OPTIONS

JW Jones of Options Trading Signals explains a high-probability trading strategy for a stock that has the most liquid options of any individual common stock.

My last missive dealt with a simple trading plan for XOM using the straightforward easily managed and easily understood strategy of selling naked puts and either allowing assignment of the stock and entering a covered call campaign or closing the position after extracting most of the premium initially received. Continuing on the theme of basic strategies, I would like to look at a different high probability strategy applicable to Apple, Inc (AAPL).

The reason for focusing on basic option trades is quite simple: they consist of few moving parts, are easy to enter and manage, and the statistics underlying their probabilities of success are straightforward.

While the available option strategies are protean and can be tailored to fit a wide variety of market conditions, it is easy to get confused with these multi-legged constructions.

I encourage the novice option trader to understand fully these basic approaches and recognize that many of these are the core of more advanced strategies.

I want to emphasize again that traders should focus their trading on the most liquid of the options series available. Life as an option trader is sufficiently difficult that there is no need to introduce the additional complications of dealing with liquidity traps.

Let us take a look at the current situation in AAPL. This stock has incredibly liquid options, trading well over $1 million in daily option volume over the last several weeks. Another manifestation of liquidity, the size of the bid/ask spread, is only a few cents. Finally, there is robust open interest in a wide variety of the option strikes. This is a liquid trading vehicle, and it in fact has THE most liquid options of any individual common stock.

The strategy on which I would like to focus has as its essential element the simultaneous selling of both an out-of-the-money call and put resulting in establishing a high probability short strangle.

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Tickers Mentioned: Tickers: AAPL, VXAPL