• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 6. Eight winning option trading ... > Trade slightly out-of-the-money, at-...

3. Trade slightly out-of-the-money, at-the-money, or slightly in-the-money options

The reasons here are the opposite of the reasons I prefer to stay away from the deep options. These options have a reasonable chance of proving profitable when buying; you gain from the maximum possible time decay when selling; and they are generally the most liquid of the bunch, resulting in a tighter bid/asked spread, which in turn saves on transaction costs. The one variation on this theme has to do with selling options; in this case, it is certainly fine, and even advantageous, to sell out-of-the-money options with this one caveat—the premium received must warrant the risk. What price might this be? There are no hard and fast rules; you just need to use good judgment. It is also advisable to use good judgment when cutting losses. This involves taking a reasonable or small loss when covering short options that are not working. It is important, as well, to cut losses in long options that aren't making you money. Human nature makes it all too easy to become complacent when buying options. I've seen too many people play them out all the way to expiration when all the indications say the play isn't working. This is just another form of hope, and hope is not a recipe for success. The fact that most options expire worthless should be a strong clue to the buyer to sell out prior to the end in cases of nonperformance. This is easy to do—just pick up the phone (or click the mouse) and “sell”!


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint