Are you finding the perfect way to trade on the top confidently, then Vertical Spreads is the best way to do it. We will see in this article how to deal with the bullish trade and Bearish Trade.
Recently the market has been showing many leaps and bounds. During such times, traders are very much in anxiety mode. Some feel that they will lose money if not planned adequately. When the upside opens wide, and the traders know they have to trade on the top price of the recent week, they may get a little shaky on confidence.
When there are jumps in the index of 5 to 10 percent, many traders get discouraged and feel fear in their minds. So, to overcome such situations, you must keep narrowing the trades and only bet on those you are 100 cents sure to get profit. You might have to lose some good opportunities while narrowing down.
Although, you can still keep trading with some modifications just like you could have traded in the opposite situation with some other trading instruments. So, what are the major fears that reduce the traders' confidence?
Traders majorly have below fears:
The stop loss position is too far
No knowledge of trading while having low confidence
Options trading has the solutions for all your fears and worries. We shall see how you can boost your confidence and get the potential answers to the above fears.
Stop loss position is too far:
Whenever you enter into the options contract, there are few chances of losing the money. The only portion of the amount lost is the amount paid as the option premium. In an options contract, the contract holder has the authority to buy or sell the underlying stock, but at the same time, he is not obliged to do the same.
So the distance until the stop loss point is not a concern here. But still, when you are reaching the expiry dates and when the amount of the option premium is high, then by applying the Vertical spreads strategy, you can reduce the cost.
How to apply a vertical option strategy?
It's very simple; you need to understand what to buy, what to sell, and at what price. In a Bullish Trade, rather than buying a call with a strike price near the current price, buy the call and sell it at a higher strike price two to three steps away. In the same way, while in bearish trade, buy a put option close to the current price and sell with the strike price two to three steps lower than that.
Are there any risks involved? If not, what are the gains?
Though we have one buy option and one sell option, the biggest risk involved here is the time factor. Time value degradation can adversely impact the underlying asset. If the distance between the target price of the underlying asset Vs. Stop loss is twice, and for the slightest move of 5 or more, the premium received on this trade will also be twice when the target is hit. This profit is more in comparison to the premium lost when the underlying reaches the stop loss.
The best part is that profit, losses, and margins are very low. But if the movement is bigger, there are possibilities of gaining more than losing. This strategy is designed in such a way that it can incur a minimal amount of loss. We suggest you exit the strategy once your desired target amount or stop loss is reached; if you stay longer, it might be a waste of time and money.
No knowledge of trading while having low confidence:
As the capital requirements in the options strategy are low in the Vertical spreads, your fear is half reduced here. You can buy the stocks even if the underlying asset has moved by more than 10 percent.
For example, buy the two to three steps higher call in bullish trade and sell them even higher than that. No doubt the premium will be less, and the amount in profit and losses might also be less. When you feel that the stock price may go up to 10 percent in the near future, you might cross the stop loss and trade farther.
So, when you trade for the farther date, the option premium amount is less. You can make this type of trade without deciding on the stop loss. Hence you can reduce your fear of missing out on the trade. So, in conclusion, when you fear trading at the top or feel less confident, you may choose a vertical spread strategy and trade with confidence.