The six
steps follow a logical thought process that makes it easier to pick a specific
option for trading. Let's breakdown what each of these steps involves.
1. Option
Objective
The starting
point when making any investment is your investment objective, and options
trading is no different. What objective do you want to achieve with your option
trade? Is it to speculate on a bullish or bearish view of the underlying asset?
Or is it to hedge potential downside risk on a stock in which you have a
significant position?
Are you
putting on the trade to earn income from selling option premium? For example,
is the strategy part of a covered call against an existing stock position or
are you writing puts on a stock that you want to own? Using options to generate
income is a vastly different approach compared to buying options to speculate
or to hedge.
Your first
step is to formulate what the objective of the trade is, because it forms the
foundation for the subsequent steps.