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Hi David,
The important thing to remember is WHY you buy the option. Low volatility makes for a less expensive option indeed, but are you buying the option as a hedge, to take a directional view or as a volatility play?
If you are buying an option as a directional market play, then most people expect the market to do too much in the small time left to expiry. Be aware of your directional view and realistic in the amount of work the market needs to do in order to get to your break even level. I recently bought some option s that went well in to the money and reached my exit target within three days. I should have made a killing, my directional view was right, but I was wrong on my volatility view, and lost all of my gains to changes in the vol. I was LUCKY to get out of the trade square. 10 minutes later I would have been a few thousand dollars down.
I recommend buying (on a directional play)far dated options since you lose less on the theta daily than you would on the near dateds. You also give the market more TIME to get to your levels.
Liquidity is my most important concern when trading (I think most would agree on this), try to avoid illiquid markets unless you are very familiar with the risks inherent in trading those.
Most importantly don't put on a trade because some-one told you it was what you should do, find out all the why's and then make up your own mind!!!! (hope I didn't insult your intelligence, that was not my aim:))
Hope this helps
Cheers
Zaheer
-----Original Message-----
From: David Trader [SMTP:trader-opt@xxxxxxxx]
Sent: Sunday, 14 September, 1997 6:15 AM
To: Zaheer@xxxxxxxxxxxx
Subject: Re: Trading Secrets
Hi Zaheer,
I buy stock options in the last month of expiration. I keep hearing
from people to use low volatility to determine which stock/option to buy,
when I do this I get a listing of options that have poor liquidity, but
they do have low volatility. Whats going on here?
Have you heard of Option Pro and is it worth buying?
David
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