THC:
The key to making money is a four letter word - Sell.
Parking at least one's original investment on a 2x-3x move is smart money management for a trader. Ride the rest but be ready to sell if momentum starts winding down.
How to measure momentum and other technical measures? Buy MetaStock from Equis. How to know which is the best option time / strike to buy? Buy, and use, Option View. this program lets one set assumptions about such parameters as the likely target price, and time for this to be reached, for the underlying asset. Option View then will rank the best strategies according to your own input as to tolerance for money drawdown, whether you want max $ gain or max % gain, Reward/Risk Ratio (my own idea they adopted), etc.
For a rule of thumb one should only buy out of the money options that offer at least 200% upside based on a move of one standard deviation in the underlying asset. The statistics such as standard deviation and coefficient of variation can be calculated with MetaStock. The essence of this is that 67% of all moves lie within one standard deviation. Hence, there is a 2-in-3 chance of seeing the 200% gain on the option if one chooses the correct option time / strike.
Another good rule of thumb for a trading range market, i.e. not a runaway bull trend but a market trending higher but with many pullbacks, is to only buy options when the implied volatility is near the bottom of the range.
Also, "the trend is your friend." Don't short (buy puts) into the pullbacks in an upward trending market.
I believe that my trading practices can be used by others but I should not advise specific trades.
RH |
