I use chart and technical signals to give me the best probability trades (odds). They don’t always work out in time or price, and sometimes I enter the trades too early. However, the charts tell the story regardless of what the option price is doing, especially when buying an out of the money play.
FULL LEVERAGE
So, when I’m going for an out of the money option buy I’m using the full leverage of options. For reference, the makeup of an option value is intrinsic and/or time. In this case, I’m buying all time – looking for a stock to move with speed, acceleration and velocity – enough to overcome the limited amount of time remaining in the life of the option.
DELTA LEVELS
Buying out of the money options should not be normal practice (selling is a different story; I’ll cover in a future piece). After breaking down the technical picture my preferred choice is to use a delta between 37 and 43. Basically, the delta is the amount an option will move with a $1 move in the stock.
This delta puts my trade in a great spot when the stock surges. Often I have found once the delta lifts to 50 the option value really starts to move, a quick move up could see the option move higher by 50% or more from the purchase price. It’s here that I am at a decision point – sell, buy protection, or let it run – a good place to be.
PUTTING IT ALL TOGETHER
One of the hardest skills in option trading is knowing which option to buy. While it’s not an exact science using the delta to find the right combination of price and time can juice up your portfolio’s performance.
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