Options  |  JAN 2008

Stocks & Commodities V. 26:1 (52-57) A Structured Approach To Option Trading by Jay Kaeppel

A Structured Approach To Option Trading by Jay Kaeppel This is the first in a series of articles about option trading with the PROVEST option trading method. The PROVEST method is not a trading system. Rather, it utilizes a series of criteria that can aid option traders in choosing the proper trading strategy for a given situation. Likewise, traders are free to choose different parameters to apply to each of the key criteria. This month’s article lays the groundwork for the strategy pieces to follow in the months ahead. Option trading volume has proliferated in recent years. Part of this is due to the advent of electronic trading, which has greatly facilitated the flow of information and trading activity. In many cases, traders can get into and out of trades almost instantaneously. This spectacular growth in trading volume has also been fueled by the fact that so many individuals have become more knowledgeable about the varied uses of options that allow them to achieve specific speculative and hedging objectives. Yet even as the business of option trading evolves, in the end the act of trading options remains an art form. Unlike trading a stock or futures contract directly — where you either go long and make money if that security goes up or lose money if it goes down, or vice versa if you are holding a short position — with options there can be many shades of gray. This creates opportunities and risks unique to option traders.

by Jay Kaeppel