Auto Trading Options

Auto trading is something that has been around for a while, and it exists in many different forms of investment including stocks, forex, and futures as well as options. Options auto trading has become increasingly popular over recent years, particularly among beginner investors and more experienced traders that are relatively new to options.

The basic concept is relatively simple; it's essentially an automated process whereby an individual would employ the services of a third party to select and make transactions on their behalf without any involvement from the individual.

By using an auto trading service it's, in theory at least, possible to make consistent profits without actually knowing anything at all about options. On this page we explain how auto trading works in detail, and we discuss the benefits and disadvantages of using this service.

  • How Auto Trading Options Works
  • Choosing a Service
  • Benefits
  • Disadvantages
  • Summary

How Auto Trading Options Works

Auto trading options contracts involves directing your broker to carry out trades from your account based on instructions from a third party service provider. It basically means that you don't have to make any decisions yourself, but instead you rely upon the service provider to decide what contracts you should be buying and selling and when you should be buying and selling them.

The idea is that a provider will carry out the necessary research and analysis, and they'll determine what transactions should be made at any given time. This is very similar to using an investment advisor to highlight investment opportunities for you, but rather than simply providing you with recommendations, the provider actually places orders on your behalf directly with your broker. There is, of course, a cost involved because providers do charge extra for the services they offer.

In principle, auto trading options is a great idea. If you use a reputable and successful provider then it's possible to simply add funds into your brokerage account and then watch your account grow as transactions are carried out on your behalf. This is all done without any real involvement on your behalf; once you have signed up for a provider and instructed your broker accordingly, your broker will execute orders as instructed by the provider.

 Because options trading is a complex subject, and consistently finding profitable trades requires a fair amount of time and effort, auto trading is a viable solution for an investor that wants to profit from the opportunities that options offer but doesn't have the time, inclination, or skills to do so themselves.

Choosing a Service

If you wish to auto trade options, then the first step you need to take is to find a service provider. Find the right service provider is, somewhat obviously, hugely important as the quality of the service provided will ultimately determine how much money you make, or lose.

There are certain factors that you need to take into account when choosing your provider, and not everyone will have the same requirements so what might be a good choice for one person may not be right for another. If you are to find success through auto trading then the key is to make your choice based on what's suitable for your own circumstances.

You should first be aware that not all brokers are compatible with auto trading services. Therefore, you need to either choose a service that is accepted at your preferred broker or choose a broker that accepts your preferred service. Second, you need to be clear about what it is you are trying to achieve and you need to determine which service is most likely to help you reach your goals. For example, if you are looking to derive an income then you will need to use a service that aims to provide you with monthly or weekly returns rather than longer term gains.

You should also ensure that you are comfortable with the level of risk involved. Even the best providers don't get it right with every transaction, so you will certainly lose money on trades from time to time. Some providers are very low risk and include tight stop losses on all trades, while others will take on more risk and you may find that large amounts of your capital are being staked on single trades.

Ideally, you need to be able to have some control over how much of your investment capital is at risk at any one time or at least how much of your maximum losses are at risk on an individual trade.

Finally, you need to carefully consider the costs involved. Although most brokers won't charge any additional fees if you choose to use an auto trading service, you will still have to pay standard commissions on all your trades. Because of this, you need to make sure that you use a provider that's suitable for your budget.

If you are using a small amount of capital, then you probably don’t want to use a provider that makes lots of trades with low profit margins because, you may discover that all your profits are eroded by the commissions incurred. Additionally, you need to consider the actual charges for using the service because, if you have relatively low investment capital, then any profits you make may not even cover those costs.

Benefits

The benefits of using an auto trading service are fairly straightforward, but they are dependent on using one that consistently performs well. If you do manage to find a decent service, then the obvious advantage is that you can make money through the time, effort, and expertise of a third party.

Even though you have to pay for this, if it makes you a significant profit over and above that cost then this it's clearly money well spent. As such, auto trading options could well be worthy of consideration for anyone that doesn’t have the required time for all that's involved, or for those that aren't confident in identifying opportunities and making their own transactions.

The other main benefit is the fact that it removes the emotional aspect of options trading. One of the biggest mistakes that investors tend to make is letting emotion take over their rational thinking, and this invariably leads to problems. It isn't always easy to control emotions when money is involved, and emotional responses can result in bad decisions like taking unnecessary risks or chasing losses. When your trading is done automatically there's no real emotion involved.

Disadvantages

Despite some clear benefits, there are some significant disadvantages too. For one thing, it can also be very difficult to find a service that fits your personal circumstances and investment objectives. Most of them have a broad standardized approach to the transactions that they make, and those approaches don't necessarily take into account what the precise requirements of the customers are.

Although it's possible to find a service that largely makes transactions that are suitable for you, the chances of finding a service that is perfect for your exact situation are fairly slim.

The fact is that you are totally reliant on a third party to invest your own money for you. There's no approval process in place which enables you to pick and choose which suggestions you follow and which you reject; if your provider highlights an opportunity then it will instruct your broker accordingly and the orders will be placed regardless of whether you like the opportunity or not.

Basically, you have absolutely no control of how your money is invested. Although this can work in your favor if your provider is consistently making you a profit.  There's always the risk that they could make a string of bad decisions that lose you money, and you still have to pay them their fee.

Summary

The popularity of auto trading options has definitely increased over the last few years, which could suggest why there are plenty of happy investors going down this route and making a profit. It's almost certainly the case that there are some investors who use this technique that are successful with this approach, but it isn't necessarily the right way to go for everyone.

It might be something that's worth considering if you have very little time to dedicate to trading options yourself, but be very careful when choosing a suitable service. We would suggest that it's much better to educate yourself, and make your own decisions without this Third Party. In the long run, you will be far more likely to make consistent profits if you can become an accomplished options trader in your own right.