Options Trading Strategy: How to Increase Your Profits?2023/01/19 15:15:15
The simplest and most basic strategy for traders is to buy call options when the market is going up, and buy put options when the market is trending down! Needless to say, you either make a profit if you made the correct prediction or lose your initial investment if you did not.
The most significant difference between call and put options is the price direction prediction between both counterparties in which one party pays the premium and owns the rights to the upside or downside of the underlying asset. For FAMEEX options, traders profit by predicting the correct price movement, relative to the opening price in the underlying assets, by a certain expiry time. Currently, there are two types of options contracts on FAMEEX options: call options and put options. Sooner or later, FAMEEX will launch range options as additional choices.
There are many ways to predict the price movement accurately. Most of them involve extensive research into the current market trends, technical indicators, and fundamental analysis of the underlying cryptocurrency asset. The exact price at expiration is irrelevant. What matters is whether the price goes up or down. Here are some trading scenarios to give you an example:
Buy Call Scenario:
You buy a call of ETH at $1942, and pay a $6 premium to the counterparty. We will look at your profit and loss potential using the same futures prices at option expiration.
In this scenario, the open price of the option will be $1942. Your option is exercised automatically at $1943.8. With 71.59% of the premium in call options and 28.41% of the premium in put options, this will result in a gain of $8.38. If you subtract the $6.18 premium paid for the option, your net profit will be $2.2. Your profit condition is…
Market Price > Your Open Price
Buy Put Scenario:
To understand the profit and loss, we look at the math for each of these potential scenarios. Your put options is exercised automatically and collected $6 in premium. For each scenario, the premium column will be $6 and the strike price is different based on the market condition.
In this scenario, the open price at option will be $1933.91. Your option is exercised automatically at $1922.84. With 42.69% of the premium in call options and 57.31% of the premium in put options, this will result in a gain of $10.503. If you subtract the $6.18 premium paid for the option, your net profit will be $4.323. Your profit condition is…
Your Open Price > Market Price
From the above two scenarios, we can clearly see that the ratio between the 2 counterparties is very close. Your potential profit ratio will result in a higher chance. Here are 2 formulas for you to calculate your profit…
Profit Ratio: Winner’s Premium / All Winners’ Total Premiums * 100%
Your Profit: Profit Ratio * All Traders’ Total Premiums in this series
Basic Options Strategy to Predict the Movement
In addition to the above winning scenario, when looking for the right options trading strategy, it is quite important to look for a strategy that implements one or all of the following trading basics: technical research, risk management, and emotional control.
( Source: Chart from TradingView: ETH/USDT )
Find support and resistance levels in the market where short-term bounces can be hard. Candlestick charts, pivot points, and Fibonacci retracement levels can be particularly useful, just as they are on other timeframes while trading longer-term instruments. Setting up a corresponding timeframe of 3-minute or 5-minute will help you better monitor the price movement of each candlestick. Afterward, following the trend can be another method. Asset prices will fluctuate with trends, and prices will grow or shrink with their associated assets. This is because the options market is based on trader speculation.
( Source: Chart from TradingView: ETH/USDT )
Risk management is at the core of options trading. This form of trading has an incredible amount of risk. That’s why many seasoned traders refuse to risk anything more than 1% to 5% of their total capital per options trade. We would go as far as to recommend risking no more than 1% of your capital, especially as a beginner. Use a strategy that minimizes your risk so that you do not make too many mistakes and potentially lose all of your risked capital. In general, a solid strategy will help you calculate your position size on each and every trade as you begin. Another way is to place the orders in series to hedge possible losses in each option. This can give you a more possible chance to reduce the loss of all your premium.
Options trading relies on a significant amount of emotional control. This goes for most types of investing, but it is especially important for options trading. Because of how volatile options trading is, it is way too easy to make a bad choice or inaccurate prediction in order to save the profitability of an option. A good options trading strategy should also include a high level of emotional control. A good way to improve one’s approach to emotional control is to start with a demo account when starting the trading process. While FAMEEX supports demo options trading with 100,000 demo funds in each user’s account, we recommend users try it out before investing real funds.
Since options function in such a straightforward manner, and both the potential profits and losses are predetermined and capped, options trading has become incredibly popular among beginner investors. It’s a very intensive form of trading akin to day trading. However, while the risks are limited, they’re still there, which is why you need a solid options trading strategy. Many inexperienced traders lose their money to volatile markets and lack of knowledge. The right tactic can’t eliminate the risks altogether, but it can significantly reduce them.