Improve your Trade Entry and Execution
In the realm of stock options, there are hundreds options to choose from. And option traders can pick virtually many of them. But how to choose the right stocks for options trading? When we setup a new trade we look at the following aspects for trade entry
Tune in to get the specifics on these qualifications and find out how our decision making differs when trading in a small account.
Liquidity of an option
Volume is the number of contracts that are traded during a particular time frame. Daily volume is the number of contracts that are traded during one trading day.
High volume is an indication that a market is actively traded, and low volume is an indication that a market is less actively traded. Typically you want to be able to go in and out the trade fast. Therefor you select only options that are liquid.
Based on truth and rumors in the marketplace, option prices change. If there’s an earnings announcement or a major court decision coming up, traders will alter their opinion and trade style on certain options. That drives the price of those options down or up, independent of stock price movement.
When we talk about the volatility of an option, we are referring to a measurement of how much the closing price varied from day to day.
Price of an option
The market price of stock options vary much. It is depended on how likely it is that the underlying stock will undergo a larger or a smaller, price change.
We sell options with high implied volatility in order to receive much option premium. Typically we sell only which has enough premium and a high probability of profit.
Strategy to select
Although we prefer to sell options with high implied volatility, the market does not always accommodates us. Therefore we use several strategies for each environment. And we diversify our portfolio by using different strategies in each environment.