Over the years, the question I've been asked most frequently is how I select which options to trade on a particular stock.
There are a lot of factors to consider with options trading – which underlying stock, which direction, which strike, and which expiration date are the big ones. But students of the markets understand that there are many considerations that can affect the price of options, from tumult in the Shanghai markets to debt pressures in the Eurozone.
Markets are global and so are your options. Everything – including the price of tea in China – that impacts the markets has the chance to affect your trades.
So how do I choose my options? Believe it or not, the answer is pretty simple.
Today, we're going to take a closer look at one of my favorite options strategies and how it helps me determine whether or not I'm going to take a particular trade.
I'll show you how to use it to target only those options that have the chance to double your money before you even risk your first dime…
The Easiest Way to Double Your Money with Options Trading
When someone asks me how I choose my options, the easy answer is always the one that has the lowest percent to double.
There are other strategies you can use to pinpoint which options you want to trade. But remember – we want to make the most amount of money from the smallest move in the underlying stock.
From there, the two major things to assess before I take an option trade are how far I anticipate the stock moving and by what timeframe I expect it to get there.
The very next thing I do is look at the "percent to double." That's the percentage the underlying stock needs to move in order for my long options to return 100%.
If you're feeling brave and want to make the calculations yourself, you can use the following formula:
This is a handy tool, but it's limited. Recall that an option's delta measures the change in the price of an option relative to the change in price of the underlying stock. But the delta is dependent on the time left until expiration. So if you're looking for a stock to make a move within a few days and you choose options that expire in a week, any move the stock makes in your direction could be negated by the loss of value in your options as they approach expiration.
The great news is, you don't even have to figure out the math on your own. You can easily obtain the "percent to double" calculation from your broker or trading platform, or from any options analysis tool.
The options analysis tool I use calculates this for me. See the image below:
The green arrow above points to the search for the "Lowest % to Double" on SPDR S&P 500 ETF Trust (NYSE Arca: SPY) call options. It can also do this for the puts as well – "percent to double" is a great strategy or analysis tool if you're looking to establish a long position in either calls or puts.
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About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.