Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Novice traders, whether they are trading pure options, stocks or futures, often overlook one of the key advantages options can provide: staying power and its ability to allow the position enough time to go their way. The simple fact is that new traders very often get caught up with too many trading axioms and don't remember to take the time to see the true advantages certain option positions offer them.

While there is certainly some virtue in the age-old trading rules of cutting your losses short and letting your profits run, the veteran option strategist knows that if the strategy is selected correctly, they do not have to immediately bail if the underlying goes against them, especially compared to just trading a stock or futures outright.

For example, if a trader is bullish on an underlying stock and currently the options are experiencing low implied volatility, or, in other words are relatively cheap, they can buy either a call, straddle, strangle, or even a call ratio backspread with 120 to 150 or more days until expiration. By employing options in this manner, the trader is allowing him/herself plenty of time to be correct, and thus profitable, without worrying so much about the day-to-day gyrations—particularly if the stock initially goes against their position. By initiating a low-risk position, the stress is reduced because the need to watch every tick is alleviated. And it also allows the trader to better evaluate the position if anything has changed with his or her trade, either from a fundamental and/or technical standpoint.

If the option strategist is combining options and stocks to create a position, this also gives the trader more time for the trade to move into profitable territory. For example, by using a “married put” where for every 100 shares of stock purchased the trader buys an at-the-money-put with 6 or months until expiration, a scenario is created where the trader can literally wait until almost expiration before having to either give up on the stock or take the profits. This type of position absolutely allows the option strategist ample time to let the position show profits. The same can be done with a synthetic call straddle, providing implied volatility is low, where the option strategist purchases 100 shares of stock and purchase 2 at-the-money calls with 6 or more months remaining until expiration.

Finally, options can be used in the very volatile and erratic world of futures trading. For example, by going long a futures contract and at the same time buying a slightly out-of-the-money put, the trader can not only stay in their positions longer but, more importantly, do not have to be worried about being stopped out or having to face a margin call. This is a tremendous advantage when trading in such a potentially volatile environment like the futures market.

Make sure to always consider the staying power advantage options provide you because it can certainly lower the stress levels of trading.

Happy Trading.


Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jeff’s Forum

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Jeff Neal, Optionetics.com

• August 26, 2008
  Tech World: Natus Medical Incorporated
• August 20, 2008
  Outside the Box: Reviewing the Elements of Fundamental Analysis
• August 19, 2008
  Tech World: Abiomed
• August 15, 2008
  Interview Central: Brent Harris, Part III
• August 13, 2008
  Outside the Box: Know Thy Exit