There is no option trading strategy which can be called best.
Quest for the best strategies or even a good strategy is an endless pursuit. Every trader whether trading Options, Futures or Equities is looking for a strategy to stay profitable.
Precious time is spent, huge data is back tested and the experts come out with some formula, method or strategy with fancy name. Do they guarantee that this fruit of their hard work will always deliver profit? No.
The success ration may improve to 60–65% with best of the strategies.
Will they ultimately be profitable?
No, if applied blindly.
Yes, if used judiciously.
So finally it is not the strategy which generates the profit but its application in a controlled manner.
Having stated that there is no holy grail, let us see what the next best thing is.
Is Option Trading Really Complicated ?
It is human nature to look for problems where none exist.
Life is simple, we complicate it ourselves and then spend our time clearing the mess.
Here is the much revered Option Pricing Formula:
I would leave it to the mathematicians and experts to deal with. We traders should look at the screen for the price action and get our two cents or two dollars from that. Whether the Option is priced perfectly or not is immaterial.
Who said markets were rational?
And which formula would work in irrational environment.
Some strategies are listed in the chart below with impact of Vega and Change in Implied Volatility indicated:
Does it mean anything to you and me?
I am not sure.
I have been trading options for quite a few years without caring for these definitions. Probably, the impact is understood automatically through price action.
Or I would have become a far better trader had I perfected my knowledge of these theories and formulas.
What Do You Want To Achieve? :
You want to be a good trader.
Work towards that goal.
You want to learn driving. Learn it. Do not aspire to be Michael Schumacher on the first day of driving.
And do not try to become automobile engineer when all you want is to learn driving.
That is where most people waste their time and energy.
For crossing a railway track, look left and right and cross. Do not try to memorize the train time table just for crossing the track safely.
What Strategies Should One Use ? :
We are back to where we started. A trader is an inquisitive person. Whether winning or losing, one would still like to know if there could be some better method for trading.
For that, a trader has to know himself ( herself ) first.
Option Buyer has the potential for Unlimited Profit and Limited Loss.
But the probability of the Limited Loss is very high.
Option Seller has the potential for Limited Profit and Unlimited Loss.
Probability of profit is higher than that of loss.
So most trader believe that selling Options is a surefire way to win the game.
Remember to be careful about the unlimited loss probability. It can wipe out your capital.
One can be a profitable both ways, by appropriate exit when losing in a trade.
Or use debit spreads, credit spreads to keep the loss manageable and wait for the profit.
Options are not as complex as they have been made by creation of strategies. Strategies are needed for large portfolios.
There is no strategy called the best strategy.
All strategies can fail.
Keeping it simple is the easy way to trade.
A trader’s personality and risk profile determines what strategy will be good for him.
Create your own strategy.
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