Six Steps to Finding the Right Option

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Market research and daily Option picks. Easy online trading and simple to follow. Free option picks with a free 10 day trial to MTOptions. The Investopedia Pick The Right Options To Trade In Six Steps. Elvis Picardo. Options can be used to implement a wide array of trading strategies, ranging.

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Thank you for signing up Please check your email inbox! You will need to confirm your request. To prevent future issues from getting caught up in your spam filter, please add Support ExactOptionPicks. Market-wide events are those that impact the broad markets, such as Federal Reserve announcements and economic data releases.

Stock-specific events are things like earnings reports, product launches, and spinoffs. An event can have a significant effect on implied volatility in the run-up to its actual occurrence, and can have a huge impact on the stock price when it does occur.

So do you want to capitalize on the surge in volatility before a key event, or would you rather wait on the sidelines until things settle down? Identifying events that may impact the underlying asset can help you decide on the appropriate expiration for your option trade. Based on the analysis conducted in the previous steps, you now know your investment objective, desired risk-reward payoff, level of implied and historical volatility, and key events that may affect the underlying stock.

This makes it much easier to identify a specific option strategy. You may therefore opt for a covered call strategy, which involves writing calls on some or all of the stocks in your portfolio. For example, you may want to buy a call with the longest possible expiration but at the lowest possible cost, in which case an OTM call may be suitable.

Conversely, if you desire a call with a high delta, you may prefer an ITM option. He doesn't want to sell the stock, but does want to protect himself against a possible decline. Bateman does not mind a little risk as long as it is quantifiable, but is loath to take on unlimited risk. Earnings come out in just over two months, which means Bateman will need to get option that extends about three months out. Buy puts to hedge the risk of a decline in the underlying stock.

This cost excludes commissions. If the stock drops, Bateman is hedged, as the gain on the option will offset the loss in the stock. Buy speculative calls on Bank of America. None, the company just had earnings so it will be a few months before the next earnings announcement. Robin is not concerned with earnings right now. The maximum gain is theoretically infinite. While the wide range of strike prices and expirations may make it challenging for an inexperienced investor to zero in on a specific option, the six steps outlined here follow a logical thought process that may help in selecting an option to trade.

The author did not own any of the securities mentioned in this article at the time of publication.

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If you're new to options, you won't believe how easy we make it to get started. Bateman does not mind a little risk as long as it is quantifiable, but is loath to take on unlimited risk.

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