Tips

Options trading can be very attractive for traders of all skill levels and account sizes. The leverage that the derivative products offer can lead to large returns very quickly.

Most traders start out by buying call options when they are bullish on a currency pair. While this approach can lead to nice profits using calls as a bullish strategy is only barely scratching the surface of what you can do with options. Trading options really gets fun when you can use different types of strategies that give you ways of profiting in all market conditions.

As a trader I want the ability to make money regardless of the market condition that we are in. Let’s discuss some ways of doing this.

Buying calls and puts to make a directional bet is a good way of getting started with using options. However, the next step in your trading should be learning how to put movement in volatility on your side. Implied volatility (IV) is the most important input that can affect the price of an option. If we know whether IV is high or low, it can give us some direction on what type of options strategy we decide to play.

When IV is high we like to sell premium by using strategies like selling Vertical Spreads. These strategies look to benefit from IV dropping back down to average levels. When IV is low then we can stick with buying long calls and puts and buying vertical spreads. This will allow us to benefit not only from a move in our direction but also an increase in IV. Selling options for premium income can be very powerful because it also allows us to take advantage of time decay.

You can use strategies that profit from the market going sideways. For many traders this is the dreaded market condition but with options we can actually use strategies that allow us to make money when the market does nothing. When we get stuck in slow markets we like to focus our attention on selling premium. This can be done by using strategies like selling Vertical Spreads or selling Straddles and Strangles.

While it does require some time learning the different option trading strategies you will find your overall equity curve will also get more consistent.