Option Trading Strategy

Steve Burke May 14, 2006

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Successful traders mature from impulse trading to trading with a plan and a purpose.  These set of rules are called a trading strategy.  When using stock options, it is crucial to have an Option Trading Strategy.  The leverage of stock options can be a blessing or a curse.  You can lose fast as well as win fast using stock options.  Of course, your Option Trading Strategy needs to be backtested with lots of samples to ensure you will have a net profit.  You will be surprised that some Option Trading Strategies being taught or sold may be trading at a net loss over the long run.  They worked in a strong trending market like 1999-2000 but they do not work in our current 2005-2006 slightly trending stock market. 

 

Let’s look at an Option Trading Strategy I’m still working out:

 

  1. On the Monday before option expiration, buy three strangles on CME, or Google that are 2 strikes out of the money for that expiration.  For example, on Monday, April 15th, with expiration Friday on April 19th, Google is at 450.  Buy the 470 call and the 430 put.  If it is not earnings month, the strangle should cost around $300 to $350.
  2. You’ll have to watch the price quote most of the day for Tuesday, Wednesday, and Thursday
  3. If the price of the total strangle is profitable by $100 or more per strangle, sell one.  The normal intra-day range for these three stocks swings enough to cause some profit.
  4. Repeat step 3 on Wednesday and Thursday.  Many times a year, there is a news event that can cause a $10 to $30 move on a single day.  These are the lottery ticket type of home runs you are looking for that will more than cover the strike outs of the relatively inactive days.

 

This Option Trading Strategy has precise definitions for entry and relatively precise definitions for exit.  In future articles I will present the detailed backtesting results of this system.

 

Steve Burke

http://www.breakthroughbacktesting.com