John, I think you just graphically illustrated why Herm prefers to SELL options! :)
If you prefer to buy them, my suggestions:
1. Buy only in-the-money options, typically 2 strikes in.
2. Don't plan on holding until expiration. When you have a profit, and there is still time value (ESPECIALLY true if you ignore (1) and trade out-of-the money options) TAKE YOUR PROFIT. If the option is at parity, though, you can go for a ride, but also consider a roll-up.
3. Stick to stocks that move, not ones that sit there. Be satisfied with small moves, which can still result in substantial percentage gains. If a stock move sup and down in a range every day, then your position will almost certainly be profitable at some point. Learn to sell when you have a profit. Learn to wait when you don't. Learn not to wait too long. :)
4. Stick to options that have good liquidity.
For me, (3) and (4) are satisfied by sticking to popular tech stocks. Heck, you could trade nothing but Intel options. (And I'm sure there are those who do just that.)
One final observations - options that are expensive are expensive are expensive for a good reason. And, as such, they can be a bargain. Every time I have had a really great win, I've felt the options were over-priced, and that the specialist beat me up on the spread coming and going. And, you know what, I just smile about those so-and-sos as I count my cash at the window. :) |
