There are many variables involved in deciding the optimal size for a trade. The size of your account, capital available, tolerance for risk and trading goals are all important considerations. Before we address these, though, let’s begin with a simple reminder: Liquidity, liquidity, liquidity. Ease of exit is always more important than ease of entry. […]

Options are an excellent vehicle for taking a directional view on a particular stock or the market as a whole. Having said that, I do not believe in buying puts or calls outright as time decay is the option owner’s worst enemy. So, we will discuss a simple and straightforward options strategy, the vertical spread. […]

Today, I want to talk about one of my very favorite low risk, high reward directional option strategies, the Butterfly. The strategy is long strike A one time, short strike B twice and long strike C once. The strategy is all puts or all calls. You can look at it as a combination of two vertical […]

With an increase of more than 30 percent in the S&P 500 during 2013, no one can blame the market for being stuck in the trading range this year. After five years of  steady increases, a correction may be approaching soon. The signals are mixed so far: Although the financial crisis is behind us and the […]

Sometimes, the prospects for a stock are not very good. You might want to open a short position on a stock when the price is too high relative to earnings, when economic prospects deteriorate, or simply when you believe a stock will suffer some selling pressure. But the availability of short selling may be limited […]

Let’s talk today about another way to hedge your stock portfolio against a major move down, albeit indirectly. We can do this by using options on the CBOE Volatility Index (VIX) in the form of a vertical call spread. The VIX is an index which provides a measurement of implied volatility in the S&P 500 […]

Over the last few months we have examined the Greek letters that make the life of option traders much easier. Delta, gamma, rho, vega, and theta are highly useful tools that correlate dimensions of risk in the price of an option to important factors such as the price of the underlying asset, interest rates, volatility, […]

The U.S. economy has greatly improved since the peak of the financial crisis with the financial markets recovering all losses and rising to record all-time highs. The $85 billion asset purchase program expanded the monetary base by trillions of dollars in just a few years, has contributed to the financial enthusiasm. The real recovery hasn’t […]

Every now and then it’s wise to review some of the basic elements in the options working method. Today I am going to review what happens when an-in-the-money option turns into the underlying asset, long or short (i.e., bought or sold,) through exercise and assignment. This happens in two ways, depending on the style of […]

Over the last month we have discussed the main options Greeks that an option trader should look at. We started with delta and gamma, which are related to the change in the option price due to changes in the underlying price. After that, we explored vega and rho, which relate the price of an option […]