Choosing the Best Option to Purchase
Len Yates

An option is a beautiful thing. Buy one. When you’re correct about the direction of the market, gains are unlimited. When you are wrong, your losses are limited.
 
Sure, time decay works against your position while the underlying goes nowhere (or takes an excursion in the wrong direction first), but this is an acceptable cost if the option is reasonably priced. (That is, implied volatility is at normal or below normal levels.) As I have said many times, there is nothing wrong with buying a reasonably priced option. An option purchase has an amazing risk/reward curvature.
 
Prior to expiration, an option’s profit/loss profile is a gentle curve, bending the most in the middle, and flattening in either direction – kind of like a bent steel bar. On one end the curve flattens out into a 45 degree angle. This is when the option is deep in the money. In the other direction the curve approaches a zero degree angle. This is when the option is deep out of the money. The figure below illustrates the familiar profile of a call option purchase.
 
Best Option
 
An at-the-money option is at its maximum inflection point. From there, as the underlying moves in the desired direction, your position makes money faster and faster. For example, the first point the underlying moves in your direction, the option gains perhaps ½ of a point. The next point the underlying moves in your direction, the option gains perhaps 5/8 of a point. And so on, until the option becomes deep in the money and begins to move point for point with the underlying price.
 
On the other hand, if the underlying moves against you, your position loses money slower and slower as the curve flattens out.
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