Options are a good way to play the market with leverage.  I have had many days where I have more than doubled my premium in a single day.  Of course that goes both ways.  I have lost more than the entire premium in a day more times than I care to think about.  There are ways to enhance your chances of winning.

I prefer to sell options as opposed to buying them.  Since options have an expiry date, they are a wasting asset, unlike the underlying security.  This time value is called "decay".  The more time left, the more it is worth.  The closer it gets to expiry, the faster the decay.

Thanks to trading-plan.com for the chart.

As you can see the 30 days and less have a rapid decay.  This is why I like to sell one week options.  You would think that no one would buy these, but I trade them weekly with Market Vectors Gold Miners (GDX) and others, and have had great success.   GDX is a gold ETF that holds the stocks of Barrack Gold Corp. (ABX), Goldcorp Inc. (GG), Newmont Mining Corp. (NEM), Yamana Gold Inc. (AUY), Kinross Gold Corp. (KGC) and many others.  It has enough liquidity to make it easy to get in and out of contracts.

There is another reason to sell options as opposed to buying them.  The chart below shows as a percentage how many option trades expire worthless.

As a seller of the option this is good news.  If three out of four contracts expire worthless, wouldn't you like to be betting on the three out of four the seller gets vs the one out of four the buyer is getting?

Conclusion: In my opinion short term options are not a good choice to buy, but enhances your chances at success when you sell them.

Goldfinger

For those of you who like the idea of owning gold but don't want to hold stocks, there is another way to invest.  Options are contracts that give the holder the right to buy or sell a stock or ETF at a certain price, by a certain date, for a certain amount of money called a premium.

• Each call option contract gives the holder the right, but not an obligation, to buy 100 shares of the underlying equity at a price agreed upon anytime before the expiration date.
• Each put option contract gives the owner the right, but not an obligation, to sell 100 shares of the underlying equity at price agreed upon anytime before the expiration date.

In reality most equities the options represent never change hands.  The holder just cashes in any premium left whenever he feels like liquidating the option.  Some equities are very volatile and premiums can move up or down more than 100% in a single day.

Below is a call option chart.  The colored area and white area meet at the approximate value of the underlying equity, or what is called "at the money".  The bid is the amount being offered for the option and the ask is what the seller is demanding.  Last means the last price paid for that option, the change is in dollars and cents.  Volume is the number of options traded at that strike price for the day.  Open interest is the number of currently open options.

by Rick Ackerman, Rick's Picks

We’ve been known to keep odd hours, which, depending on the circumstances, can be good or bad when attempting to earn one’s daily bread trading. Sometimes it seems as though the best opportunities — meaning the ones that produce quick and easy gains with relatively little stress – occur in the dead of night. At other times, especially in the first hour or so after the opening bell, the low-hanging fruit positively beckons those who are able to stay cool while most other traders, too scared to act, are waiting for the dust to settle. We love it when the action is heated – wild, even — since this tends to drive most other traders to the sidelines. Let them sit on their thumbs, as far as we’re concerned – it just means easier pickings for us.  When things get moving, the Hidden Pivot Method that we use to trade and forecast is especially good at identifying the “filet” of uptrends and downtrends. As such, the terms bullish or bearish apply only to the extent that the “impulse legs” that drive these trends are headed higher, or lower, in a given time frame.

A Silver trade that we put out to subscribers Wednesday night February 1 implictly required them to pay close attention to impulse legs on the very lesser charts. Here’s what we advised (and keep in mind that although the jargon is technical, it is geared to the many hundreds of subscribers who have taken the Hidden Pivot Course):  “March Silver appears to be building thrust for a shot at 35.535, the ‘D’ target of the pattern shown in the thumbnail mini-inset.  The 34.235 midpoint resistance that would need to be surpassed first is above Tuesday’s spike high, so we’ll  need to make our move below that level, camouflage-style, if we’re going to get aboard with a minimum of stress. For that purpose, I suggest leveraging a B-C pullback from just above the obscure, look-to-the-left peak at 34.030 shown in the larger chart.  The ‘X’ entry trigger could come up quickly, so a state of nimble alertness may be the key to getting executed.”

The recommendation is much easier to understand if you look at the chart. What it boils down to is that a small pullback from just above the obscure peak ‘F’ had the potential to set up a juicy buying opportunity. This is exactly what occurred yesterday morning, and the relevant retracement is labeled B-C. A four-contract trade initiated at the subsequent buy signal (aka ‘X’) could have been worth as much as $3100 for about 72 minutes of work. After the trade triggered, we established a “tracking position” to follow it to completion, since a subscriber in the Rick’s Picks chat room reported having done the trade. We advised exiting the last piece of it on the swoon to J, but by then we were looking for a way to catch the next leg up – to the 35.535 target mentioned above.  That’s a “Hidden Pivot” resistance, as well as our minimum upside objective for the near term.

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About the Author

Rick Ackerman is the founder of Rick's Picks, an online publication which publishes stock, commodity, and mini-index trading recommendations and forecasts based on a proprietary technical analysis method that took more than ten years to develop and hone.