Trade Winds: An Options Strategy Styled For You

With many options trading strategies to choose from, how do you find the right one? Consider a three-step process to help with your decision. with wooden blocks and a T coming into place: an options strategy for you
5 min read
Photo by Dan Saelinger

Key Takeaways

  • When selecting options trading strategies, it’s best to develop a systematic approach
  • Consider your directional bias, current volatility, and high probability versus high potential reward

  • Know which strategies you could potentially use and which ones you could rule out

When you’re shopping for spaghetti sauce, having several choices is great. Of course, options trading involves unique risks and is not appropriate for everyone. But, if you’re an options trader, it’s kind of the same thing with options strategies. But with all those various strategies, strikes, and expiration dates, how do you choose?

When you’re starting with, say, 60 options strategies, you need a process to get that number down to a manageable level. Start with three basic questions:

  1. Are you bullish, bearish, or neutral? This answer can narrow a list fast—by half or more. If you’re looking for a market advance, you’re likely not shopping in the long put verticals aisle.
  2. Is it a buyer’s or seller’s market for options? In other words, where’s volatility being priced in the short term and longer term, and how does that rank against historical levels? This narrows a list even further.
  3. Are you looking for a strategy with a high probability for success or high potential reward? Trading would be a lot easier if you could have both, but that’s not the way it works. It can feel like the ultimate trade-off. When you swing for the fences, it’s great when you connect, but you often skulk back to the bench after striking out. Or you can grind it out with base hits—unglamorous and labor-intensive, but it gets the odds working for you. 

An SPX Example

Suppose you expect the S&P 500 Index (SPX) to trend higher in the weeks to come. Now look at the Cboe Volatility Index (VIX). Let’s say it’s in the upper 20s. You check the chart and see that’s the high end of where it’s been in recent days. (Note: You can also get a volatility [vol] snapshot by looking at the implied volatility and historical volatility percentiles for any stock, index, or exchange-traded fund on the thinkorswim® platform on the Trade tab > Today’s Options Statistics.) Maybe your convictions aren’t terribly high; you think this rally could be a slow burn, and you typically like to play high-probability grinder ball.

So, you’re looking to the upside. Short and neutral strategies are out. No long puts or put verticals, and no strangles or iron condors.

Vol is elevated, and your conviction isn’t super high. Rule out long calls with high vega. You might also rule out buying low delta and low vega calls because they’d be low probability. A long call butterfly spread (with the middle strike centered around your upside target) could fit the bill. But it’s not a high-percentage play. 

From here, it all depends on your risk tolerance and personal preference, but the leading candidate looks to be a short put vertical with a few weeks until expiration. Next, you can look at strike selection, keeping that ever-critical trade-off between high reward and high probability in mind.

Above all, you’ve created a process by which you can narrow down the options strategy choice set. Now, about that spaghetti sauce? You’re on your own.

Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.


Key Takeaways

  • When selecting options trading strategies, it’s best to develop a systematic approach
  • Consider your directional bias, current volatility, and high probability versus high potential reward

  • Know which strategies you could potentially use and which ones you could rule out

Related Videos

Call Us

Do Not Sell or Share My Personal Information

Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.

Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.

Spreads and other multiple-leg option strategies can entail additional transaction costs, including multiple contract fees, which may impact any potential return. These are advanced option strategies and often involve greater risk, and more complex risk, than basic options trades. adChoicesAdChoices

Market volatility, volume, and system availability may delay account access and trade executions.

Past performance of a security or strategy does not guarantee future results or success.

Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.

Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.

This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.

TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2023 Charles Schwab & Co. Inc. All rights reserved.

Scroll to Top