The following blog entry was originally published Jan. 7 at 1:05 p.m. ESTStocks have done a little dipsy-do during the first half of the day which has allowed me to nibble on some calls, a little tech and a little health care, as I discussed
Again, I will repeat, I always keep an inventory of Spyder Trust ( SPY) puts. For all other positions, make sure you have clear entry and exit points. I'll also repeat my belief that in option trading, strategy selection and overall position structure are of equal importance to stock-picking prowess. There are very few individuals that can outperform the market over time by simply picking a handful of stocks. And when you are dealing with a decaying asset such options, then using the strategy and how it aligns with your short-term outlook and overall investment portfolio take on increased importance. Realize that not every position will start in the plus column and that losses are inevitable in trading. No one ever likes to take a loss, but once you start backpedaling, it does not take much to be dealt a knockout blow and incur a large loss.
For example, if one sees a huge spike in implied volatility, then ratio spreads might make sense. Or if one believes IV might increase over time, using a calendar spread in which one sells short some "extra" of the front-month option might be a reasonable risk. The difference between these type of positions that have a component that owns or is long an option whose strike is closer to the money than the options sold short, is that even in an adverse move, the losses will be significantly less compared to a position that is simply short or a naked a single strike price.