As a newer options trader, I need advice for this current market cycle. What length of contracts should I be trading?

As a somewhat newer Options trader ... Is it okay to buy/sell 1-month contracts or is it wiser to start with 3-6 month contracts until more knowledge is gained?  Or are their similar patterns that can be utilized no matter what the timeframe of the contracts are?  

I am finding that my current Put contracts of a month are all turning up losers.  Wall Street is clearly divorced from main street.  Most of my options are in the airlines, cruise lines and retail with a majority of them as PUT contracts.  Several are expiring in two weeks and I keep thinking that his market is WAYYY overbought.

I am hesitant to use any stop losses because of the wild volatility.

Am I wrong in my thinking?   

1 Answer

  • 1 month ago

    Most successful option traders use spreads as opposed to speculating with naked options. 

    Usually it is better to buy longer term options and sell shorter term options. There are, of course, exceptions.  For example there was one small drug company which had sky high implied volatility because they had no product in production and only one drug in their pipeline. When they sent a new drug application for the drug to the FDA I sold naked puts with eight months until expiration. I had no idea if the drug would be approved or not, but I was confident they would not get a decision from the FDA for several months. In the mean time I could let theta decrease the value of the options and close the position before the FDA decision. 

    I suggest you learn how to trade low delta, low gamma spreads. Be prepared to adjust the spread to by adjusting it if your delta or gamma risk exceeds predetermined levels.

    Your options trades should be based at least as much on the "greeks" (delta, gamma, theta, vega and rho) as your guess about the future direction the stock will move.

    • BigDeihl1 month agoReport

      Thank you.  I have not looked into Greeks yet but I will add that.  I also appreciate the idea of buying longer term contracts and then short term contracts when its heading in the opposite direction.

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