Auto trading is a great tool that can be used in your options trading. The stock market is very high in volatility, and usually, the price moves up and down several times a day. It makes it challenging to pick an appropriate strike and expiry date for your strategies.
According to reports, the New York Stock Exchange is the largest globally.
Auto trading can automatically adjust these parameters according to market conditions, so you no longer have to worry about doing that. The following article will explain trading options basics and optimize options trading for auto trading.
A stock example
If you are bullish on AAPL stock, you can write one call expiry January 2015 with a strike of $525 for AAPL. The current price is ~715, so you collect 715 – 525 = 200 per the contract that expires in January at the end of the options expiration week. That’s an immediate 40 percent return.
Auto trading will pick up the best strike and expiry for you to collect the most premium.
Tips to optimize auto trading
1. Make sure the calls and puts are of the same contract month
One great thing about auto trading is you can trade both calls and puts. But only is in the same contract month. An excellent example of this is the AAPL expiry in January 2015.
If you want to collect maximum premium, then write both a call and a put expiry January 2015 with a strike of $525. But make sure both of these contracts are written in the same month (i.e., November 2014 expires).
2. Choose the maximum strike and expiry
Auto trading will choose the best option if you don’t know what strike to use or when to expire your options. So, for the AAPL example above, auto trading will write a put with a strike of $500 and a call expiry January 2015 with a strike of $700.
3. Don’t short call or put options
Make sure you are not shorting the options when auto trading. If you buy calls because you are bullish on XYZ, don’t write calls because you are bearish on XYZ.
4. Don’t write weekly options
Writing weekly options is always risky since the liquidity is very low, and it can be challenging to get out of an option position when there’s a big spike up or down in the stock price. So, don’t let auto trading write weekly options for you. It’s best to stick with monthly expiries for writing options.
5. Time your trades
You should time your trades when you write calls or writes since the profit potential is usually higher when markets are trending strongly in one direction or another. If there’s no clear trend, it might be good to switch off auto trading.
A put option example
For example, you expect XYZ stock to decrease in the coming weeks. You must not miss out on any big moves, but you also don’t want to risk too much capital by buying put options with a strike of $25 expiry January 2015.
However, writing puts is always risky since you face potentially unlimited losses if the stock moves against your position.
Once you know the trading options basics, you can optimize your trading experience by using auto trading.
If you are bullish on XYZ, make sure to write a put with a strike of $20 expiry January 2015 with the same contract month. This way, you still participate in any upside but limit your downside risk to just 20 percent if the stock moves against your position.
Auto trading will choose the best option if you don’t know what strike to use or when to expire your options.
6. Choose between standard and American options
You know the basics of trading options, but you need to decide between standard and American options. A standard option can only be exercised at its expiry date, whereas an American option allows its owner to exercise anytime during the contract’s life.
It is not a big difference since it usually doesn’t matter if you choose between standard and American options. The only difference you might feel is during earnings season since earnings releases can move the stock price around a lot (i.e., more than usual).
If this is the case, owning American options during earnings season can benefit. You can exercise your option anytime if you expect the stock to make big moves after the earnings release.
Conclusion
You now know the trading options basics, but you still need to optimize your trading experience by using auto trading. An intelligent trader knows when to use it and when not to. So, only consult auto trading if you are uncertain of what strike to use or expiry to choose. Don’t just switch on auto trading all the time.
