Option Trading Tips

  • Most options expire worthless (for call options it means that at the expiration date the stock price didn't increase higher than the strike price you picked when you bought the call option). Refer to "Placing/Closing Options Orders" menu link, section "OutOfTheMoney Call Options at Expiration Date" above. Right before expiration date, if you have out of the money options, go ahead and sell them to get at least some return.
  • For a sample call option, an increase in stock price in the short run will provide you with a better return if you place slight out of the money options than slight in the money option for the same total investment, assuming reasonable option deltas.
  • In the money characteristics: Good return(still higher than stocks), more expensive, retain value better(if stock does nothing, option investment doesn't decay and loose value too fast).
  • Out of the money characteristics- Higher return/More speculative, cheaper, erodes faster(if stock does nothing, option investment decays and looses value faster), More Illiquid(might have to sell at a discount or might not be able to sell all the way through expiration), Most time these options will expire worthless.
  • Closer expiration date options are cheaper than options with far expiration dates.
  • If you choose an option that is close to expiration, you need to have good confidence that the stock will make the anticipated move soon enough, since with time, your option investment will keep on decreasing in value daily even if the stock does nothing.
  • Following from the previous point of the option loosing value with time, an ambitious call option on a hard hit stock could turn out to be failure if the stock doesn't go up for a long period of time.
  • Since you have to be right in the direction as well as the timing, choose an expiration date that will give the stock ample time to make the anticipated move unless of course you're speculating on a near time event.
  • In the money call option premiums(Bid, Ask) increase faster than out of the money call option premiums(Bid, Ask) for the same stock price increase, since delta values for in the money call options are higher than delta values for out of the money call options. You can see this general trend by looking at the "Change" column and verify that the option price change for the session/day decreases as you go down the column.
  • You can close your option position(sell to close) or you can even exercise(American style) the option to buy stocks at anytime before the expiration date regardless of the strike price(both IntheMoney Or OutOfTheMoney).
  • You can place options on stocks as well as ETFs. Search for symbol "SPY" ETF for S&P 500 on yahoo finance and click options.
  • For an expiration date of 1 or 2 month, the expected stock move should be large and soon enough to make up for the fast time decay/loss of investment value with time.
Note: Majority of the examples provided are related to call options. Put options should not be hard to wrap your head around once you get a general understanding of the concepts discussed above.




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