In this volatile market, should I buy front-month options or go a little further out?
Answers
117 points
JohnLansing answered 10 months ago …
It depends – use the time frame that gives you more fluidity. Too often, traders get stuck in the mindsets of "I only trade front-month options" or "I only buy LEAPS." This market will crush that kind of rigidity.
Every option I trade is determined by my stock analysis and my level of confidence in the direction, speed and distance that stock is likely to take. I look at how the stock has traded recently, especially when stocks begin to “stall and grind.”
If it's approaching a breakout or a breakdown, historical data tell me that the upcoming move will be violent, which is what you need to move options trades.
In this market, the catalyst could really be anything, though it's always something only an insider would know. But the underlying stock's behavior "speaks" to us, if you will, at my Parabolic Options service throughout the day because “insiders” and “people in the know” are human -- and “humans” just can’t keep secrets.
Recognizing these kinds of sneaky moves is more of an art than a science. I'm fond of saying, "Anyone can paint a picture, but is everyone good at doing so?”
And artists use a variety of tools for their works, which is why I've been known to trade near- and longer-term options, and so should you.
989 points
rvilmur answered 10 months ago …
With high volatility you are paying more option premium. The front month premium will decay rapidly so you better have your stock direction and time frame for your move right.
It is much more conservative to pay more absolute premium for a 3-6 month option that is In the money with a delta of about 0.8. You get much of the stock movement in the option and not too much premium decay. Volatility is usually lower for the out months also so the premium is more reasonable.
411 points
jester112358 answered 10 months ago …
With high premiums you want to be selling options not buying them! If you must speculate on direction then you always want to buy long time expiration options, deep in the money, so that the time expiration doesn't kill you. Understanding when to buy and when to sell premium is critical to making money in options. Very few understand this and this is why over 80% of all open options expire worthless. Do you want to win 80% of the time or 20% of the time? If you prefer the latter sell out-of-the-money front month options to the suckers who like to gamble and collect the premium when they expire worthless.
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825 points
Dragonsbane answered 7 months ago …
I wouldn't mind winning 20% of the time if I made 600% on those trades and losing all of my money 80% of the time. It's all a matter of perspective.
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