Trading Rules: Long Options

Buying a put or a call is the simplest way to trade options. If you think the price is going up, buy a call. If down, buy a put. None of this long-short-spreads-condors-diagonals-calendars strategic strutures that produce confusion, and yet are so beloved by experienced traders (myself included).

Despite the ease of execution, buying calls and puts is a quick, low overhead way of making trades. It has the added bonus of working best with low implied volatility symbols and so can be attractive trades in those times when there are few high-volatility trades on the table.

With all of that in mind, I’ve spent some time pondering a rule set for long options trades.

Long options are debit trades: The trader hands over the money and gets the contract in return. The profit comes when the trader is able to sell the contract for more than buying price.

One attractive characteristic is that the risk is limited — to the price paid for the contract — and the reward is unlimited.

One unattractive characteristic is that as a long position, it is subject to time decay, or theta in the jargon of options. Theta is a loss of value as the contract approaches expiration. A study I ran across concluded that the rate of time decay begins to increase 60 days before expiration. So that inescapable characteristic is something every long option trader must be mindful of.

The solution to time decay, of course, is to buy options that have more than 60 days until expiration and exit them before time decay grows swifter. That necessity frames all long option trades.

No matter how long until expiration, there is always some time decay. To me, that suggests that the best use of long options is for relatively short-term trades — days or weeks rather than months.

With all of that in mind, here are my trading rules.

Low Risk: Long Options

  • A long option position should be entered upon an entry signal, no less than 70 days prior to the contract’s last day of trading.
    • The closer to the last day of trading an option is, the cheaper the option’s price will be.
  • The option traded should be at the money or slightly out of the money at entry, with a Delta of 50% being the preferred positioning.
  • The option must be sold upon receipt of an exit signal.
  • A position must be managed no less than 63 days prior to the contract’s last day of trading.
    • Management consists of exiting the trade, whether it produces a profit or a loss.
    • If the stock is expected to continue to moving in a profitable direction for the option, then the position can be reestablished with a later expiration date.

Each trader will have her or his signal for entry and exit. My preference is for technical signals that produce clear buy and sell signals, such as the RSI, the MACD or the Fisher Transform. For my trades I use the Fisher Transform.

And that’s it. Initially I’ll be focusing on exchange-traded funds and will consider branching out later.

By Tim Bovee, Portland, Oregon, September 30, 2021


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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