So Many Choices
in the Stock Option Market
Isn't it amazing how many
choices are available in the world of OPTIONS? If you have ever gone into a
restaurant with a zillion choices on its menu and had a hard time deciding what
to order, you can probably see where I am going with this.
Look at the choices we have as stock option traders:
- Do you want to trade an index or
equity?
- Do you think it will go up or down?
- When do you think this will happen
and how much will it move?
- How many companies or indexes would you like to
SPECULATE on?
- Do you want to buy some stock or maybe you want SHORT it.
- How
about looking into the OPTIONS MARKET?
- Maybe buy some CALLS or perhaps we
should SELL some - lets not forget to look at the PUTs maybe we should buy some
of those or maybe we should SELL them too... what about the time frame and how far
out should we go? Maybe buy some LEAPs or perhaps some WEEKLY's on an index.
- Do
we HEDGE or go NAKED?
- Buy a STRADDLE or a STRANGLE?
My point here is that before a stock trader gets caught up in what products to use, it
is imperative to realize what the objective is. It is often said that no matter
what level of TRADER you are - it should be handled like a business. I think
that is a very good approach and could not agree more as I have lived by this
rule in my own trading effort.
A very important first step in trading would be for the trader to distinguish
what kind of trading style best suits they're lifestyle along with his or her
daily agenda. It would not be possible for someone to become a DAY TRADER if
they were working fulltime during market hours or to be involved in some complex
SPREAD STRATEGIES and not be able to RISK MANAGE (Adjust) the POSITIONs because
they are away on some tropical island. Another important consideration would be
to understand your own emotions. HIGH RISK and extremely TICK sensitive
positions would not be a good place to be for someone who is trading with scared
money. As we investigate to learn more about the OPTION PRODUCTS and STRATEGIES
that are available – we should become attracted to a STRATEGY that fits our
OBJECTIVE and ties in with our own personal lifestyle and emotion. If we learn
about OPTION PRODUCTS properly we will know how to apply them to the
OBSERVATIONS we make but more importantly we want to use them to suit our own
OBJECTIVE and level of RISK. If we can narrow down the STRATEGIC choices we will
be properly organized. If we can avoid being overwhelmed we will be better
managers which will provide a greater opportunity to excel in the business of
OPTIONS TRADING.
OPTION TRADERS using OPTIONs as a STRATEGIC INVESTMENT should be aware of the
two STRATEGIC categories that can be incorporated into the OPTION PORTFOLIO PLAN
- one is SPECULATIVE and the other being INCOME driven. Of course neither
category will apply when PROTECTIVE PUTS are bought to INSURE (Hedge) a STOCK
PORTFOLIO. Since the PROTECTIVE PUT is a tied to an existing STOCK POSITION, it
did not begin as an OPTION TRADE and it is not considered a pure OPTION
STRATEGY. This will not be considered as part of the OPTION TRADERS STRATEGIC
OPTION PORTFOLIO.
As OPTION TRADERs we need to determine the differences between a SPECULATIVE
OPTION STRATEGY and an INCOME OPTION STRATEGY. We need to streamline the choices
and come up with an OPTION TRADING PLAN that is PROFITABLE and works in synch
with our existing MANAGEMENT skills. In our next few articles we will do a
comparison between the STRATEGIES. We will discover how the retail trader can
gain an EDGE using attractive OPTION STRATEGIES with a HIGH PROBABILITY of
success.
Frank Kneipher
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