Do NOT trade options until you read this!

Diversifying Stock Option Trading Strategies. (Here is an email advisory from Jeff Neal)

Diversification is an important component to overall investment success and performance of a long-term portfolio. For example, a well-diversified portfolio should include things like stocks, gold, real estate, bonds and certificates of deposit. While most investors may indeed understand this for their portfolio when they become option traders they seemingly totally ignore this same concept when developing an option strategy trading approach to the markets.

Learn more about my Stock Options Trading strategies.

Just as it is very important for the investor to be diversified in their long-term investments it is equally as important for the stock options trader to be diversified in the stock option strategies that they employ. As stock option traders we know that a particular market can go only one of threes directions which is sideways, up or down. With that knowledge base intact the stock option trader needs to deploy stock option strategies that account for these three scenarios in order to have a diversified options strategy plan of attack.

First to account for a sideways market the stock option strategies needs to research and analyze stocks that are currently and have been exhibiting consolidation over the last two to three months. Once a stock or stocks have been identified with distinct trading ranges in place make sure they do not have any upcoming news event like earnings or any other catalysts that could cause a breakout in the underlying issue.

Once this is done the stock options trader is ready to select the best sideways strategy to put on like a butterfly or calendar spread that takes advantage of the trading range and gradually profits from time decay. When dealing with calendars any skew you can get between the front month and the back month is a plus to the position.

Next to deal with a particular directional bias the stock option trader needs to perform due diligence and choose stocks that have a strong bullish or bearish bias based on their technical and fundamental analysis. The stock option trader then needs to determine the optimum directional strategy to employ. If possessing a bullish bias the stock options trader can use straight calls, bull call spreads or bull put spreads. On the other hand if having a bearish bias then the stock options trader can implement straight puts, bear put spreads or bear call spreads.

Finally, if the stock option trader has a neutral outlook they need to locate stocks that are currently experiencing low implied volatility with a key news event like an earnings announcement coming up in the next 2 to 6 weeks. Also, it is best if the stock or stocks have experienced high levels of volatility in the past particularly around a big news event like earnings. Once identified the stock options trader is ready to choose the best strategy to fit this particular market scenario like straddles, synthetic straddles or strangles.

It is important to note that there are several other combination strategies that can be employed for each market environment which is why it is so important to become familiar with the choices and know for what particular market scenario they will work best. Also, the best way to choose the best strategy is to evaluate the particular risk graphs. This can be done quite easily by using a top line options analysis software tools. By diversifying among option strategies that address the three environments the option strategist is reducing their overall risk and their account equity curve will be much smoother which in turn will make this thing we call the trading business a much more enjoyable venture.

Again you can go here to Learn more about my Stock Options Trading strategies. For other free trading and investment informational reports go to Free Stock and Options Trading eBooks.

Happy Trading!

Jeff Neal "The" Stock Trader