8 Best Automated Options Trading Strategies • Benzinga
Options trading is a great way to diversify your portfolio, but it takes a lot of time to watch the charts and manage them yourself. Emotions can get in your way and take you away from your family, work, and other activities in life. What if you could get the returns of options trading without spending so much time researching or reviewing your portfolio? Automated options trading makes it possible. Artificial Intelligence (AI) does the trading for you based on parameters you decide. This article will reveal automated options trading strategies that you can use to make money from your portfolio without having to check stock prices every minute.
What is Automated Options Trading?
Automated options trading, also known as algorithmic trading, does the trading for you. You won’t have to worry about choosing options or sticking to your exit plan. Human errors and emotions can get in the way of good returns, and automatic options trading gets rid of these elements of trading. You can walk away from your portfolio knowing that the algorithmic trading platform buys and sells stock options based on your preferences.
Why Choose Automated Options Trading
Removing human emotions from the equation is one of the many benefits you can experience with automated options trading. An automated approach allows you to implement multiple trading strategies in real time. If you set your exit prices 20% above your cost base, the algorithm will sell your option as soon as its value exceeds 20% of the price at which you bought it. Automated options trading covers multiple markets and has historical data to guide its decisions. Spreads allow you to enter the market quickly and gain greater options exposure instead of manually waiting for your offer price to be accepted.
8 Strategies for Automated Trading Strategies for Options
Options traders can integrate several strategies with their algorithmic trading platform. You can start with these choices.
Aggressive investors look at a stock’s current direction and volume. If a stock has been rising for a few days and still has high volume, it may signal that more gains are to come. Investors can buy calls during bullish sentiment and buy puts when a stock looks bearish.
Investors who follow mean reversion believe that a stock will return to its average price, even if it is currently overbought or oversold. According to this philosophy, an overbought stock will fall to its average, representing a bearish opportunity. Oversold stocks should rise to their average over time. While new means may establish themselves as a stock continues to move and fundamentals may change, mean reversion is a good resource to have in your trading toolkit.
Arbitration seekers are looking for two nearly identical assets with different valuations. The trader looks to buy several shares of the stock with a lower valuation and waits for it to reach the valuation of the stock with a higher value. Investors limit their search to companies in the same industry with similar earnings growth, opportunities and valuations. Arbitrage is more common in forex markets, but algorithmic trading helps investors take advantage of stock market arbitrage.
Mathematical models examine historical market patterns and price movements to predict what is likely to happen in the present. Algorithmic trading platforms can help you generate these mathematical patterns and use them to trade.
Trend following strategy
Traders who follow trends look at resistance and support lines. They take breakout opportunities in both directions and follow the current trend. If a stock crosses a resistance line, it is bullish and may present a buying opportunity. Stocks tend to turn bearish if they fall below their support lines. Trend following strategies rely on technical analysis to determine entry points.
Synthetic Options Strategy
A synthetic option mimics a long call or put while reducing risk. Traders can use synthetic calls and synthetic put options to reduce risk while capitalizing on stock price movements. A synthetic call requires a trader to buy 100 shares and then buy a protective put option that is in-the-money. A synthetic sell setup requires an investor to sell 100 shares short and then buy a long call that is in the money. Synthetic positions protect the long position from depreciation. Some investors use synthetic options to hedge against short-term price fluctuations due to earnings reports and other notable events that can significantly impact the stock price.
Traders who apply seasonal strategies look at historical returns for each month and quarter to determine their positions. These traders know that September usually produces the lowest returns of the year and that the end of the year minus the fiscal harvest in December produces better returns. Some investors adopt the “Sell in May and leave” mantra. Stocks tend to deteriorate from May to October and do well from October to May. While seasonality is one of many factors, there is historical precedent for the May selling approach.
Buying index fund options is a less risky way to start. These prices aren’t as volatile, and because they measure the market, you’re less likely to encounter outliers. Options traders can prepare for a bear market with put options, but some individual stocks can skyrocket in the short term even if indices fall.
Accuracy of Automated Options Trading
Automated trading does not offer guaranteed returns. It involves risk like any other investment, but these algorithms allow you to use backtesting to see how your criteria would perform. Backtesting allows you to measure performance before trading options and creating positions. You can use backtesting and optimize your strategy to increase your accuracy with every trade.
Automated trading of options against stocks and other commodities
Automated options tend to be less risky since an algorithm manages the trade. An algorithm doesn’t get carried away with the excitement of an earnings report or some other dramatic event. An automated options trading broker meets your criteria and knows when to enter and exit positions based on your settings. Trading stocks and commodities on your own makes every trade more vulnerable to human emotion and error. Although automated trading may present less risk, it involves more factors. Algo trading has a learning curve, but once you get familiar with the basics it gets easier over time.
Simplified options trading
Automated options trading is a simplified approach to get started. You can use benchmarks to make investments and use backtesting to see how your settings would have worked in the past. Having this context can help you make better decisions with your funds without spending hours in your wallet every day.
Frequently Asked Questions
What is one of the most used strategies for automated trading?
Trend following, mean reversion, and arbitrage are popular automated trading strategies, but these three strategies are just the tip of the iceberg.
Is automated trading profitable?
Automated trading can be profitable. You can save money on every trade and not let emotions get in the way of winning trades.
Is it hard to learn algo trading?
Algo trading has a learning curve like any other investment strategy. Some platforms make it easy to learn algo trading and help you understand the basics.