My Basic Options Strategy

This is general information only and is how I use options.

I don’t specialize in options and there may be better or more efficient strategies than what I use. 

All information should be independently researched and confirmed.

Over 50% of options expire at 0, so I assume that my option positions will expire at 0 as well.

I don’t use options often because I don’t like the probabilities. Options are engineered to expire at 0.

In a general market downtrend, I like the flexibility of put options.

I don’t use stop losses on options, so my stop loss is my position sizing.

If I take a 1% position, I assume that I will lose the full 1%.

There are more complex strategies – spreads, verticals, butterflies, etc. that I don’t know very much about and I don’t plan to look more into them.  Any of these could be more efficient that what I do.

If I make a standard buy on a put (or call) option, my risk is limited only to my capital invested, the premium – defined risk.

There is a *chance* that the options can return the capital invested or multiples of it, based on the underlying security. Defined risk, higher *potential* upside.

A put option allows me to hedge or participate on the downside with defined risk and I can personally hold through the volatility because I know where my risk is. I don’t view an open short position or inverse ETF the same way.

With single stock or ETF shorts there can be gap risk, earnings risk, takeover risk, or any other risk that does not limit the potential risk.

I often go out 4-6 weeks, or longer, and generally go out of the money by 5-10%. I am looking for an intermediate term trend move. Shorter term traders often use much shorter-term expiries or in the money.

I always look for higher volume and higher open interest options.