My next post in the Stock Options Trading Series will focus on put options tips. There is a lot of discuss about long calls & puts, so we will ignore the more advanced options trades for a while. Here are 4 tips on buying using my recent purchase of Amazon Inc. (AMZN) put options at a strike price of $47.5 as an example.
1. Safeguard Your Holdings, and Invest Your Spare Money
In order to fund this investment, free up some cash from another account other than your stock portfolio, mutual fund portfolio, or IRA account. I funded the ZQN SW (AMZN 47.5 Puts) with spare cash from my checking account. Buying puts places a lot of risk on your investment because options prices tend to move extremely fast.
While you may only lose your initial investment, you still may endure a financial loss (or as I call it, a business expense). Therefore, investing your discretionary funds is a good idea. Risk your screw around money, and leave your existing investments alone.
2. Put Stocks With Aggressive Price Movement
Note: This is one of many put options methods available at your disposal.
Amazon posted a strong Q1, and AMZN stock rallied on April 24th by gaining 16 points since the earnings release. Now, Amazon shares are overvalued in my opinion.
The company still copes with a negative retained earnings deficit, and the P/E ratio stands at 102. Along with the current bull market, AMZN stock ignited, but I believe Wall Street will extinguish the fire once the bears take control.
Amazon looks like the perfect short play. One of my newly adopted put strategies is to bet against overvalued stocks with aggressive price movement. If the price moves up quickly, then the downward may follow close suit.
3. Give Your Options At Least 3 Months Until Expiration
My Amazon puts had 75 days until expiration when I purchased them. 75 days was the perfect time frame in terms of my analysis and cost, however, 3 months gives you an extra 15 days to profit from the market. Timing, along with at least 3 months of cushion days until expiration, greatly affects your profit earnings potential.
To serve as an example, I bought AMZN puts set to expire in July because the month of July serves as the middle month between the beginning of the summer and the end. Since Amazon will surely experience strong sales during the Back to School scramble, July appears to be the optimal month for sluggish retail sales. As long as Amazon stock depreciates in value before the end of July, I will make some money on the puts.
Unless you're an expert at day-trading stock options, giving your options time to move towards In-The-Money will save you pain and agony in the future, and accelerate your gains.
4. Think Objectively!
My first put trade was a disgraceful decision made with zero reasoning or sanity. I was emotional. And I lost money.
What's the moral?
Eliminate your emotions, and either make or cancel the trade. Letting your emotions dictate your course of action is like handing your wallet to Wall Street and running in the other direction. Another trader will take your money, and never offer it back. So make it easy on yourself, and think objectively, not subjectively. The Amazon trade made sense, so I placed it. If every options trade turns into a game of 20 questions, just stop altogether.
Important Bonus Video! Click Here to Watch A Free Video Tutorial on the Basics of Stock Options Trading
Tarik Pierce is the founder of InvestorTrip.com and regularly contributes articles to this website.
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While his background is mostly related to trading stocks, he recently gained interest in real estate crowdfunding with Fundrise.