Be more successful when buying options

Buying Options

Importance:        Medium     Star full.pngStar full.pngStar full.pngStar full.png
Execution: Easy
Buying options is the easiest and most common option strategy. It’s usually used as a leverage position of the underlying, but can also be used to hedge risk. Long options strategies have limited risk and unlimited profit (usually) but suffer from a low probability of profit – usually, the sellers have a higher probability of success. This is why it is important to trade with an edge.

 

I usually buy options and trade them on the long side in 2 distinct ways:
  1. Long term – buying leaps and long-term options as stock replacements – usually leveraging the limited risk – unlimited reward and trying to get more than 100% on the option price.
  2. Short term – I’m looking for trades where the break-even point is lower than the average volatility. I’m hoping for a quick jump above the break-even point and close it shortly after entering.
Buying options as stock replacements for the long term:
  1. I trade long call if:
    1. The stock price is high
    2. high buyback yield
  2. I trade married put (buying the stock + protective put)
    1. High dividend yield
  3. I prefer In The Money options – usually, 10-20% ITM because the break-even point is lower.
  4. Trade when implied volatility rank is low.
  5. Only trade if you expect a large move in the stock.
  6. It’s important to understand the leverage risk – I never commit all the capital to long calls as one bad year can destroy the account.
  7. We have back-tested and gave an example of buying Barron’s roundtable recommendations and results. Check them out here.
Buying options as stock replacements
Buying options as stock replacements
Short term volatility play:
  1. Implied volatility is low.
  2. A month to expiration – I won’t hold the trade for a month but we need some time for expiration to get the full effect of volatility rise.
  3. The trend is your friend – Only trade with stock trend AND market trend
  4. The Break-even point is much lower than the average daily volatility (so there can be a random move and we’ll see profit).
  5. Max loss no larger than 5-10% when compared with a stock position.
  6. We backtested trades where the break-even point was 3 times lower than the average volatility. read more here.
Buying options with close break even point
Buying options with a close break-even point

Use Option Samurai to help you:

You can use Option Samurai to help you, for example, you can use the predefined screens to help you find volatile stocks for short term or long-term options ideas: Long calls screener

 

Long call screener
Long call screener – Predefined scans

 

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