Using Uncovered Options Trading System to Trade Regular Options

There are some situation when you have found a trading system that you would like to use, however, due to the various circumstances (luck of funds, margin requirements, etc) you are not able to utilize this system. In many cases any trading system could be adjust to a different than specified by the system type of trading.

For majority online trading system when signal "Short", "Sell Short", "Sell", "Buy Put Options", "Sell Call Options" is generated, the system expects the traded security (stock) to drop down in price and cover short position later with profit. Respectfully, when a trading system generates signal "Long", "Buy", "Buy Call Options", "Sell Put Options", the system expects traded security (stock) to go up in price and receive profit from the price advance. This information could be used not just to trade suggested by a system security (stock), but for other types of trading vehicles as well. For instance if system generates signals for QQQ stock then an experienced trader may use this signals to trade QQQ options. However, a trader who wishes to use the system differently then suggested by the system has to realize that this might involve additional risk, and the trader's return will differ from the return generated by the trading system.

The most challenging system transformation or system adjustment is when a trader is trying to use uncovered options trading system to trade regular options (buying put and call options). However, it is still possible. For instance if a trader decided to use the uncovered options signals to buy options it is recommended that the trader develop a trading strategy of using uncovered options signals. The following rules might be an example of such strategy:

• Buy call options when the system issues a signal to sell short put options;
• Buy put options when the system issues a signal to sell short call options;
• Close position when uncovered options trading system closes position.

It appears simple at first sight, however a trader should always remember that the time decay affects the options price. Options have a tendency to loose their value with time and this favors the uncovered options trader. Furthermore, uncovered options trader may use options time decay to make profitable trades, while options trader has to be on the constant alert because time decay is playing against him/her. For a trader who buys options, the amount of time maintained in the position is critical and the trading strategy above should be followed with the following additional rules:

• Buy only in the money options (even if a system generates a signal for out-of-the-money options);
• If possible, buy options with later expiration (2-3 months expiration could be recommended) than the system suggests for uncovered options;
• Think about closing a trade if a system stays in the position for more then 2-3 weeks ( time affects the options price and it's critical for the options buyer while it's in the hand of an options seller).

Of course this is only an example of rules which could be modified in accordance to personal trading style and risk tolerance. A trader should always remember that options trading is very risky and it is not recommended that traders invest an entire options portfolio in a single trade.