There are a lot of key factors to consider when looking into a stock option trade.
Here are 8 option considerations to keep in mind when analyzing a stock:
1. The trend of a stock, which is found through a technical analysis of the stock’s charts. Steven Sitkowski recommends using indicators such as the moving averages, the MACD, the relative strength index. Use these indicators to determine if the stock is likely to do up or down.
2. Type of Option - There are three types of options to choose from.
In the money - the most conservative approach. In the money call options mean the price of the stock is higher than the strike price. Vice versa on a put option.
At the money - the strike price is the same as the stock's price.
Out of the money - The price of the stock is lower than the strike price of the call option. Vice Versa on a put option. Losses can rack up quickly with out of the money options. Steven Sitkowski does not recommend this type of option.
3. Expiration Date - You need to know the appropriate expiration date for the types of options. 60 days for in the money. 90 days for out of the money.
4. Implied Volatility - When the market is highly volatile options are expensive, which is a good time to sell. Sell when implied volatility is high and buy when it is low.
5. Know Your Exit - Use technical analysis to make your exit decision. If you have a call option and the trend indicators say the stock is not likely to go up anymore, then sell out and harvest your profits. If you have a put option and the indicators say the stock is not likely to go down any further, then sell out and take your profits.
6. Stop Orders - One of the ways to automatically trigger an exit is to use a stop order to protect your downside. If you don’t want to watch your stock option every single day, place a stop order 35% below the price of your option, where it will automatically take you out when it hits that price.
7. Roll with your winners - You can reinvest your profits into a similar contract to let your profitable trades continue.
8. Lock in your profits - You can have a limit order on your upside. Where if a stock option hits 100% ROI, it takes it out. Or you can even take 50% out and let the rest run. For example, if you buy 10 contracts and the stock goes up you can sell 5 contracts to lock in your profits and let the other 5 contracts still roll.
Steven Sitkowski from Market Mastery Group explains each consideration in detail in our latest YouTube Video.
Click here to watch the full video.
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