I haven’t seen a robust thread on this and I figured I’d make a new one as a mutual benefit to everyone as kind of a repository of things to look out for while trading options.
Basically, I want to know if there are some options-related observations that you might’ve noticed while trading. It could be something common sense like “Buying deep OTM contracts with short expiry never goes well” or something more specific related to option greeks, strategies, hedging, etc.
Here are some of mine, most are common sense and in no particular order:
- Earnings plays: These, in my experience, almost never work due to the volatility drop right after earnings. I learned this lesson playing $EBAY’s earnings and barely broke even despite being right and anticipating a huge drop. I bought the contracts one day before earnings at the peak of their volatility as well. I’m sure sure you can profit by playing earnings if you buy the contracts early enough but I personally don’t see the point of playing earnings when there are lots of other opportunities to enter with favorable conditions . I filter out stocks with earnings less than 2 weeks with my scanner.
- Volatility: Having a healthy understanding of volatility is crucial whether you’re an option buyer or seller. For option buyers, low volatility is ideal and high volatility contracts tend to be dangerous buys. Conversely, option sellers benefit with high volatility and suffer in low volatility conditions. Having bought high volatility contracts on meme stocks, it was frustrating to see their value plummet when they didn’t make massive moves. I personally filter out option contracts with volatility over 75%.
- Stock movement and time: Be realistic with your expectations of when and how much an underlying will move. I personally made dozens of trades which correctly predicted a trend or direction but they fell short of profitability because I either didn’t buy contracts far out enough or wrongly anticipated the timing of a trend forming. I personally use the Probability Analysis chart on TOS to get an idea of where a stock could potentially be in the desired time frame. It’s basically a standard deviation so other indicators like the Bollinger Bands can achieve a similar result (though I personally don’t use it). Once you establish a range of where a stock could potentially go, buying should be strictly be in that range. For option sellers, selling contracts outside of that range would be ideal.
- Understanding how to analyze and predict stock movements: This doesn’t directly relate to options but having a foundational understanding of how to analyze stocks will help you time your entries and exits for option contracts . I personally use a mix of technical and statistical analysis as I use Support/Resistance, EMA20, and Standard Deviation. Some of you might have your opinions about technical analysis but it works for me ¯_(ツ)_/¯. Though I’m still a novice at all this, I’ve found that simply experimenting with the various tools out there will give you an idea of what works and what doesn’t. Having experimented with just about everything, I found that an uncluttered chart with a single moving average and some key lines is sufficient for me.
That’s about the big takeaways I’ve learned thus far. I’d love to hear yours.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.