| To create momentum in your options trading you | | | | option’s delta to outpace the |
| need to understand the advantages and | | | | option’s rate of decay.Now, with the |
| disadvantages of at-the-money options, | | | | out-of-the-money option, there is less extrinsic |
| in-the-money options and out-of-the-money | | | | value than the at-the-money option so the |
| options.An at-the-money option has both | | | | amount of total possible decay (cost of the |
| advantages and disadvantages over stock and | | | | option) and the rate of this decay is less than the |
| in-the-money options. First, the at-the-money | | | | at-the-money option.By being further |
| option will be cheaper then both the stock and | | | | out-of-the-money, this option needs more |
| the in-the-money option. So there is less capital | | | | movement from the stock. As a naked option, |
| requirement and less total risk.Remember, when | | | | this out-or-the-money example is extremely |
| buying an option, you can only lose what you | | | | speculative and should only be used naked when |
| spend. Creating momentum is understanding this | | | | the investor feels there is a very good chance of |
| problem, what is the amount of extrinsic in the | | | | a stock having a large percentage move.An |
| at-the-money option.In order for you to profit | | | | investor must understand that the odds of them |
| from buying an at-the-money option, you need | | | | profiting from the purchase of a naked |
| the stock to make a move very quickly. Because | | | | out-of-the-money option is very slim. When |
| you have so much extrinsic value, you will be | | | | purchasing a naked out-of-the-money option, be |
| battling against the option’s daily rate of | | | | prepared to lose your entire investment.Out of |
| decay.So, the movement of the stock must | | | | The Money Call vs. At The Money CallFor chart |
| happen quickly enough and large enough to offset | | | | below, stock price = $35.00 |
| the amount of money you will be losing daily as | | | | |
| expiration draws near.With this said, the best | | | | Strike Option Delta Breakeven Extrinsic |
| chance you have to make money when buying a | | | | Price Price Value$30 5.20 85 35.20 $.20 |
| naked at-the-money option is to use it as a short | | | | $35 1.00 52 36.00 $1.00 |
| term trade. The longer you hold onto this option, | | | | $40 .30 20 40.30 $.30 Although options can be |
| the harder it is for you to be profitable due to | | | | traded by themselves for directional plays, and |
| the options decaying extrinsic value.At The Money | | | | can perform well under the right conditions, they |
| Call vs. In The Money CallFor chart below, stock | | | | are much better used in coordination with stock |
| price = $35.00 | | | | or other options in formatted strategies which will |
| | | | be discussed in the next section.While buying |
| Strike Option Delta Breakeven Extrinsic | | | | naked calls and puts can provide some of the |
| Price Price Value$30 5.20 85 35.20 $.20 | | | | biggest leverage and highest returns, they can |
| $35 1.00 52 36.00 $1.00 | | | | also involve the most risk. This momentum |
| $40 .30 20 40.30 $.30 An out-of-the-money | | | | strategy should only be used by experienced |
| option presents many of the same advantage & | | | | options traders or traders using risk |
| disadvantage parameters to the investor. The | | | | =-=-=-=-=-=-=- |
| out-of-the-money option is even cheaper then the | | | | If You Would Like to Learn More About |
| at-the-money option which means more leverage | | | | Momentum |
| and less risk.However, with a smaller delta, the | | | | Then Discover How to Protect Your |
| stock must move much more than either the in | | | | Investments |
| or at-the-money options in order for the options | | | | With the Leveraged Power of options & Learn |
| to become profitable. Again, we need the | | | | How to Trade options Like the Pros.. |