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5 advanced options trading tools and features

5 advanced options trading tools and features

Options trading is a type of trading where investors buy and sell contracts that give them the right, but not the obligation, to buy or sell an underlying asset at a predetermined price and within a specified time period. Options traders can speculate on a variety of assets, from stocks and bonds to currencies and commodities, and they can purchase multiple options in different directions simultaneously.

While there is often a strong emphasis on refining your technical and fundamental analysis skills, as an options trader with relative experience, you will understand that having the right toolset can also make all the difference in your success.

Luckily, many options trading platforms offer a wealth of tools and features to help you make informed trading decisions. In this article, we will look at some of the top tools and features you should consider the next time you put together an options trade.

Options chains

The first tool we will introduce is the options chain. An options chain is a listing of all available options contracts for a particular underlying asset. It includes information such as the strike price, expiration date, bid and ask prices, and option type (call or put).

Traders use options chains to identify potential trading opportunities and to analyse the pricing and volatility of different options contracts. It is in a table format, and the location of your options chain on your platform can vary depending on the specific platform you are using.

If you are having trouble locating the options chain on your platform, you should consult your platform’s user guide or seek professional assistance from your platform provider or brokerage.

The Greeks

Options Greeks are a set of risk measures that describe how various factors, such as changes in the underlying security price and time decay, can impact the value of an option. There is a lot to the Greeks, but below is a quick rundown so you can familiarise yourself with them.

The first thing you should know is that there are five main Greeks: delta, gamma, theta, vega, and rho.

Delta measures the option’s sensitivity to changes in the underlying stock price. Gamma measures the rate of change of delta, with respect to the underlying asset’s price. Theta measures the rate of decline in the option’s price over time as it approaches expiration, and vega measures the sensitivity of the option’s price to changes in implied volatility. Finally, rho measures the sensitivity of the option’s price to changes in interest rates.

Understanding the Greeks can help options trader make more informed decisions about which options to trade, as well as on the pricing of options contracts. To find them on your trading platform, you simply need to look for an options chain or an options calculator. You will find the Greeks displayed for each option contract, typically in a table format. You can then use the trading platform’s built-in analysis tools to perform your calculations.

Options algorithmic trading

A third features you can take advantage of as an experienced options trader is algorithmic trading. This is the automation of your trade execution based on predetermined criteria. Some traders refer to this as ‘algo trading’ or ‘automated trading’.

To use algorithmic trading in options trading, you will need to use a platform that supports this feature. Many online brokers offer such platforms, which allow you to create your own trading algorithms or use pre-built ones.

The first step in algorithmic trading is to determine the criteria you want to use to trigger trades. This could be based on technical indicators, such as moving averages or relative strength index (RSI), or fundamental factors, such as earnings announcements or economic data.

Once you have identified your criteria, you can use the algorithmic trading platform to create a set of rules that will trigger trades when those criteria are met. For example, you might set up an algorithm that automatically buys call options on a stock when its price crosses above its 50-day moving average.

When using algorithmic trading in options trading, it’s important to regularly monitor the performance of your algorithms and make any necessary adjustments to improve their effectiveness. Additionally, it’s important to keep in mind the risks associated with algorithmic trading, such as the potential for errors or technical glitches that could result in unexpected losses.

Options spread builder

An options spread is a strategy that involves buying and selling two or more options with different strike prices or expiration dates in order to potentially reduce risk or increase potential profits. An options spread builder is a tool available on some trading platforms that allows traders to create and analyse different options spreads.

This tool allows traders to select the options they want to use and customize the parameters of the spread, such as the strike prices, expiration dates, and number of contracts. The tool then calculates the potential risk and reward of the spread and displays it in an easy-to-read format.

Some builders also include advanced features, such as the ability to view the Greeks of the spread (such as delta, gamma, theta, and rho) and allows traders to analyse how changes in the underlying asset price or volatility can affect the spread’s potential profits and losses.

Options backtesting

Finally, the last method we will look at is options backtesting. This is a method traders use to evaluate the performance of their backtesting strategies. As an advanced trader, you will no doubt have tried to use your own strategies using historical data from old trade entries.

Options backtesting simply involves simulating trades and testing how well a particular strategy would have performed in the past, using actual market data. This helps traders identify potential weaknesses in their strategies, so they can refine them for future trades.

As an advanced trader, you can use specialised software or platforms that allow you to input your strategy parameters, historical data, and other relevant information to simulate trades and evaluate performance metrics such as profitability, risk, and volatility. Usually, you can find these tools built into your trading platform – especially if you are using a professional, bespoke platform launched by your brokerage.

The bottom line

If you are an advanced trader who is looking to level up their trading game, you may find it helpful to explore new territories in your trading. This includes looking at various features and tools, ranging from the Greeks and options chains to spread builders and backtesters. You may also look into automating your trades to focus your time on trading other securities. You can usually find these functions available on a bespoke platform built for professionals. However, you may have to use third-party plugins for more complex tools.

Regardless of the features and tools you make use of, it is essential that you understand there is no such thing as the perfect options strategy. The market changes every day, and it is essentially to monitor your trades and understand there is risk involved in trading. This includes doing your homework before trading and having a solid understanding of each market. It also means never trading more than you can afford to lose. With these risk management protocols in place, you can trade in a safer way.

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