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.
