3 Things To Consider Before You Make An Options Trade

Trading options are a potentially valuable way for traders to double down on profitable trades and protect themselves from risk.

While options are a somewhat complex trading technique, it’s not difficult for even beginner traders to pick up options strategies that work for them.

What’s The Directional Edge?

Directional edge is an advantage gained by staying aware of where markets and the underlying companies are moving, and why. It’s easy to get distracted by headlines and experts that are constantly calling out market tops and bear markets. However, the market doesn’t move when experts make prognostications. It’s important to find out what does move the market, and trade off of that. In other words, what's driving the overall market?

To learn more about how to trade options like an expert, check out these two webinars from 40-year market veteran Marc Chaikin on August 31

Currently, higher corporate earnings are moving the market higher, and that trend will likely continue as long as earnings are growing. Riding the directional edge of the market will help traders make options plays, as they’ll be keyed into the larger trends.

Look At Institutional Activity

Institutional buying and selling pressure happens when financial institutions decide to buy or sell a stock to a notable degree. Typically, when an institution makes a big buy into a stock, the price will go up with the demand. The inverse is true when an institution pulls out. Investors can track institutional activity by monitoring Chaikin Money Flow, which is an excellent proxy.

If traders are astute enough to detect these moves, they can use options to profit by going long or short the stock.

These are a few advanced options strategies that beginner options traders can take advantage of just by knowing the reasoning behind them. While a novice options trader might not always understand the direction of the market or why an institution is diving big into a stock, knowing that these are things to look for can help them spot profitable options trades.

Is The Stock Outperforming The Market?

Paying attention to which stocks are outperforming—or underperforming—the market is a key way to finding options plays. Buying puts on underperforming stocks or calls on outperforming stocks, and potentially hedging using bets on the S&P itself, can be profitable plays when executed correctly.

To learn more about how to trade options like an expert, check out these two webinars from 40-year market veteran Marc Chaikin on August 31

Chaikin Analytics is an editorial partner of Benzinga. This article may have been subject to their approval.