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Strategies & Market Trends : The Options Box
QQQ 622.00+0.8%Dec 2 4:00 PM EST
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To: ig who wrote (9397)2/3/2001 10:35:30 AM
From: dli  Read Replies (3) of 10876
 
If your timeframe is a few days at maximum you should stick to front month options except when there's only a few days left until expiration. The front month also tends to have the highest liquidity so you won't be giving up as much getting in and out. However, keep in mind that if your timing is off somewhat time decay can hurt you badly on front month options even if your directional assessment is proven right eventually. As for the strike price to choose, assuming that you have a fixed dollar amount to commit to the position if you want a precise answer you should run all strikes through a pricing model with your forecast values (the CBOE has an options calculator on their web site). Unless you are expecting an extended move in the underlying often the OTM strike that will be ATM at your target price will offer the highest percentage return but also the highest risk. However, with highfliers there's often a very pronounced U-shaped vertical volatility skew where far OTM strikes are most affected (i.e. far OTM calls and puts are highly overpriced). So if you expect an extended it move a strike that's a little closer to the money may prove to be the better choice. That's why it pays to run things through a model.

Dave
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