Creating Momentum with Options - Pro and Cons of At-the-money, In-the-money, and Out-of-the-money

To create momentum in your options trading you need to understand the advantages and disadvantages of at-the-money options, in-the-money options and out-of-the-money options.

An at-the-money option has both advantages and disadvantages over stock and in-the-money options. First, the at-the-money option will be cheaper then both the stock and the in-the-money option. So there is less capital requirement and less total risk.

Remember, when buying an option, you can only lose what you spend. Creating momentum is understanding this problem, what is the amount of extrinsic in the at-the-money option.

In order for you to profit from buying an at-the-money option, you need the stock to make a move very quickly. Because you have so much extrinsic value, you will be battling against the option’s daily rate of decay.

So, the movement of the stock must happen quickly enough and large enough to offset the amount of money you will be losing daily as expiration draws near.

With this said, the best chance you have to make money when buying a naked at-the-money option is to use it as a short term trade. The longer you hold onto this option, the harder it is for you to be profitable due to the options decaying extrinsic value.

At The Money Call vs. In The Money Call

For chart below, stock price = $35.00 Strike Option Delta Breakeven Extrinsic Price Price Value

$30 5.20 85 35.20 $.20 $35 1.00 52 36.00 $1.00 $40 .30 20 40.30 $.30

An out-of-the-money option presents many of the same advantage & disadvantage parameters to the investor. The out-of-the-money option is even cheaper then the at-the-money option which means more leverage and less risk.

However, with a smaller delta, the stock must move much more than either the in or at-the-money options in order for the options to become profitable. Again, we need the option’s delta to outpace the option’s rate of decay.

Now, with the out-of-the-money option, there is less extrinsic value than the at-the-money option so the amount of total possible decay (cost of the option) and the rate of this decay is less than the at-the-money option.

By being further out-of-the-money, this option needs more movement from the stock. As a naked option, this out-or-the-money example is extremely speculative and should only be used naked when the investor feels there is a very good chance of a stock having a large percentage move.

An investor must understand that the odds of them profiting from the purchase of a naked out-of-the-money option is very slim. When purchasing a naked out-of-the-money option, be prepared to lose your entire investment.

Out of The Money Call vs. At The Money Call

For chart below, stock price = $35.00 Strike Option Delta Breakeven Extrinsic Price Price Value

$30 5.20 85 35.20 $.20 $35 1.00 52 36.00 $1.00 $40 .30 20 40.30 $.30

Although options can be traded by themselves for directional plays, and can perform well under the right conditions, they are much better used in coordination with stock or other options in formatted strategies which will be discussed in the next section.

While buying naked calls and puts can provide some of the biggest leverage and highest returns, they can also involve the most risk. This momentum strategy should only be used by experienced options traders or traders using risk capital.

-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
If You Would Like to Learn More About Momentum
Then Discover How to Protect Your Investments
With the Leveraged Power of options & Learn
How to Trade options Like the Pros..

Click Here --> http://www.options-university.org
-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-

Selecting Rules for Investing and Trading

There are three important differences between investing and trading. Overlooking... Read More

The Perfect Mutual Fund

The Perfect Mutual Fund is the one you build yourself!The... Read More

Shop More, Save More for College Gimmick or Reality?

The man sat in a chair beside a dressing room... Read More

New U.S. Mint Coins a Golden Opportunity

In April, the U.S. Mint revealed plans to strike in... Read More

Powerful Hidden Techniques Mystery Formula - The Covered Call Option Trading Buy-Write Strategy

For better or worse, most option trading investors purchase stocks... Read More

Stock Market Leaders and Laggards

Leaders are stocks that breakout immediately when the market confirms... Read More

Emotions: A Traders Worst Enemy; Get Rid of Fear and Greed - Youll be Glad You Did

You hear it over and over and over in books,... Read More

The Economy Is Not The Stock Market

Several days ago, the Commerce Department reported that May's factory... Read More

A Gadfly On A Dinosaurs Butt, Or The Hood-winking Of The American Investor

Have you ever noticed how some words in the English... Read More

Well Managed Investing Risks Bring Rewards!

"Risk comes from not knowing what you're doing!" Warren Buffett... Read More

June 2005: Weather Forecasts for Weather Traders

If Johannes Kepler, the renowned 17th century astronomer and discoverer... Read More

The Real Cost of a Bad Habit

What is the value of a good habit? Think of... Read More

Just what is Arbitrage Investment?

In the simplest of terms, Arbitrage means to exploit price... Read More

Are You An Investment Dummy Like Me?

I am good at a few things. I can certainly... Read More

Volatile Oil

The Light Crude Continuous Contract fell from $67.70 a barrel... Read More

Annuity Investment - The Whole Truth

Do you ever feel like you haven't been told the... Read More

Gold and Silver Maple Leafs Get New Packaging

Gold Maple Leafs and Silver Maple Leafs are receiving packaging... Read More

How To Start Investing For Financial Independence, Part 1

Today, I am going to start a multi-part series about... Read More

How to Calculate the Value of Your U.S. Savings Bonds

If you're like many Americans over the age of 55,... Read More

5 Things To Know About The Stock Market

50% Of U.S. Households Invest In The Stock Market Individuals... Read More

Super Rules, OK?

Do you rule your superannuation or does it rule you?It's... Read More

Angel Investors: Who They Are & When Are They Appropriate

Angel investors are individuals who invest in emerging business ventures.... Read More

Discipline in Investing and Trading

Discipline can be simply defined as your ability to follow... Read More

Is Offshore Banking for You?

You've probably heard about people who keep their money offshore.... Read More

Delist My Corporation Please

It use to be said that once a company was... Read More