Buying Options or Selling Options


Juan Sarmiento Image Juan Sarmiento Independent Trader,

For the options buyer, the probability may increase with your pattern recognition abilities, even if the probability, as calculated by options pricing theory, is low.

For the option seller, it is a numbers game: you want to make as many trades as possible because the probabilities are on your side. However, selling naked options may not be suitable for most of us, so trading spreads with at least an equal number of long and short options may be a more reasonable approach.

Spreads have their own complications and a different set of skills is required, one of which is patience as time will work on your side. But, you will be disappointed to find out that a strong move in your direction may not necessarily translate into large and/or immediate profits because you own a short that will cap your profits and its value only erode close to expiration.

You can profit by buying a simple call or put if you time your trade perfectly, and this is a skill that takes time and effort to develop. In future articles, I will develop this idea. Briefly, a watch list of 30 or more stocks may be classified as bullish or bearish based on their intermediate trend.

Your job is to time your entry by waiting for a correction, opposite to the trend, and enter your trade when the stock price shows signs of resuming its trend.

This is not easy to do, but with some skill may prove to be widely profitable.

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