Avoiding Option Trading Trap.pdf

Avoiding Option

Trading Traps:

What to look for

Strategies for Success

Presented by

Lawrence G. McMillan

“The Option Strategist”

www.OptionStrategist.com

www.optionstrategist.com 800-724-1817 lmcmillan@optionstrategist.com

F-1

5 Common Problem Areas

• Option Buying

• Covered call writing

• Bull Spreads

• LEAPS covered writes

• Running with the crowd

www.optionstrategist.com 800-724-1817 lmcmillan@optionstrategist.com

F-2

What Makes An Option

Purchase Profitable?

• Foremost:

– Favorable movement by the underlying

• Secondarily:

– An increase in implied volatility

www.optionstrategist.com 800-724-1817 lmcmillan@optionstrategist.com

F-3

Call Buying Problems

• Getting too theoretical

• Using the wrong strike price

• Not factoring in implied volatility

• Buying the wrong quantity

www.optionstrategist.com 800-724-1817 lmcmillan@optionstrategist.com

F-4

Which Option To Buy?

• “The shorter term your horizon, the higher

the delta should be. ”

• Day traders: use the underlying

• Short-term position traders: buy in-the-

money, short-term

• Intermediate-term position traders (3

months or more): buy at the money.

• Long-term: can consider LEAPS, at- or

out-of-money

www.optionstrategist.com 800-724-1817 lmcmillan@optionstrategist.com

F-5