- Underlying security – How much we know about the underlying security and how confident we are that it's going to move in the expected direction by the expected amount. Also we have to find out how that sector is doing and what is the correlation to the overall market.
- Strike price – How far is the strike price from the current price? Out-of-Money options seem to be cheap but the risk is higher because there is a bigger chance that they will expire worthless. That means you can lose 100% of your investment.
- Expiration date – It's tempting the buy with expiration date in a month or two because they are cheaper. Again, if the underlying stock doesn't move in favorable direction you can lose all your money.
- Volatility – High volatility makes option prices expensive. If volatility drops so does the option price and you can lose money even if the underlying price doesn't change. It's better to buy options with low implied volatility.
- Liquidity – The problem with thinly traded securities and options are that it could be hard to get in and out of positions.
- Bid Ask spread – Relatively high bid ask spread compared to the option price can be costly. You can lose money just because this spread. The bid ask spread is usually wider for thinly traded options.
- Commission – If you don't invest a lot money the commission could be proportionally high to the option price. If the commission is 10% of the option price you have to make at least 20% to get even (10% to get in and 10% to get out of the trade)
- Events, News – Any news or reports are coming out during the time I want to hold the position and that could affect the price, such as earnings, merger and acquisition, etc?
Sometimes it's tempting to quickly buy a cheap call or put option for extra profit. But it's easy to make a mistake and lose money if we don't consider the followings:
0 Comments
Leave a Reply. |
Loading
Search Site
Links
Archives
September 2014
Categories
All
|