Analyzing Trading Tactics and Risk

Each Friday, we go through all of the questions in the Option Profits weekly chat forum and individual trade and analysis pieces to gauge what our readers are focusing on. For the week of June 10 the focus was on trading tactics, in particular the spreading and shooter approaches to a trade set up.

Question: Why do you spread most of the time instead of using a shooter tactic for a trade?

Answer: I prefer to spread because in the long run I think the odds highly favor spreading returns over shooter returns. Most stocks move up or down about 10% before either pausing or resisting any further serious price advances or declines. Option spreading takes into account the acceptance of this 10% biased approach.

Spreading makes far more trader-sense since, once again, the odds highly favor that the calls or puts of any spread that are the shorted side of the spread probably will not become in the money options. Thus, it makes sense to use those odds to lessen the risk of any trade as well as use shorted options capital to reduce the required capital for a trade.

Shooter trading should only be done with highly discretionary capital that I think of as "house money" (profits from other trades already closed out). I preferred to use spreading profits, a portion of such, to fund the shooter account.

Your approach, your options trading strategy, is for you to discover, plan, and then implement. I know this strategy worked for me which is why I still preach this "spread first, shoot later" methodology.

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