When Not To Buy An Option

It is also important to consider the time or the date at which one should enter the option market. While these option-buying suggestions are presented in the context of day trading options, they apply equally as well to option position trading.

• When day trading, a trader must give the market adequate time to perform. Consequently, eliminate day trading within the final hour of trading. If one is position trading options, this suggestion should not be a concern.

• Avoid trading in an illiquid option market.

• Avoid purchasing call options just prior to a stock going ex-dividend. Avoid buying or selling options based upon anticipated news (buyouts in particular). Besides bordering on unethical trading, the information received is more likely to be rumor than correct.

Avoid purchasing options well after the market has established a defined trend—this is especially true when day trading, as any option premium advantage will have dissipated.

• Avoid purchasing way out-of-the-money options when day trading, as any favorable price movement will have a negligible effect upon premium.

• Avoid purchasing call options when the underlying security is up for the day versus the prior day's close, unless one intends to take a trend-following stance. (See Option Rules, Chap. 4).

• Avoid purchasing put options when the underlying security is down for the day versus the prior day's close, unless one intends to take a trend-following stance. (See Option Rules, Chap. 4).

• Be careful when holding long option positions beyond Friday's trading day's close unless one is option position trading. Many option theoreticians recalculate their volatility, delta, and time decay numbers once a week, usually after the close of trading pn Fridays or over the weekend. The resulting adjustments in these values most often have a negative effect on the value of the long option, which may be acceptable when holding an option over an extended period of time but is detrimental when day trading.

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