Option Trading Criteria

Option Trading Criteria

Unlike investing in stocks, options have a time element involved. The infusion of a timeframe to an investment creates dramatically different dynamics. The time factor creates three crucial criterion: DIRECTION, TIME, and MAGNI­TUDE.

As has been experienced through the centuries, most investors have diffi­culty in mastering the direction of a price move. Implementing candlestick analysis greatly increases the probabilities of analyzing price movement in the proper direction. Knowing the direction of a trend’s move, with a relatively high degree of probability, allows an investor to produce high-profit option strategies.

The direction of a price move is only one key element to a successful option trade. The amount of time available for that price to move is also an important factor. The strategy for a trade will have a vast difference when considering a trade that will expire in one week versus a trade that will expire in two months.

Evaluating what the candlestick signals are demonstrating makes establishing a very short-term option trade much more feasible. Establishing longer-term option trades can be implemented with more sophisticated risk/ reward strategies when the direction is visualized with the signals. The fact that the candlestick signals illustrate what investor sentiment is doing right NOW per­mits an investor to incorporate the direction of a move for any time period.

Magnitude is a third key element. Magnitude or volatility! Just because a price moves in the correct direction does not guarantee that an option will make money. Bill Johnson author of “An Investors Guide to Understanding and Mastering Options Trading,” “The Single-Stock Futures Revolution,” and “10 Biggest Mistakes in Option Trading” provides valuable instructions for inves­tors that want to master profitable option trading strategies.

Option trading usually implies high risk. Utilizing candlestick analysis can eliminate a lot of the risk implication. The same analytical approach for putting all the probabilities in your favor for a stock trade can easily be assembled into a successful option trade. Stop-loss procedures can easily be incorporated. Evalu­ating price movement with candlestick signals at potential targets provide im­proved exit strategies.

Bill Johnson’s 14 years of option trading background has helped with the creation of many successful trading strategies. Applying that knowledge with candlestick analysis makes for some high-probability, high-profit trade poten­tials while utilizing commonsense risk management procedures.

The following chapter, written by Bill Johnson, not only describes how direction, time, magnitude/volatility are important factors, but another major criterion needs to be considered. The value of the option as measured by the remaining time and past volatility of the underlying trading entity needs to be evaluated. When putting all the probabilities in one’s favor, evaluating whether an option price is overvalued or undervalued becomes part of a successful option trade.