Using the Right Option Strategy
Len Yates

Stock option premiums remain pretty reasonable despite the recent correction. (Often, a sell-off leads to very expensive options.) So buying calls would be a feasible way of playing stocks when looking for a rally. Also viable are other bullish strategies such as a vertical debit spread in calls or a backspread in calls.

How do these strategies compare, and how should the individual trader select the best for himself?

Each strategy has its own unique risk/reward characteristics. The individual trader must choose the strategy that matches their own trading philosophy and psychology.

A simple call purchase is like raw energy. This position responds dramatically to every move in the underlying. And if the underlying has already moved your way to a certain extent, the call option, now more expensive, gains or loses even more money with every move in its underlying. (In options parlance, the option's delta, or sensitivity to the underlying has become greater.)

This is where trouble can arise. Increased stress on the trader, now trying to pick an appropriate selling point, may contribute to a bad decision. For example, a sudden (but not great) drop in the underlying can lower the price of the option and cause the trader remorse that he did not sell earlier. Now he must decide whether to sell and lock in whatever gain he has before the stock drops any further. On the other hand, a sudden rise in the stock can easily double the value of the call option, possibly leading the trader to feel euphoric and smug, emotions just as dangerous to successful trading as anxiety!

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