Which Options to Buy?
Hey, Traders! I trust you are all doing amazing, splendid and fantastic as always! I often get questions about trading options and I wanted to write an article about "which options to buy".
First, to break down some simple insight into options, there are two types:
Options were created as insurance tools in the early 70's.
If a trader was short stock, call options can be purchased to protect the bearish position, in case the stock goes up.
If a trader is long stock, put options can be purchased to protect the bullish position, in case the stock drops dramatically.
As an investor, it's good to also know that these 'insurance positions' can be purchased by themselves. If you are bullish on a stock and your analysis confirms it might go up, you can buy call options. If you are bearish on a stock and your analysis confirms it might go down, you can buy put options.
Which Options to Buy:
As a general rule, I prefer to buy options with at least two months before they expire. For example, if you're buying a put option on AAPL on September 8th, 2015, I would buy the November expiration. If you specifically go into a trade with a plan to be in and out within two to three weeks, you can buy shorter time. So, in the above example, an October expiration. It's all about how long you plan on being in the trade. If your analysis dictates a potential four to five month trade, look for a six to seven month option expiration.
Buy In the Money:
When buying an option, in the money options are usually safer and less volatile.
If buying a put, buy the option strike that is higher than the current price of the stock.
If buying a call option, buy the option strike that is lower than the current price of the stock.
Example: Stock XYZ is trading at $103.04 You are bearish. Buy the $105 put
Example: Stock XYZ is trading at $167.24 You are bullish. Buy the $165 call
When you buy an option, the good news is, you can sell it anytime before expiration. You can sell it days, hours, minutes or even seconds after you buy it if you want to.
Obviously, this is an incredibly brief run down on which options to buy. To gain more insight, feel free to check out this video.
Until next time, love life, live life and trade it!
~ Jerremy Alexander Newsome