From my research, experience and track record, I have
found that the most powerful of all option strategies is to just
BUY CHEAP OPTIONS, especially puts. We have discussed the inherent
statistical advantage in buying options due to the fact that
stock prices move in a chaotic pattern, sometimes far beyond the
range of the pricing model’s parameters.
Such surprise volatility makes options gems in the rough, or
“gold in them thar hills”. Buying cheap options, you truly have a
mathematical and statistical edge, something you are looking for
as you play the game.
However, finding the gold is more difficult than most people
think. As mentioned previously, most cheap options are not good
plays. They are overvalued with little chance of paying off. Therefore,
it is important that you analyze an option before you buy it.
You must know your probability of making a profit, the theoretical
value of the option, the delta and implied volatility.
The best way to find these plays is to use a SCAN program
that identifies undervalued options. We previously mentioned
several excellent web-based programs that can do the job.
After I identify a list of undervalued options, I look at the
charts of the underlying (i.e. check out bigcharts.com) to make
sure the underlying stock or futures does not face a lot of overhead
resistance for calls or underlying support for puts and also
to see if the underlying security has made the necessary move in
the past within the time frame allotted.
Then I look at a chart of the implied and historical volatility
of the stock or futures (such charts are available in the Option
Research Scanner and the Power Analyzer.) to make sure these
volatilities are at a low ebb on the charts. Finally, I would do the
probability analysis prescribed to ensure I am not betting on a
dead horse.
Option buying should be part of every option investor’s arsenal.
It provides excellent insurance and explosive firing power for
your portfolio.
The drawback here is that in practice, most investors do not
fare well buying options. They do not have the patience, discipline
and ability to handle a lot of losses.
From my research, experience and track record, I have
found that the most powerful of all option strategies is to just
BUY CHEAP OPTIONS, especially puts. We have discussed the inherent
statistical advantage in buying options due to the fact that
stock prices move in a chaotic pattern, sometimes far beyond the
range of the pricing model’s parameters.
Such surprise volatility makes options gems in the rough, or
“gold in them thar hills”. Buying cheap options, you truly have a
mathematical and statistical edge, something you are looking for
as you play the game.
However, finding the gold is more difficult than most people
think. As mentioned previously, most cheap options are not good
plays. They are overvalued with little chance of paying off. Therefore,
it is important that you analyze an option before you buy it.
You must know your probability of making a profit, the theoretical
value of the option, the delta and implied volatility.
The best way to find these plays is to use a SCAN program
that identifies undervalued options. We previously mentioned
several excellent web-based programs that can do the job.
After I identify a list of undervalued options, I look at the
charts of the underlying (i.e. check out bigcharts.com) to make
sure the underlying stock or futures does not face a lot of overhead
resistance for calls or underlying support for puts and also
to see if the underlying security has made the necessary move in
the past within the time frame allotted.
Then I look at a chart of the implied and historical volatility
of the stock or futures (such charts are available in the Option
Research Scanner and the Power Analyzer.) to make sure these
volatilities are at a low ebb on the charts. Finally, I would do the
probability analysis prescribed to ensure I am not betting on a
dead horse.
Option buying should be part of every option investor’s arsenal.
It provides excellent insurance and explosive firing power for
your portfolio.
The drawback here is that in practice, most investors do not
fare well buying options. They do not have the patience, discipline
and ability to handle a lot of losses.