Simply select the desired criteria and a list of matching strategies will be displayed. A detailed explanation of the Strategy Selection Tool as well as a FREE copy of the Strategy Selection Handbook can be found at the bottom of this page.
IV Rank: -
How to use the Strategy Selection Tool?
The goal of this tool is to help aspiring options traders develop a better understanding of options and the strategy selection process. When selecting an options strategy to trade, there are many things to look out for. The Strategy Selection Tool helps you narrow down the list of potential strategies based on 5 of the most important factors:
- Direction: What’s your current market assumption for this strategy? Do you have a bullish, bearish, or neutral market outlook?
- Risk: Depending on your risk appetite and account size, you might want to stick to defined risk strategies. If, on the other hand, you have a higher risk tolerance, you might prefer undefined risk strategies since they can offer more upside potential.
- Profit: If you expect a large upcoming move, you might want a strategy that has no upside limit to its profit potential. Alternatively, you might be okay with limited upside potential since such strategies can offer other benefits.
- Credit or Debit: This specifies whether a strategy can be opened for a net debit or net credit. A net credit means that you receive a premium to open the position, whereas you pay to open a net debit position.
- IV Rank: When trading options, implied volatility is one of the most important metrics to pay attention to. IV Rank helps you determine whether the current IV is high or low. Certain strategies are best suited for low IV environments, whereas other strategies profit from high IV. Some strategies such as stock trades aren’t affected by implied volatility at all.
To use the Strategy Selection Tool, you simply have to specify what requirements a strategy should fulfill and all matching strategies will automatically be displayed.
To learn more about a specific strategy, you can click its name. This should bring you to a detailed breakdown of the selected strategy. Note that this feature does not yet exist for all strategies.
Let’s say you are looking for a new options trade on XYZ to add to your portfolio. You have a relatively small account size which is why you want a position with defined risk. Furthermore, XYZ’s current IV Rank is 90 which is very high. You don’t really have a clear market assumption which is why you want a neutral position. If that’s the case, you could narrow down the list of potential strategies as follows:
Both a short iron condor and a long butterfly would be a good choice for your situation. A short iron condor would likely have a higher probability of profit, whereas a long butterfly would have a higher max profit. But this, of course, depends on how you set up the strategy. The best way to determine which strategy to use would be to compare different variations of these strategies in your broker platform.
Hopefully, this brief example clarifies how to use the Strategy Selection Tool. But if you have any questions, comments, or feedback, please don’t hesitate to let me know in the comment section below.
Note that the Strategy Selection Tool should only be used as a rough guideline and learning tool. You should never trade purely based on results from this tool.
Free Strategy Selection Handbook
As promised at the top of this page, I also want to give you a FREE copy of my Strategy Selection Handbook. The Strategy Selection Handbook basically is a 12-page PDF guide that breaks down the strategy selection process. Furthermore, it gives you an overview of what market factors to consider for 28 different options strategy.
Simply click the following button to download your copy:
If you enjoy the Strategy Selection Tool and Handbook, make sure to share this page with a like-minded friend.
Do You Want More?
Do you want even more resources and tools to analyze various options strategies? Then check out The Strategy Lab!
The best way to learn about options strategies is not by reading articles about them. It is by trying different things and visually seeing how a certain strategy behaves for changes in different market factors.
That’s why TradeOptionsWithMe developed The Strategy Lab – a research tool that allows you to visually learn about endless options strategies, options pricing, and the options market in general.