Don't overpay for overpriced options
Sometimes options can be priced just right. Other times they seem downright cheap, yet in some other situations they can be trading at a steep premium. How do you know if the "price is right" for a particular option?
Options can be an inexpensive way to play a big-name (and oftentimes big-ticket) stock, as one options contract that controls 100 shares of stock can seem like pocket change in comparison. However, you have to be extra-careful when volatility levels in the markets spike. Option premiums go up during these times but then pull back as investors gain more confidence.
When you pay too much for an option, it just takes a little adjustment to this volatility to whack the price down (even when the underlying stock doesn't move that much). Keep tabs on the Chicago Board Options Exchange's Volatility Index (VIX) and its Nasdaq Volatility Index (VXN) -- the higher the volatility numbers, the greater the fear out there and, thus, the higher the option premiums.
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You don't have to buy the same number of contracts with every options trade you make, especially when trading the options of higher-dollar stocks.
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