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Tips


The Basics
- Have a defined process on your option trades. What are the conditions to open the position? What is the structure of the trade? What are the conditions to close the position?

- Always be aware of event risks for a stock such as earnings reports. Earnings report days often have a large amount of implied volatility that is price in, and that IV falls significantly after the event.

- Plan and identify price levels where you want to buy options. For example, don't decide to buy some calls on a day when the stock is up a bunch and chase price higher.

- IV, Delta, and Theta are important to understand when buying options, but they are critical when buying OTM options. You can still lose money on options even if you make the right call on the underlying directional move.

- Theta hurts an option's value the most in the week of expiration. Options with more than 60 DTE have smaller theta. Once there is less than 20 DTE theta really starts to increase. Deep in the money options have the least theta since those options are mostly intrinsic value there isn't much theta to decay (Theta is the decay of extrinsic value).

- Generally you don't want to hold options until expiration. Instead, sell after hitting your price objective or reaching your max loss. Sell/roll at least a few days prior to expiration if needed.

- The fewer the days to expiration the less room for error you have.



Some Set Up Ideas:
1) Implied Volatility is abnormally low compared to a stock's historic IV and there is a large negative SA-GEX so that you are expecting a big directional move in either direction.
--> Straddle with strikes about one standard deviation out-of-the-money.

2) Implied Volatility is abnormally high compared to a stock's historic IV and there is a large positive SA-GEX (espeically in major indexes) so that you are expecting prices to remain within a range.
--> Condor / butterfly / short strangle where your nearest calls and puts are about one standard deviation out-of-the-money.

3) Strong Call Skew vs average, strong negative SA-GEX and you're expecting prices to move higher.
--> Call spread.

4) Strong Call Skew vs average, flat/positive change in SA-GEX and you're expecting prices to move lower.
--> Put spread.