The important steps before selecting an options strategy for short-term trading:
The stock market movements are not the same every time. The reward is in riding the ongoing market direction for short-term trading.
How to gauge the short-term market direction?
The four popular methods are based on:
1. Technical Analysis (Price Action & Indicators)
2. Dynamic Support & Resistance
3. Volume Profile
4. Options OI data
Interpreting the market's likely trend, whether it will go up, down, or remain range-bound, is a crucial step in determining whether to trade bullish, bearish, or neutral options strategies. Another important consideration is the volatility index or options VIX. This factor helps decide whether to trade debit option strategies or credit option strategies.
If the implied volatility is higher than the historical volatility, credit option strategies are generally preferred. On the other hand, if the implied volatility is lower than the historical volatility, debit option strategies are favored.
The popular options strategies in up-trending markets are:
Debit Spread:
1. Naked call buy
2. Call Spread (Buy ATM call options & Sell OTM call options)
3. Bullish Calendar (Sell ATM call option of near expiry & Buy ATM call option of far expiry)
4. Call Butterfly (Buy ATM call, sell near OTM calls in double quantity & Buy far OTM call)
Credit Spread:
1. Naked Put sell
2. Sell Put Spread (Sell ATM put options & Buy OTM put options)
3. Sell Put Calendar spread (buy ATM put option of near expiry & sell ATM put option of far expiry)
4. Sell Put Butterfly (sell ATM Put, buy near OTM put in twice quantity & sell far OTM put)
The popular options strategies in down-trending markets are:
Debit Spread:
1. Naked Put buy
2. Put Spread (Buy ATM put options & Sell OTM put options)
3. Bearish Calendar (Sell ATM put option of near expiry & Buy ATM put option of far expiry)
4. Put Butterfly (Buy ATM Put, sell near OTM put in twice quantity & Buy far OTM put)
Credit Spread:
1. Naked Call sell
2. Sell Call Spread (Sell ATM call options & Buy OTM call options)
3. Sell Call Calendar (buy ATM call option of near expiry & sell ATM CE option of far expiry)
4. Sell Call Butterfly (sell ATM call, buy near OTM call in double quantity & sell far OTM call)
The popular options strategies in range-bound markets are:
Debit Spread:
1. Calendar option strategies
Credit Spread:
1. Short Straddle
2. Short Strangle
3. Short Iron condor
4. Short Iron Fly
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