Overview of Position Trading Options
Unlike other options trading styles, position trading is not commonly used for most financial instruments. In fact, it is pretty much unique to trading derivatives such as options and futures. It is a very low risk style that is used to make profit by taking advantage of some of the distinctive opportunities that options can present. It is absolutely not a style that should be undertaken by beginners, as it requires a very comprehensive understanding of options and all the related dynamics.
Position trading is a style that is almost exclusively used by professional and institutional traders. Market makers, for example, would use this style to fulfill their role, but it is really not a style of that any casual or home trader should be considering. Swing trading is usually the much better choice for most, or day trading for those that are able to make a full time commitment. It is still useful to understand how this style works though, and on this page we provide a brief overview of what is involved.
What is Position Trading?
Position trading is a style that is typically used by professionals representing banks and other large financial institutions. It's primarily used for transacting derivatives and, in particular, options contracts. To use this style, a trader needs to know a lot more than just how options work; a truly in depth knowledge of all the relevant characteristics and factors that affect options and their prices is required.
In addition it's essential to have a complete understanding of all the different strategies that can be used, how they work, their advantages and disadvantages, and how they can be utilized depending on prevailing market conditions.
The fundamental aim of this style is to minimize the risk involved as much as possible, even if it means making very low percentage profits. Position traders do seek to profit from directional moves in the market like most investors, but instead their activities are mostly based on hedging existing portfolios against those directional moves and attempting to profit from the time decay of options contracts.
It generally requires holding positions for significantly longer periods of time, in order to maximize the potential profit, and options are often held right up until expiration. Although position traders may only hold positions for short periods sometimes, depending on the strategies being used and the market conditions, the basic definition of a position trader is someone who holds a position for the long term.
Profiting from Position Trading
We have already explained how this style isn't really suitable for the more casual investor because of the incredibly in depth knowledge that is required. It should not absolutely be ignored if you genuinely feel you have mastered the subject of options and all that is entailed, but for the most part you will invariably be better off using a different style. Another specific reason for this is the way that position traders make their profit.
The whole point of this style is to always keep risks as low as possible. Like most forms of investing, the level of risk is reflected in the level of profits to be made. While it's true that the professionals can make very large sums of money, this is because they are dealing with enormous amounts of capital.
Most of the strategies used are based around trying to guarantee a certain amount of profit, however small that profit is. Keeping the risk low is much more important than trying to create maximum profits. When trading with a huge amount of capital, making returns of miniscule percentages can still be very much worthwhile. However, for those that have a smaller starting capital, making any kind of significant money using this style is very difficult indeed.
Positions trading options isn't likely to be the most suitable style for the vast majority of options traders. It's essentially the domain of professional and institutional traders for two main reasons. First, it requires an intimate knowledge of everything related to options trading, all the dynamics involved, and all the possible strategies that can be used. Second, it's only really possible to make any kind of significant profits with a very large starting capital.