What Determines Good Stock Options For Trading

A tape reader who deserves the name, makes money from stock options in spite of commissions, taxes and delays. If you don't get aboard your train, you'll never arrive. Giving limited orders loses more good dollars than it saves. We refer, of course, to orders in the big, active stock options, wherein the bid and asked prices are usually 1/8th apart.

Especially is this true in closing out a trade of stock options. Many foolish people are interminably hung up because they try to save eighths by giving limited orders in a market that is running away from them. For the tape reader there is a psychological moment when he must open or close his trade. His stock options order must therefore be "at the market." Haggling over fractions will make him lose the thread of the tape, upset his poise and interrupt the workings of his mental machinery.

In ‘scale’ buying or selling stock options, it is obvious that limit orders must be used. There are certain other times when they are of advantage, but as the tape reader generally goes with the trend, it is a case of "get on or get left."

By all means "get on." The selection of stock options is an important matter, and should be decided in a general way before one starts to trade stock options. Let us see what we can reason out. If you are trading in 100 share lots, your stock options must move your way one point to make $100 profit.

Which class of stock options are most likely to move a point? Answer: The higher priced issues. Looking over the records we find that a stock selling around $150 will average 2½ points fluctuations a day, while one selling at 50 will average only one point. Consequently, you have 2½ times more action in the higher priced stock options.

The commission and tax charges on the stock options are the same in both. Interest charges are three times as large, but this is an insignificant item to the tape reader who doses out his trades each day. The higher priced stock options also cover a greater number of points during the year or cycle than those of lower price. Stock options like Great Northern, although enjoying a much wider range, are not desirable for trading purposes when up to 300 or more, because fluctuations and bid and asked prices are too far apart to permit rapid in-and-out trading.

Look for stock options leaders where there is a large floating supply; where there is a wide public interest in the stock options; where there is a broad market and wide swings; where trends are definable (not too erratic); these are popular with floor traders, big and little. It is better for a tape reader to trade in one or two stock options at the most - rather than more - since concentration is absolutely necessary for the work at hand.

Stock options have habits and characteristics that are as distinct as those of human beings or animals. By a close study the trader becomes intimately acquainted with these habits and is able to anticipate the stock options action under given circumstances. Stock options may be stubborn, sensitive, irresponsive, complaisant, and aggressive; it may dominate the tape or trail along behind the rest; it is whimsical and exhibit serendipity. Its moods must be studied if you would know it personally.

Study implies concentration. A person who trades in a dozen stock options at a time cannot concentrate on one. The popular method of trading (which means the unsuccessful way) is to say:

"I think the market's going bearish. ‘Smelters’, ‘Copper’ and ‘St. Paul’ have had the biggest rise lately; they ought to have a good reaction; sell a hundred short of each for me."

Trades based on what one "thinks" seldom pan out well. The selection of two or three stock options by guesswork, instead of one by reason and analysis, explains many of the public's losses. If a trader wishes to trade in three hundred stock options, let him sell that quantity of this stock options which he knows most about. Unless he is playing the long term he injures his chances by trading in several stock options at once. It's like chasing a drove of pigs -while you're watching this one the others get away.

It’s better to concentrate on one or two stock options and study them exhaustively. You will find that what applies to one does not always fit the other; each must be judged on its own merits. The varying price levels, volumes, percentage of floating supply, earnings, the manipulation of large traders and other factors, all tend to produce a different combination in each particular case.