Option Selection and Trading Strategies - Option Ideas

Traveling through an option chain can be an intimidating experience; however, following a few simple guidelines should make the journey much easier.

When trading options, one of the principal issues one must consider is how much time-value to purchase. If you don't purchase enough time-value, you may miss out on the majority of the move; nevertheless, if you purchase too much time-value you might be wasting your money. A seasoned trader will purchase just enough time-value to allow his strategy to unfold.

For instance, let's assume you're a fan of the "Large Cap Momentum" strategy found in the Research Wizard. After back-testing the strategy over a three year period of time, you're pleased with the results. Note, a 12 week holding period was selected for this example.

Let's run a query today and get a list of potential plays. Below is a list of the stocks that have passed the "Large Cap Momentum" screening criteria. We could pick one stock from the list or we could pick all the stocks from the list. For this example, I'll pick a stock with an upward trend. Netflix (NFLX) fit that description.

As we glance at the option chain, it may seem overwhelming – so many different strike prices and different durations. We know, however, from the back-tested results provided from the Research Wizard that we need 12 weeks of time-value in order for the strategy to complete. We will therefore pick an option duration that exceeds 12 weeks.

Once we have decided on the duration of the trade, our next step is to select a strike price. No one single strike price is better than the other. Every strike price in the option chain has advantages and disadvantages. For this example, we'll buy the September 120 at-the-money option contracts for approximately $14.

You can learn more about different option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.

And be sure to check out our new Zacks Options Trader.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

 
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