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I am in the process of developing an options trading plan. The tentative criteria for selecting stocks that are suitable for buying calls follows. What do you think? Are there better indicators?
By the way, for the sake of staying on topic, I have excluded all but one of the references to macro indicators, fundamental analysis, and sector/industry analysis.
Price Criteria
- The short term price EMAs are above the intermediate term EMAs
- Market prices are above the middle Keltner channels but below the upper channels
- RSIs are between 50 and 70 and, preferably, closer to 70.
- Timing: In a bullish environment. of the stocks that meet the criteria, pick those that experience a short term fall in the market price (with a corresponding decline in the intrinsic option price) coincidentally with a short term drop in the broader markets.
Volume Criteria
- Simple VMAs start to fall after the volumes peaked during price declines
- OBVs indicators are rising
- MFIs are between 50 and 80 and, preferably, are closer to 80
One thing I've learned trading options is that the shorter your time frame, the more money you are likely to lose. Also, the further out of the money you go the more likely you will lose.
You are better off paying extra premium and buying close to the money options dated at least 3-4 months out, then selling those options 4 weeks before expiration regardless of price. If the option achieves your price target early, take profits and close your position. Or roll out to a longer dated option if you like the company.
Avoid the weekly calls. Its pure gambling. You may get lucky and make 500% in a day on one trade, but more often than not you will lose lots of money quickly.
One thing I've learned trading options is that the shorter your time frame, the more money you are likely to lose. Also, the further out of the money you go the more likely you will lose.
You are better off paying extra premium and buying close to the money options dated at least 3-4 months out, then selling those options 4 weeks before expiration regardless of price. If the option achieves your price target early, take profits and close your position. Or roll out to a longer dated option if you like the company.
Avoid the weekly calls. Its pure gambling. You may get lucky and make 500% in a day on one trade, but more often than not you will lose lots of money quickly.
Not always the case on time frame, it really comes down to strategy. However, if it's a long term play, the further out & further up you go the more likely you are to lose, I would agree on a long call.
I wouldn't necessarily say going 120 days, selling with time left. You're possibly leaving money on the table unless your underlying is moving away from your strike, then yes try to salvage.
At any time and becomes ITM, for sure take profits and exercise. I would never roll an ITM option that I'm long, I would exercise & sell then open a new position. Bird in the hand type of thing.
The time frame will, of course, depend on each call's intrinsic and time values, striking price, and expiration date as well as my profit goal and loss limit (both of which will be very modest). My guess is 30 to 90 days.
Not always the case on time frame, it really comes down to strategy. However, if it's a long term play, the further out & further up you go the more likely you are to lose, I would agree on a long call.
I wouldn't necessarily say going 120 days, selling with time left. You're possibly leaving money on the table unless your underlying is moving away from your strike, then yes try to salvage.
At any time and becomes ITM, for sure take profits and exercise. I would never roll an ITM option that I'm long, I would exercise & sell then open a new position. Bird in the hand type of thing.
Why would you exercise? Exercising means you must take delivery of the shares then sell them as a separate transaction. Why wouldn't you simply sell to close the call option?
Rolling an option is the same thing as selling to close one option and buying another. The only difference is that both transactions occur almost instantly in one click of the mouse. Rolling minimizes delays between transactions that could result in you missing out on a major price move.
Why would you exercise? Exercising means you must take delivery of the shares then sell them as a separate transaction. Why wouldn't you simply sell to close the call option?
Rolling an option is the same thing as selling to close one option and buying another. The only difference is that both transactions occur almost instantly in one click of the mouse. Rolling minimizes delays between transactions that could result in you missing out on a major price move.
Not true, you can exercise & sell at the same time in a simultaneous transaction. You can roll, but you never take a profit that way, just push out the option window for exercise. You take a small profit from the original & spend most of it (usually) by opening another option which uses up gains by having to pay premium (assuming an ITM option). If you can accomplish a roll-out, you are only getting the options value. If you exercise, you get your underlying value, and immediate gain, and then if you want can open a new position.
Ex. 1 Long 1 ABC 100c 1/12/18, ABC @ 120 currently.
=> +20 on underlying @ exercise on 100 shares = $2000, assuming initial outlay of $100 premium, net $1900
Opening a new position, Long 1 ABC 130c 3/30/18 @ 1.25/1.30/1.35 bid/mid/ask
=> BCO @ 1.30= 1*1.30*100= $130 ===> you're now in the hole for $15.
So you tell me, which profit are you going to take? Or spend more money on a new position?
Now if your position is you can't afford to exercise, then by all means roll-out. Or (just from inside knowledge) understand you won't be given a free ride (for sure verify with your broker-dealer before exercise) for the exercise & sell w/out sufficient funds in your account.
I'll take the $1785 difference please.
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