Optin Box close
Welcome to the Options University Blog

This is no ordinary ebook. Options 101 just hit the bookstore shelves all over the country. It's available at Amazon.com and BarnesandNoble.com and we've been told it's the 'best options book on the market today'.

Because we feel that a proper foundation in options is critical to your success,
We'd Like To Offer You
3 FREE Chapters
of Our NEW Book
Options 101:
From Theory to Application
by Options Expert Bill Johnson
To get your 3 FREE chapters, simply enter your name and email address below, and we'll send these to you right away
(You'll have them in your email inbox instantly!).
"It's fun for me to spend time with people that are really bright and passionate about something that I love as well. Options University has done a wonderful job of getting their message across in an easy to understand way. I hope this is the first of many..."

Tom Sosnoff
thinkorswim, inc.
Name:
E-mail Address:

Aug

12

Advanced Options Trading - Timing Stock Options

Filed Under Advanced Options Trading 

Timing Stock Options
It’s an established fact that to get the best correlation for the buck, options traders should look for in-the-money options with Deltas around 80-85. In this way, you can capture at least 80-85% correlation with the movements of the underlying stock. OK, but what expiration month do you choose?
 
If you think the stock is going to make a similar type of downward movement it made in the past and it made the same downward movement seven months ago, again two years ago, and again four years ago, you think the current pattern is a close match to past patterns and this will be a good indicator of what might happen. In the past, each time it looked like it had taken two to two and a half months to complete the breakdown cycle. So, you decide to buy put options that fit that timing pattern. If you think that it should take about two and a half months to complete the pattern, you would decide to buy an option that expires in three months; in other words, you want to match the days to expiration on the option to the amount of time you think it’s going to take for the stock to make the anticipated movement.
 
Of course, you can be off a bit on both ends, but picking a month that is most likely to contain at least some of the movement we expect is the key.
 
In the case of a short stock position, you locate a put option that closely will mimic the short stock position. So, you go out three months and look for an in-the-money put with Deltas around 80-85; this is called “the sweet spot”. Now, you have a good idea of the timing and an option at the best price for what you want to accomplish.
 
Exception to the Sweet Spot
 
In the Options Mastery course offered by the Options University, it’s mentioned that there is a time when an option trader doesn’t want to use the sweet spot. That is when a stock is going through a breakout; you should consider buying an at-the-money put. Why is that?
 
An at-the-money option has a mix of intrinsic and extrinsic value. With extrinsic value, the stock has to perform better than at an in-the-money option to over come the extrinsic value cost; every penny of extrinsic value is one additional penny more that the stock has to move to start making a profit. When an option is deep in-the-money, option and stock prices move in lock-step. But there are times when you would want to capture the volatility of an option; it’s like catching a wave before it breaks.
 
A break down in a stock is normally a violent, aggressive movement lasting four to maybe eight days.  If thisis the case, the problem of time decay is not a major concern because you won’t be in the position for that long. In this case, the at-the-money put becomes a better play. Break downs give you the opportunity to benefit from the volatility and not get hurt as much from the decay because break down stocks usually make their big moves within a short time span.
 

For a total knowledge of stock options, go to www.optionsuniversity.com

Share This

Comments

Leave a Reply

You must be logged in to post a comment.

Close
E-mail It