The last couple of posts have been dealing with trying to give a base line knowledge of options. Today I will get down to how I have been making money on the call side. I will try to continue with some posts on puts and eventually how I have been making money on puts too.
What is the Market Doing?
This is the question that drives investment. However, with options, I can control, not own, more shares for a limited time with less risk. My first recommendation would be to go to any of the major websites that offer financial information and create a portfolio. I use yahoo finance. I have a fairly broad selection of stocks in mine. This gives me a quick snapshot at what the market is doing for that day. I do not have a lot of time usually to continually check the market.
What am I Looking for in Picking a Stock?
In one word, VOLATILITY. If I can find a stock that I think is going to move, I can make money on it. So if I see some big movers in my portfolio, I have learned what their average range is just by watching them for awhile. I will also typically look at the 6 month to a year chart to see where that stock is in its’ natural curve. If it is on the low end of its’ average range, I will click on the options tab to see how much the premium is on usually a month to two months out. This gives the stock time to move to my target range. The reason that I like the one to two month range is that they are cheaper than farther out options because of what I wrote yesterday about time value.
If the stock goes up as I expected, then I will sell the calls that I purchase. This is called selling to close.
So back to our example from 2 days ago (Options are a Viable Option Right Now) where stock XYZ closed at almost $27, I wanted to buy 10 contracts. So why didn’t I?
Remember when I said that options expire on the 3rd Friday of the month? Well, tomorrow is the 16th (or the 3rd Friday) and the November strike prices will all expire. This is the primary reason why I didn’t purchase the $30 December calls. Typically the Monday after an expiration, the prices go down because investors realize that time is starting to run short on the next month’s options. So if stock XYZ hasn’t gone up significantly, I will look at buying the January $30 calls probably on Tuesday. I guess only time will tell if this is a good investment.
We will continue on in the next couple of days, and I will try to explain puts, vertical spreads, and straddles. Again, these are more complex strategies that require extensive knowledge to trade. I would highly recommend using a website like Think or Swim to paper trade. This will give you valuable experience in executing these trades while using fake or paper money. Again, feel free to ask questions. These are complicated issues. When it comes to investing, remember the old saying, “Time is Money.”