A new trader could start by trading exactly like a tastyliver but that is probably asking a lot. It might be hard to grasp all the concepts and believe in them to take that first step. That’s why we decided to put together this strategy overview which can take you from beginning strategies to more advanced ones, each accompanied by a table which lists the directional bias, Probability Of Profit (POP), the level at which to manage winners (if there was one) and defensive measures such as rolling to be taken for those trades with an undefined risk.
A short Put was the first strategy examined. Most traders will have an upward directional bias on a particular stock or the market as a whole. Instead of buying the stock or the stock index a short Put might be better. It lowers your cost basis and increases your POP. The flipside of the short Put is the short Call. This is appropriate when a trader has a bearish bias. The guys reviewed the benefits of a short call. So what do you do when you have no directional bias? A 1 Standard Deviation (SD) Strangle was the next strategy discussed. This combines the short Put and short Call strategies. To do the same thing but take on more risk (and hopefully more reward) one can trade an at-the-money (ATM) Straddle.
The rest of the the strategies were ones with defined risk. A Vertical Credit Spread, using either Puts or Calls, was examined and then a Vertical debit Spread. Finally, an Iron Condor was discussed. Just as the short Strangle is a combination of a short Put and a short Call an Iron Condor is a combination of a short Call Spread and a short Put Spread.
For more information on Strategy Selection see:
Best Practices from August 5, 2013: "Strategy Selection"
tasty BITES from December 9, 2015: "Trade Checklist & Strategy Selection"
Options Jive from February 24, 2016: "IV Indices And Strategy Selection
Watch this segment of Best Practices with Tom Sosnoff and Tony Battista for a great overview of the main strategies we use when we trade options.
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