It all depends on the situation. If you are going to trade pure directional up/down like a stock then you might be better off in the long run only going with long calls or long puts. This is the same as traded the stocks but using the options instead for leverage. You can ust do a cursory study of the greeks to understand IV and delta to help you understand the risk parameters.
Since stocks do not always make large moves after you go long the call it is important to understand why the stock can move $2.00 after you buy the call and the call moves like $0.50.
Ignoring that then you should simply learn about IV and relative price. Even if you expect a stock to jump higher, buying a long call with IV at high levels is putting some headwinds in your way, such as IV changes and a larger move needed for the position to become profitable.
Does not mean you need to move to spreads per se, but understanding the IV and comparing it to historical levels may help you pick better entries or stocks to get directional on.
Since stocks do not always make large moves after you go long the call it is important to understand why the stock can move $2.00 after you buy the call and the call moves like $0.50.
Ignoring that then you should simply learn about IV and relative price. Even if you expect a stock to jump higher, buying a long call with IV at high levels is putting some headwinds in your way, such as IV changes and a larger move needed for the position to become profitable.
Does not mean you need to move to spreads per se, but understanding the IV and comparing it to historical levels may help you pick better entries or stocks to get directional on.
Quote from candeo:
But I do have limited risk when I use money management and stops with an open long call, and still unlimited reward potential, don't you agree?
Don't you agree that by selling a call you are only reducing your "money at work", which can be done by just reducing your size, without having to sacrifice your profit? Shouldn't we be focusing more on stops and money management?
I guess my concern is that I am always wondering if it is really worth getting too much into spreads, studying the greeks like crazy etc...when the edge /risk management you would get seems to be a very small factor compared to good position management. It seems especially true on vertical spreads. A lot of people love them, as well as covered calls, until they realize that they don't make money with them. There is a big difference between "reducing your risk" and "reducing your money at risk". When you really think about it, a bull spread works pretty much like a call, except that it is cheaper. And that your profit potential is capped
A long call has limited dollars at risk as well. In fact in exactly the same way that a bullspread does.
I am a big believer that what is more complicated is not necessary what makes you money. I used to have dozens of indicators on my chart, which now have only a couple MAs.
Now, asap said that professional option traders use these kind of spreads very often. I am very curious to see how they do it.
