Professional traders use six options trading tactics in the UK to maximise their returns and minimize risk exposure. These tactics include technical analysis, trend trading, and hedging strategies. This article will examine these strategies and how they can help you to do well in options trading.
1. Technical analysis
Technical analysis in the UK is one of professional traders’ most widely used options trading tactics. It involves analysing price movements and other data points on charts to identify potential entry and exit points for trades. Tools such as moving averages, support and resistance levels, oscillators, candlestick patterns, etc., can analyse trends and determine when it is appropriate to enter or exit trades.
2. Trend trading
Trend trading is another popular option trading tactic that professional traders use in the UK. This strategy involves identifying trends across different asset classes, such as stocks and commodities, and using these trends to make informed decisions about when trade options contracts. Many traders will track indicators like moving averages and RSI (relative strength index) to determine whether a trend is still active or nearing its end.
3. Hedging strategies
To minimise their risk exposure, many professional traders in the UK also use hedging strategies when trading options. These strategies may involve buying both puts and calls on a single underlying asset or setting up spreads between two assets that are expected to move closer together. Options can hedge against other asset classes, such as stocks or currencies.
A straddle involves trading call and put options on an asset with the same price and expiration date. This strategy is usually used when there is high market volatility but no clear direction for prices to move in.
5. Butterfly spreads
A butterfly spread involves buying or selling three options contracts with different strike prices at varying per cents out-of-the-money (OTM) and selling or buying an option with a higher strike price at a further OTM. This strategy is used when there is high volatility, but the market is expected to stagnate near current levels.
Finally, a condor involves selling options with lower strike prices and buying options with higher strike prices on the same underlying security, again at varying OTM percentages. This strategy takes advantage of the fact that markets can remain neutral for extended periods and that volatility tends to be lower during this period, resulting in less risk but also less potential returns than other strategies.
What are the risks of using these trading strategies?
While these options trading tactics can help professional traders reduce their risk exposure and increase their returns, they are not without risks. For example, technical analysis relies heavily on past data to predict future price movements, meaning that there is always a chance that the market may behave in unexpected ways and invalidate your analysis.
Additionally, it can be challenging to identify trends and determine when best to enter or exit trades based on specific indicators or patterns, which may result in you missing out on potential opportunities or leaving money on the table.
Finally, some of these more complex strategies may be difficult for beginners to understand and use effectively, exposing them to additional risks if they need to understand how each strategy works fully. However, with good preparation and careful consideration of all the risks, these options trading tactics can be highly effective tools for UK professional traders.
The final word
Professional traders use a range of tactics and strategies to help them succeed in today’s competitive marketplace. Whether you are new to options trading in the UK or have some experience, these tactics can help you take your trading skills to a higher level and achieve the desired results. Novice traders should use a reputable and experienced online broker from Saxo Capital Markets to help them get started and build the skills and knowledge they need to succeed in today’s high-stakes trading environment.