to learn more about the market, your trading style and gain exposure to new markets.

Hypothetical Application

Let’s see how a new position may play out with XYZ Pharmaceuticals. You’ve done your research, and you think that XYZ Pharmaceuticals will have their clinical Trial approved, which will likely result in share prices skyrocketing.

There is not much implied volatility since the market does not know what to expect, so you decide to utilize cheap OTM calls to employ your new strategy.

  • Objective — Speculate on the outcome of a new clinical trial (Bullish)
  • Current Price — $29.45
  • Strike Price — $35
  • 5 Month OTM Call Price — $1.05; Breakeven at $36.05 ($35+$1.05)
  • Clinical Trial — 4 Months away.

Theoretically, your maximum gain is unlimited as long as the share price goes past your break-even point. Since the strategy is purchasing naked calls, your maximum loss is the premium you paid or the option contracts.

Although this is a hypothetical example, here at Lantern, we want to make sure that all of our users understand how different strategies work. We also want to provide Personalized insights so that you are confident in your trades and can utilize actionable information to push you and your trading ability to the next level.


Trading Strategies: Researching New Options Positions was originally published in Lantern on Medium, where people are continuing the conversation by highlighting and responding to this story.