Options with options

Options with options

This blog was written from recent discussions while in our live chat. We encourage all our members to participate and reach out to each of the moderators individually in private message if you would like further explanation of something or help with anything at all.

It is often asked in chat, where to start with options for beginner. I almost always respond with a recommendation to look at just SPY and forget all the individuals for now. SPY is more liquid than all other options combined. It will remove some of the later frustrations with common issues that arise in spread pricing and volume lock ins. If cost basis is primary concern, low premium stocks like F, BAC, USO are generally very low-cost options, and hold good volume to trade in while learning.

The first thing I look for in option selection, is finding a stock setup that is close to support or resistance on its chart. I want to find out as quick as possible if I am wrong about the stock direction, but also have as much room as possible if Im right. Using entries nearest support for calls and nearest resistance for puts, will allow lowest risk with max potential.

Once I have found a list of stock trading near major support or resistance, I look through these for the stocks that are near options strike prices, generally whole or half dollar increments. Since the majority of my trades are day or two focus, I tend to look at the option strikes closest to the current stock price to work from in an attempt to gain the most leverage possible in the trade.

The final aspect I look at in option selection, is the option cost. Take the cost of the contract and add (for call) or subtract (for puts) to the stock price and determine how much further away my stock target is, and what the theoretical option price may be if my stock reaches its target. This is how I decide if the trade is worth me taking or not.

Throughout all of this, there are a few other constant variables to be aware of. Announcements or news of any kind can greatly alter a stocks movement, and these events are sometimes planned or not. A trader needs to know if there is anything pending on a company’s schedule before trade entry. Another constant is volume. Some platforms have different names for relative volume, sizzle, volume buzz. The focus is always on volume in any trade and can become particularly important with options. You should always have an eye on individual contract volume and open interest once your trade selection is made, to ensure that it is a viable trade.

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