Papale on Long Options

It is a short trading week so I will keep these initial few sentence short as well.  Happy Easter.

Unfortunately there is no magic option strategy that works perfectly in all market conditions.  The strategies need to be evaluated based on risk and reward and once placed, managed according to pre established rules.  If you are looking for a quick move in the underlying, it may make sense to look at buying options, either outrights or as spreads.  By doing this you give yourself more potential to capture more profit from the move than a traditional credit spread might, especially if the move is large.

Time is also a factor to consider.  If the timeline is short,  buying an option can often make more sense as risks like theta and changes in implied volatility have less time to adversely affect our trade.  The less time when long an option, the more the movement in the underlying becomes the main driver of performance.  On the other hand, if direction and or time is less defined, selling options could  provide more room for error and a greater range of potential profitability, albeit  most of the time less than the long option strategy.  These are general guidelines however and obviously not hard and fast rules.

For example, with a long timeline buying longer dated options can be a viable strategy as the theta is less of a factor and implied volatility is less volatile the farther out in time the expiration date.  The flipside is a greater vega so when vols do move the effect can be greater. In addition, with longer dated options there is less sensitivity to changes in the underlying so if the expected move in the underlying occurs relatively early in the trade, the profit can be less than a shorter dated option.  So when deciding on a strategy consider the expected time in the trade and price target. That’s a good starting point.

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