What Option Months to Use

Once you've worked out what strike or strikes to trade you now have the problem of what month to trade. Again, no right or wrong answers here. Clues will again be offered via the open interest and volume. Always check these early on because when there are multiple months to choose from and some will hardly trade at all.

All options eventually expire so you must come up with some sort of time period for your trade. Perhaps you think the move will come within a month, perhaps it's a long term move. One point that cannot be emphasised enough is the problem of timing.

Sods law suggests that if you trade options with too little time value your market view will be correct but you'll end up losing money because the stock makes its move after the options have expired.

For example you buy the March Vodafone £1.30 call in February. However, the stock doesn't start rising until sometime after the March options expire (3rd Friday of the month). It is therefore always good advice to buy the next month out, ie if you want to buy the March options, buy the April of May.

Yes, the longer dated options will cost you more but then your percentage chance of being correct rises as well.

One Way To Choose The Option Month

The best and only way to find the right combination of option strikes and months is to play around with what's offered. For example -

• It's Easter 2008 and you're mildly bearish on the FTSE index over the next few months
  
  
• The near months available are April, May and June
  
  
• The FTSE 100 is trading at around 6000 and you’re looking at the strikes between 3925 and 3725
  
  
• So now start to play around with them. What would your potential p&l look like if the FTSE 100 dropped to 3700 and you bought either the 3925, 3875, 3825 and 3775 put options?
  
  
• And mix the months up as well for the above strikes so the April, May and June Put options
  
  
• These calculations don't have to be complex and should be done quickly
  
  
• Only by doing enough of them will you start to see which options are best for any individual trading idea
  
  
• As we've mentioned before the free software from www.hoadley.net does an excellent job of these types of calculations

Why It's Important To Use an Option Broker

If you trade options it is normally better to deal with a dedicated options broker rather than with a stockbroker who also offers the ability to deal Options. This is because the buying and selling of Options is a specialised business and traditional stockbrokers are not usually known for being experts in this field.

To execute stock orders is simple but with options it is far more difficult because of the inherent lack of liquidity etc. A good options broker knows this and will work to get you good prices, or perhaps suggest better strategies.