How to Price and Trade Options: Identify, Analyze, and Execute the Best Trade Probabilities, + Website

CHAPTER 5 Choosing Your Trades

Now that we have covered the theoretical background and probability formulas, you may be wondering, “What good is all this and can it help me to make money?” I’m glad you asked, as it’s time to put this theoretical background to use. Once again, there is no guarantee that a given trade will be profitable. But if we can create a methodology that takes advantage of what we know about the probabilities of an options trade, we can make money in the long run. Taking advantage of the probabilities is the key to our success.

Choosing Your Underlying

Before you can search for trades, it is important that you create a list of underlyings that you like to trade. This list should consist of liquid products that have sufficient volume and open interest to ensure an efficient marketplace. If the bid/ask spread is too wide, you may be giving up any edge you fought so hard to achieve. The list should be long enough to give you ample underlyings to trade, yet short enough to filter out any “noise” and provide you with only viable trading candidates. Furthermore, I like to get to know each one of the underlyings I trade. Therefore, I recommend you start with a shorter list of core trading candidates and add new underlyings as you are able. Though I know and have traded over 1,200 underlyings in the past few years, my main watch list of stocks currently consists of 157 underlyings. I can tell you a great deal about each and every name on my list. These names ...