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Strategies & Market Trends : Ask Vendit Off-Topic Questions -- Ignore unavailable to you. Want to Upgrade?

To: Gush who wrote (4134)	1/22/2005 3:01:24 AM
From: Walkingshadow	Respond to of 8752

Rule #1: OPTIONS CONTRACTS EXPIRE Rule #2: see rule #1. Rule #3: see rule #2. One more specific rule I use (not absolute, but there should be only rare exceptions) is never buy contracts with less than 3 months to expiration. That's because during this period, the time value evaporates in accelerating fashion, so even if your contract is in the money, the increase in intrinsic value can much more easily be eclipsed by the decrease in time value. I also don't buy contracts deep in or out of the money. That said, there can be some good reasons for doing so, for example if you are hedging a big long position with put options, or by selling out of the money calls against the position. Another rule most will recommend: options should make up no more than 10% of your portfolio, and in most cases, considerably less. It is wise to give a lot of consideration to your own personal risk tolerance, and how much of your portfolio you are prepared to lose entirely (since that is possible if you are buying puts and calls). And it is usually a good idea to trade most options with limit orders to avoid getting nailed on the execution. With some contracts that typically have very narrow spreads this may not be important, but most options tend to have fairly wide spreads, and you can be sure you will get the worst possible end of that spread. T