{"id":328,"date":"2012-07-13T17:00:07","date_gmt":"2012-07-13T17:00:07","guid":{"rendered":"http:\/\/priceactiontradingsystem.com\/?p=328"},"modified":"2026-08-15T22:21:32","modified_gmt":"2026-08-16T03:21:32","slug":"use-price-action-trading-strategies-to-trade-futures-options","status":"publish","type":"post","link":"https:\/\/priceactiontradingsystem.com\/use-price-action-trading-strategies-to-trade-futures-options\/","title":{"rendered":"Use Price Action Trading Strategies To Trade Futures Options"},"content":{"rendered":"

Occasionally I will get an email asking if a trader can use price action trading strategies to trade futures options.\u00a0 The answer is obviously yes, as you can definitely use price action trading strategies to trade futures options<\/strong>.\u00a0 In fact, you can use price action trading strategies to chart and trade any market, and it works on any time frame as well, so no matter what chart size you prefer, you can still learn to read that price chart like a trading professional.<\/p>\n

\"Futures<\/a>
Futures Options And Price Action Trading
(ebookee.org)<\/figcaption><\/figure>\n

What you have to understand is that once you learn to use price action techniques to read a price chart, you will instantly learn to have a much better understanding of what your chart is telling you and where prices are likely to go in the future.\u00a0 Reading a price chart is a skill, just like learning to track big game or learning how to fly an airplane.\u00a0 The more time you spend doing it and practicing it, the more you learn and the better you will get at it over time.<\/p>\n

Once you learn to read the price action movements on your trading chart, your job is then to predict where prices have the highest likelihood of going in the near future, so how you enter or what format you use to position yourself to profit from on that price movement is irrelevant.\u00a0 You could enter with futures contracts or futures options and profit or lose from either one, so hopefully that makes sense to you now.\u00a0 The bottom line is that you must be able to predict where prices are going in the near future and then you can position yourself with the instrument of your choice in order to profit from that movement, assuming of course that you were correct in where you determined prices would be going in the long run.<\/p>\n

While there are some additional rules and regulations around trading with futures options, we are going to assume that you already have a basic understanding of futures options when discussing the rest of this information and article.\u00a0 In some cases, trading options may actually have some benefits over trading futures, but there will be some short comings just as well.\u00a0 The main benefit of options over straight futures contracts is the fact that your timing does not have to be exact when using options.\u00a0 When you enter with a futures contract, you may actually get the direction right, but be early to the game so you still lose money on the trade due to a lack of staying power.<\/p>\n

If you enter a trade early with a futures contract, prices could continue to move against you short term costing you a large sum of money.\u00a0 With options, the danger of short term movements going against you are not nearly as costly, so you potentially have more staying power and you do not have to be nearly as good with your timing.\u00a0 You just need to be close with your timing, and getting the near term direction correct is the most important aspect of the trade.\u00a0 With straight futures, you must get the direction right, but your timing must be spot on as well, because the leverage is much higher and every tick in the wrong direction could be extremely costly to you.<\/p>\n

Now, having said all of the above, I am going to throw you an unexpected curve ball.\u00a0 All of the above on using futures options was based on “buying” options.\u00a0 Now we are going to discuss what many\u00a0 consider to be a completely taboo subject, and that is are of “selling” futures options.\u00a0 Selling options is often considered the worst way to trade futures, because of the unlimited losses that can occur.\u00a0 When you buy options, you can never lose more than what you paid for that option.\u00a0 However, when you sell options, your income in limited, but it is similar to trading full futures contracts, and your losses are not limited, but can rather be unlimited.<\/p>\n

Selling options is supposedly preserved for professional traders only, but here is something to consider:\u00a0 90% of all options expire worthless!\u00a0 That is correct, 90% of all options expire worthless and out of the money, so what does that tell you about the profits that those professional traders that sell options are making?\u00a0 If it’s so hard to make money “buying” options, and 90% of all options “sold” actually make money, then why is “selling” options such a bad way to go?\u00a0 If you learn to read a price chart properly and you can use price action strategies to learn to read a chart accurately, then you can be even better at predicting where prices won’t go than you will be at predicting where prices will go, and that’s why we are suggesting that you consider selling options<\/strong> over buying them!<\/p>\n

Here is an interesting pieces we found at www.seekingalpha.com that was written by Angad Guglani.\u00a0 Here is what Angad had to say about “selling” options.<\/p>\n

One of the more conservative options strategies I utilize has its roots in the\u00a0efficient market hypothesis. This hypothesis states that all available information is currently priced into the stocks. According to the hypothesis, it is difficult to beat the market consistently, because the only way to do so is to both predict the future news and how this will be priced into the stock. The validity of efficient market hypothesis is the topic of much debate, but it is a good place to start for the purposes of this article. In accordance with efficient market hypothesis, each stock is just as likely to outperform or underperform the market. If no substantial news or information is realized, each stock will perform just how the general market does. Currently the S&P 500 (SPY) trades at the price to earnings of 13.22 based on\u00a0forecasted earnings of $102.40. This implies that the index should yield 7.56%. Since 5.56% (7.56% – Current yield of 2.00%) of these earnings are held in company reserves, the value of the company should appreciate by 5.56%. The last piece of the equation is the rate of inflation, which will effect the hard assets and future earnings of the company. The current\u00a0inflation rate is about 2.5%. This implies that the value of the index will rise by approximately 8%<\/p>\n

The chances of the market gaining exactly 8% are quite slim, even though this is what is priced in. Every day new news and information is constantly being priced in, causing the prices of stocks to fluctuate. For example, positive news out of Europe could move the markets up 10% in the matter of days, but the fact remains that negative news developments are just as likely to move the market down as positive developments are to move the market up.<\/p>\n

The Efficient Market Option Strategy:<\/strong>\u00a0This strategy is for investors who are risk averse and not looking for wild market swings. This strategy relies on the assumption that over the long run, the market should yield about the expected return. One can implement this strategy by selling call options at a strike price that is indicated by the market expected rate of return. As it stands to today, this would be a yearly rate of 8%. If I own a stock priced today at $100 a share, I would sell strike $108 calls.\u00a0 You can read the entire original article here<\/a>.<\/p>\n

While the article is discussing stocks, the strategy works the same in futures, and the strategy is interchangeable, so don’t get hung up on the fact that his wording is around stocks.\u00a0 Also, if you are not familiar with options, this strategy will seem very complicated, when in fact, it is relatively easy.\u00a0 First you need a basic understanding of how options work, but with a little reading and research, that is not too difficult.\u00a0 All you really need to understand is the following:<\/p>\n