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Wednesday, July 27, 2005

Choosing the best option

Peter Stolcers writes in Options Trader Magazine how to choose the best options for swing trading instead of buying stocks directly. In my opinion, his story is a little too simplified and doesn't reflect the full reality (especially when he speaks about point-for-point moves). It's still worth reading to get some idea of options trading.

Choosing the best option
Options Trader
By Peter Stolcers
July 2005
In today’s market, an overnight stock position can cause insomnia and devastating losses. Swing traders who typically hold positions for two or three days should consider buying options to potentially limit their risk. Finding the “right” option to trade plays a large role in the success of this approach. Options may or may not be a suitable trading strategy for you.

If the options have more than a week until expiration and are trading within 50 cents of their intrinsic value, they present an opportunity because they are a low-cost, limited-risk approach that controls the shares of the underlying stock without being
exposed to time premium decay. If the options have more time premium than 50 cents, you may need to go one strike further in-the-money.

This is a surrogate stock position with less risk since you can only lose what you paid for the option if you buy one option contract for every 100 shares of stock you intend to purchase. This is an important point. Many traders will increase their leverage by trading more options. Why? Because they can. More is better, right? Wrong!

To find options that are trading close to parity, we need to focus on the front month because those options don’t carry as much time value.

Front-month options that are only one or two strikes in-the-money generally have good volume. This normally narrows the bid-ask spread and may make it easier to get in and out of the trade.
Read further:
Options Trader Magazine (free subscription required)


Anonymous PENNY STOCKS said...

Its not possible to pick the perfect option.

12/03/2012 02:59:00 PM  

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