What Is The Best Options Strategy?

[Kim]

I'm often asked by novice options traders what is the best options strategy. I'm sorry to disappoint you, but there is no such thing "the best options strategy". Each strategy has its pros and cons. Each strategy will work the best under certain market conditions, and no strategy will work under all market conditions.

One of the first things you need to decide before placing your first trade is: do I want to bet on direction (bullish/bearish) or I want to be able to make money regardless of market direction? In the first case, you have the choice of the following major strategies:

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[Optrader]

Here is a scenario .

 

MU stock went up from $13 to $30 in year 2014. So basically doubled or 100% return. So investment of $13000  turned into $30000 with only 1 transaction cost of $15 to buy and sell .

 

Now looking to trade options. What kind of option strategy would you adopt to chase MU from 13 to 30 and attempt to either make 100% or with options leverage of 1:100 make a 10000% return ?

What I mean is we dont typically buy the same $ amount of options. We spend mostly 10% of stock price.

So say you decide to chase MU with say $1300  investment and try to make $17K  ( $30K-$13K of stock investor gains)  at the end of the runup.

 

Is it possible to do it ? and what kind of strategy would you adopt ?

[Kim]

Well, if you knew in advance that the stock will double, you would buy OTM options expiring in one year and bank few hundred percent gain. But this is hindsight. And this is exactly the issue: you know what is the best strategy only in hindsight. 

 

If you knew that the markets will be moving sideways, you would trade only iron condors, wouldn't you? If you knew about 2008 crash in advance, you would buy puts, right? if you knew that NFLX will be up 18% after the last earnings, you would be OTM calls. But you don't. So you trade based on probabilities and your best knowledge.