It's fitting that I start off the Strategy Session with my favorite type of options play. I am of the opinion that the market and traders want to trade for Alpha. That means I want a return that is above and beyond what the market is doing. This goes for my portfolio and trades. If the market returns 10% I want a return above 30%. On most trades most people are happy with 20% even 50% gains. For me I like to see things pop; nothing like looking at your positions and seeing 100+% gains.
My strategy is buying Out of the Money options in the front month. Usually I am in a stock that is a quick mover this usually equates to either a strong support bounce that is quick or a resistance rally that fails and is equally quick. The key is the price movement. If the delta of the option moves up quickly that OTM option becomes very valuable very quick. The philosophy I have with this strategy is similar to a good Texas Holdem Poker player. I put a small amount in the pot. Then when I see a good hand I start throwing my chips in.
When I trade OTM options its the same idea it may only cost me .25 for the option and if I lose all of it, no big deal. I usually position size that I would not consider it a loss. The upside is is that when the price moves the option can easily double, triple, quadruple. Now this is not the most consistent in terms of wins and losses. In fact I would say I have a 55% win percentage. But the average return on this strategy is a little over 100%, and I have been profitable in this type trading.
Again it is not for everyone to trade like this but it does have advantages in certain situations
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I've also done this options trading strategy before and I think it is effective.
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