We are back for more! This week we are going through a long call trade. We talked about a few of the things we need to be concerned with when looking into trading a long call. Those two items were time and volatility. These two concepts can help us determine if it is the right time to use this particular type of trade. For every trade, we do there is a certain set of rules that we need to have in place to ensure that we have a shot at being profitable in a trade. We have talked about what we need for a stock trade, such as a proper risk/reward ratio, a good pattern and a good exit plan. Option plays are no different, they require certain things to make them worth trading. The following is a list of the criteria we are looking for and what we need to consider before jumping into an options trade, in this case, the Long Call trade.
1. We need a bias on the equity – A bias is an expectation of what is possible for this particular equity. In the case of the Long Call, we need a bullish bias. We actually need an aggressive bullish bias. This means that we expect this stock to move up and move up quickly.
2. We are looking for a pattern that can give us the bullish bias we require from the above need. A bullish retracement or a bullish breakout is what we are looking for and we need to ensure that the equity has enough room to run to give us the profit target we desire.
3. In a Long Call, we would benefit from a rise in implied volatility so it would make sense that we buy when implied volatility is on the lower end compared with the historical value.
4. We need to mind the amount of time we buy in the Call option because as we discussed last week time bleeds out of an option unlike a stock and we need to make sure we give ourselves enough time to be right.
5. Finally, we need to ensure we have a solid exit plan as we need with every trade.
Happy Trading!
