Ken Trester

4 Factors in Play With Options Trades

by Ken Trester   02/27/09

Boring markets are made for long-term stock investors -- as long as their shares are staying steady or inching upward, they are happy.

But option traders fare best when there is frenzied market activity and volatile price action. Market volatility can be the options investor's friend, because it can drive up premiums and make profitable positions even more valuable.

However, it can also impact the true value of option premiums, as cash-flush institutions and fund managers sweep big dollars into and out of positions in the fraction of a moment that it takes for them to point-and-click.

So, how can you determine the "real" value of a position you want to enter?

The single-biggest advantage stock options have over other investments is that you can measure their value and the probability of profit -- before you even initiate a position in the trade. This is not true of any other type of investment.

Options, due to the fact they have a time limit and specific contract terms, can be measured mathematically. While most professional option traders mathematically analyze option plays, most individual investors do not.

I'm always in search of that super play on an overvalued or undervalued option with an excellent risk-vs.-reward picture. That is what successful options trading is all about.

Every option investor should do some analysis before entering a trade, but you do not need to be a math genius to do so.

Here are the four factors to look at before entering an options trade: