The Smart Profits Report: Issue #246
Thursday, September 29, 2005 Short-Term Options - Two Ways to Make Them Work
By Karim Rahemtulla
Chairman, Mt. Vernon Research A couple of letters ago, I wrote that I used short-term options for event-specific investing. Short-term options, as opposed to LEAPS, lose value very quickly because they're close to expiration. They are a far riskier bet on the movement of the underlying share price. The example I gave for my most recent short-term option play was buying put options on insurance giant Allstate just before Hurricane Rita was upgraded from a category 1 to a category 4. That was for a protective trade. I also bought some short-term QQQQ put options in case of a worst-case scenario for the markets. The Allstate trade returned triple digit returns. The QQQQ trade broke even. There are other situations where short-term options make sense. And these are centered on earnings releases. Today I want to tell you about the only other ways I'm comfortable trading short-term options. Quick Profits Using the Experts' Homework The markets today are NOT very volatile. In fact, they are pretty range-bound, with most indexes up less than a few percentage points on the year. But a range-bound market does not imply less volatility in certain situations. The only other methods that I feel comfortable with when it comes to short-term trading of options is using technical analysis and quantitative research. Lee Lowell takes a technical approach, looking closely at volatility to check on whether an option is a bargain or too expensive. Volatility is one of six variables used to price options, but it's the only one that's not universally accepted by all market participants. So it's a must-know factor. Calculating options volatility can be done in various ways. Some traders like to use a 10-day, 30-day, or 50-day historical volatility in pricing options, while others like to use the current at-the-money implied volatility of the front-month options. However it's calculated, the idea is to buy when the volatility is low. Quantitative research is the machinery behind Dean Albrecht's ESP Profit System, which predicts stock movements based on leading indicators, moving averages and price momentum. The system filters the stock universe using three strategies - stock correlation, cycles, and distressed or event-driven swings. Short-Term Options Strategies For You It's a focused, finely tuned data machine that crunches dynamic market behavior and produces an easy-to-follow indication of future price movements. And it's geared toward big, short-term profits. Because both methods use the least amount of subjective criteria, they eliminate the "emotional" short-term plays that often result in losses. In the coming weeks, we will explore some of these short-term trading strategies in more depth, and explain the mechanics of how the experts use these systems. Today's Smart Profits Cribsheet Good trading, Karim Related Articles: Smart Profits Report Archive | 
