Option Investor
Educational Article

Marrying The Long Put to your stock

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Hitting the Trifecta is the only way you win with a long option purchase, but it is an even more of a necessity if you plan to have any long-term success in Option buying. It's the only transaction that requires you to WIN, PLACE and SHOW. You can only WIN, if your option SHOWS up at the right PLACE at expiration. Sounds like a crap shot to me!

In the world of options this theme cannot be more apparent then in a discussion of understanding stock and Index option out of the money premiums in relationship to price movement and time. Several areas of discussion need to be reinforced in every option trader's arsenal. Whether you are a seasoned trader or a beginning novice, a careful and complete understanding of the power of TIME, STOCK PRICE DIRECTION and STRIKE PRICE is essential in determining the outcome of a trade that could be highly profitable versus a trade that might be only marginally successful at best. Even more significant, is this understanding when you consider that a choice of the wrong strike price could turn an otherwise profitable trade into a complete loss of a trader's capital outlay. This is a quite thought provoking issue, when you consider that this one decision alone more often then not, is the main reason for turning what would be a winning trade, into an outright trading disaster. Now with that thought in mind, let's see how TIME, STOCK PRICE DIRECTION and STRIKE PRICE become the variables that will ultimately affect the profitability of your long option purchase.

Let's look at an example that I have seen too many times over the last 25 years of option trading. This scenario will continue and continue until option traders fully learn to recognize and understand completely the false allure of the out of the money option.
More importantly, they must imprint it on their minds to that they consider it EVERYTIME they consider any type of long option purchase.

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