As I look at the panic in today’s markets along with the enormous volatility as a result, I find myself reminiscing about an old lesson that was taught to me by one of my early mentors. Paul once told me that the Chinese symbol for ‘crisis’ was a combination of Chinese letters that translated as death and opportunity. Today’s markets are indeed death for investors and traders alike who don’t have a comprehensive strategy for option trading or for swing trading. But that also spells opportunity for nimble swing traders who know how to swing trade stocks in a bear market as well as use option trading strategies correctly. For such option traders, there is enormous potential for profit.
Proper option trading strategies coupled with swing trading allows for skilled traders to utiltize stock option trading maximizing their profits while minimizing losses when swing trading stocks in today’s volatile stock market. Using a simple moving average crossover option trading system where a stock explodes out of a base pattern to the downside, the trader looks for a stock to pull back to a 20 period moving average for a short trade to the downside. Now, importantly, if the stock is setting up for a short trade and pulls back so the 20 MA, the 20 MA must be trading below a 30 period MA to show momentum to the downside without trading above that 30 MA at any time or the trade setup is abandoned.
If all goes well, once the stock’s price action then our swing trading system calls for a price pattern setup usually involving price falling past the high of the pivot point setup by the stock. Once the stock’s price action falls below the low of that bar’s pivot point then a skilled trader can purchase put options on a pure directional play to the downside when trading stock options on this stock.
Now, a proper option trading system or a swing trading strategy will call for proper trade management and profit taking which is another subject for another article but, for now, option trading virtually guarantees risk control as the risk is limited to the cost of the option itself. Worse case, you lose the entire value of the put option you are trading but that is all.
And, if you compare the profit potential of just swing trading the stock versus the leverage of stock option trading it is apparent that make money trading stock options several degrees greater that just trading the stock by itself.