6 Steps to a Trading Decision

1. State your Forecast

- important to be specific about price of stock and time frame
e.g. XXX stock will rise from $10 to $15 in 20 days. Today is 40 days to expiration.


2. Calculate the Implied Volatility

- volatility percentage in the option pricing formula
- Stock price
- Strike price
- Dividends
- Interest Rates
- Days to expiration
- Volatility


OIC Option Pricing Calculator

Trading Strategies

1. Stock- Oriented Strategy - Covered Straddle

- Normally price rise, sell shares to realise profit. Price drop, buy more shares.

- BUT Alternative to waiting for price rally/ dip --> can use COVERED STRADDLE
--> call + put with the same strike price and expiration date


LONG STRADDLE 

- Buy both call + put
- depending on the underlying stock's direction of movement, either the call will profit more than the put (vice versa)

Option Strategy - Long Stock; Stock UP/ DOWN since Purchase - what next?

Long Stock, Stock UP since purchase

Next steps

1. Take no action - monitor price and change strategy if price outlook sours

2. If want to sell at my Target Price --> write Covered Calls

    - look for Strikes = stock target price, short time to expiration, high option premium

    - at least gain premium from selling

3. Buy Protective Put to protect downside, but require cash outlay to purchase

    - protective put will "kick in" when price drops to strike price

    - "insurance" is valid until expiration date

*Credit: OIC Beginners - Managing Stock Positions