Before You Subscribe
to any Options Trading Service (System)
Before subscribing to any online options trading
service, you should evaluate the service fully. Traders must realize
that they are solely responsible for their own investment decisions. In
some cases, it may be very difficult to evaluate an online options
trading system - some services do not even provide a history of their
trades (or reveal the signals that triggered the trades).
Below, we list some common questions traders might wish
to ask when evaluating an options
What kinds of options signals are generated?
Example: For equity options or for options on ETFs?
Traders should know how liquid these options are. Liquidity is important
for opening and closing positions;
For a given signal, what is the average price of the
options and what are the expiration dates? Are the options in-the-money,
out-of-the money, or near-the-money?
You need to answer these questions so that you can evaluate how risky
the signals are, and how much you should potentially invest in a trade.
Out-of-the money options generally carry a higher degree of risk than
How long does the trading system stay in a position
once a trade has been initiated in accordance with their signals?
This is a key question. Options' time erosion is the main reason why
many options traders lose money. Answering this question will therefore
help you evaluate the risk of trading such signals. The less time an
options trader stays in a position, the lower the risk the options will
lose value due to time erosion;
Does the options trading service allow you to
auto-trade signals with leading online brokers?
This question is significant, even if you are not going to auto-trade.
It is important to that perhaps the signals are not auto-tradable
because online brokers cannot open or close positions when following the
trading service's signals. Online brokers may refuse to auto-trade
signals that are not clear.
What is the basis for the signals - how are they
Some online options trading services use "black box" systems. Traders
should be wary of these. Would you feel comfortable trading such a
How are subscribers notified about signal changes?
The answer to this question determines how quickly you will be able to
react to a new trading signal. While a majority of options trading
services provide email alerts, not all providers also send email alerts
to your cellular phone email address.
At what time are signals issued?
Traders need to know that they can respond to signals in a timely
manner. If signals are issued during trading hours, if the trader has a
full-time job, and if and the service does not offer auto-trading, a
timely response to trading signals may not be possible.
What signal parameters are used? Were they designed
for market orders or for limit orders?
Many options trading services are designed to execute trades at market
prices (i.e., making use of market orders rather than limit orders).
With such systems, it is common to see that the system will enter a
position at a price that differs from the prices available to those
traders who follow the signals. In some cases, this could lead to the
system showing a winning trade while traders actually lose money. When
assessing a trading system, make sure you are able to open / close
positions at the same price as the options trading system;
Does the system use stop-losses?
Understand that if an options trading system does not use stop-losses;
you could see trades where you may lose all the money invested in a
particular option. You should be comfortable with this fact. Also
understand that options trading is not the same as stock trading;
What is the system's performance?
A trader should be able to review a system's trade history. If one is
not available, ask WHY. If a trade
history is hard to find or represented in a way that makes it hard to
evaluate objectively (i.e., difficult to see winning and losing trades),
also enquire WHY;
Are options signals monitored by an independent third
party (such as
Traders should know whether they can trust the result represented for an
options trading system. If a service is not being monitored, the logical
question is to ask WHY.
You may have other questions – do not hesitate to
ask them! You should feel confident about the online options trading
service you use. Whatever system you chose, it should never conflict
with your personal risk tolerance and trading style.
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