Be more successful when buying options

Buying options is the easiest and most common option strategy. It’s usually used as a leverage position of the underlying, but can also be used to hedge risk. Long options strategies have limited risk and unlimited profit (usually) but suffer from a low probability of profit – usually, the sellers have a higher probability of success. This is why it is important to trade with an edge.

I usually buy options and trade them on the long side in 2 distinct ways:

1. Long term – buying leaps and long-term options as stock replacements – usually leveraging the limited risk – unlimited reward and trying to get more than 100% on the option price.
2. Short term – I’m looking for trades where the break-even point is lower than the average volatility. I’m hoping for a quick jump above the break-even point and close it shortly after entering.

Buying options as stock replacements for the long term

1. I trade long call if:
2. 1. The stock price is high
   2. High buyback yield
2. I trade married put (buying the stock + protective put)
3. 1. High dividend yield
3. I prefer In The Money options – usually, 10-20% ITM because the break-even point is lower.
4. Trade when implied volatility rank is low.
5. Only trade if you expect a large move in the stock.
6. It’s important to understand the leverage risk – I never commit all the capital to long calls as one bad year can destroy the account.
7. We have back-tested and gave an example of buying Barron’s roundtable recommendations and results. Check them out here.

Short-term volatility play

1. Implied volatility is low.
2. A month to expiration – I won’t hold the trade for a month but we need some time for expiration to get the full effect of volatility rise.
3. The trend is your friend – Only trade with stock trend AND market trend
4. The Break-even point is much lower than the average daily volatility (so there can be a random move, and we’ll see profit).
5. Max loss no larger than 5-10% when compared with a stock position.
6. We backtested trades where the break-even point was 3 times lower than the average volatility. Read more here.

Use Option Samurai to help you

You can use Option Samurai to help you, for example, you can use the predefined screens to help you find volatile stocks for short-term or long-term options ideas: See our Options screener here.