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My Favorite Option Strategy!

Posted by Pete Stolcers on May 12, 2006

It’s only fitting that I start my first option trading blog off with my favorite strategy. I’ll bet it’s yours too. I like to buy cheap out of the money front month options with a week left until expiration. There is nothing like the thrill of watching them get to the strike. If there’s a day or two left and the stock has momentum you can just feel the premium getting ready to pop. If your lucky, the options are a few points in the money on expiration Friday and you are leveraging thousands of shares for just pennies on the dollar.Don’t get excited, I said my favorite strategy, not my most consistent one. This “take a shot – make a lot” play only works in rare instances. You need to have a sustained market move in one direction, a stock that has very high relative strength, a strike price that is one or two points away, a stock that is over $50 and options that trade for $.50 or less. It is the “perfect storm” and it is an all or none play. It amounts to a scenario where there is an equal chance that the options will more than triple in price or expire worthless. From a risk/reward standpoint, it’s a bet worth taking. These situations don’t come up very often, but when they do, they can produce some huge winners. They comprise about 2% of my option trading.

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Posted in Option Strategies - Good and Bad!

Option Trading Comments

  • On 05/24, Tom said:

    I like that idea of trading during the last week of expiration. I have traded on the last day also.  At May expiration I bought CLF puts for $20 and sold them for $65.  But the trade I hade mapped out and didn’t take was NUE calls @ $35 which went to $250 and then NUE puts @ $25 which went to $150.  Using $1000 and risking half of it one could have profited by 20-30 thousand $$$ by rolling over profits.  Of course this kind of price movement is rare but there are usually great trades to be made even on the last day.  In my view they are risky and can easily go against you however the market doesn’t know me and how i trade so i believe the opportunities will always be there for those who are aware of them.

  • On 05/24, Jon T. said:

    I have tried this strategy also, with absolutely no success.  Guess I needed that perfect storm.  I think as long as one keeps the risk amount small relative to the size of the account, it has a place in a trading account.

  • On 05/24, Joe R said:

    I have tried this with atm calls with little success.  It can go against you real quick.  But buying cheap otm options sounds like a good idea.  As you said, either a great or not so great ending.  I think it was in Feb or March, goog puts could be bought for $.05 and ended up being worth 3.00 or 300 per contract.  A $500 investment was worth $30000 from Wed to Friday.  So stocks with movement is the key.. right?

  • On 05/25, Dan P said:

    Does anyone do "Options Made Easy" where the favorite strategy is to buy "in the money" options and not go for the $$$$$$$$$ quick big bang? Frankly, I’ve had more success with following the algorithm signals with several months to ride than the one month or less one-option (level 1) like CI and BVF, (and HOV which I held too long). I guess I’m not smart enough to play Pete’s game plans.

  • On 05/25, Tom said:

    Good posts from everyone.  I also like in the money options at times.  I don’t like buying options with more than a month until expiration because of the price movements where they can double or triple several times over the course of a few months and give it all back over and over.  I don’t think it’s all about being smart as much as being experienced and watching the similar patterns that occur again and again.  Sometimes the best trades seem the most risky and they take the most guts to enter into.  Sure I have failed on many last minute trades and have made many mistakes.  However I use several different strategies and gain confidence over time.  Hitting for the quick $$$ is not the way to trade for most of the time...but the opportunities are there no matter who trades them.

  • On 05/28, Neil said:

    Check "Options-Intelligence.com" for past expiration week possibilities on selected stocks. I’m looking for rent money consistancy. I haven’t found it doing expiration weeks.

  • On 05/26, cpptrader.com said:

    slow and steady wins the race - same concept applies here.  you won’t win every time, but when you do it can be a major windfall that more than makes up for both prior trades and opportunity costs.  I’ve enjoyed this strategy with VIX options… like the other day when the data was delayed and the DOW checked 500 points.  It was a 140% profit day.  Not that I’m a black swan believer, just saying that if you are astutely applying this strategy it can generate a reasonable return - maybe not the 50 or 100% per year everyone dreams of, but a reasonable and realistic return.  good post, and thanks.

  • On 04/26, Brett Hansen said:

    If this is your game- then I’ll add a consideration- its also nice if the stock is going to post earnings a day or two before expiration to provide that big upside / downside move you are looking for.

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