Four Tips for Options Trading for the New Year and Beyond

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In my previous column on options tips, we looked at tips focused on price action. Here, we’ll cast a wider net and share more options trading advice to try in 2023 and well beyond. 

Tip No. 1: Read the News but Trust the Charts, Indicators

Turn on the financial news, and what do you often hear? Lots of opinions, with facts sprinkled in here and there.

If you pay more attention to what the talking heads are saying than what is actually happening in the charts and technicals, you will either miss out on trade opportunities or make a trade when you shouldn’t.

In March 2020, the stock market and global economy were in tatters, and investors and traders bailed on the markets.

As spring progressed, things began to change. If you studied the charts, you could see evidence of a bullish trend; you just needed to be patient and wait for confirmation. Once the Fed announced drastic measures to support markets and the economy, indicators began flashing buy signals and money flow returned in a hurry. The headlines were still dour, and if you had listened to them, you would have missed some big winners.

Now, let’s talk about this past summer when the media were in a bull-trend feeding frenzy. The markets did turn up, but it was a bull trend in a bear market. Those tend to be sharp and spectacular, but they are not long-lived. If you had whipped out your bull market playbook, you would have been crushed.

And this brings me to my next tip:

Tip No. 2: Don’t Jump the Gun

Traders who are new to technical analysis often try to interpret a chart before a pattern is fully formed. They then enter a position prematurely — a major error.

I see this a lot with the bullish “morning star” pattern. A morning star signals a reversal in a down trend; it appears as three candlesticks (the first is tall, the second is smaller and the third is tall).

New technicians often jump the gun when they see the second candlestick form. This is when the bears give way to the bulls, but the new upward trend is not confirmed until the third candlestick is fully formed. If you jumped the gun, you risk loss. Patience will serve you well as a technician.

Tip No. 3: In a Bear Market, Play Both Sides

If you’re up for it, you can play the market in both directions during a bear market. This can dampen portfolio volatility and increase your chances of banking wins.

Most of us are conditioned to only play the bull side. Throw out that playbook. I come to the table each day looking for opportunities on both sides of the trade, regardless of where the trend is. Stocks do not rise every single day, even in a bull market. Stay agnostic and look for opportunities with an open mind. You’ll be more likely to find ideas on both sides.

Tip No. 4: Learn How to Manage Rising Volatility

I have three words for you: Buy index puts.

Adding index puts will protect your portfolio from rising volatility. My favorite put instruments include the S&P exchange-traded fund (SPY) , the SPDR Dow Jones Industrial Average ETF Trust (DIA) , the Invesco QQQ Trust fund (QQQ) and Russell fund (IWM) . These are all liquid and will offer you great protection in times of need.

The goal is not to cash in and make loads of money (though that can certainly happen very quickly). Rather, you want to blunt the market volatility as much as possible.

As we start 2023, I have no idea what the year holds — will have a recession, won’t we? — but I will share whatever advice is right for the moment as the year the progresses. I’m sure by the end of 2023, I’ll have even more options trading tips to bundle up and pass along.