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Let’s say you recommend an option in a certain stock, but aren’t actually recommending the underlying stock. What makes you want to trade the option rather than the movement in the stock?

By Matt McCallSep 12, 2017

That’s a really good question, and typically it comes down to timing. In NexGen Profit Mulitplier, we will generally hold an option for anywhere from a few days to a few weeks and stocks for about one to three months. That’s a big difference in holding periods, so it puts importance on how imminent a move ahead is.

If the payoff looks like it will take some time to play out, we will more likely target a trade on the underlying stock. However, if a stock is likely to take a near-term pop, we can maximize that upside potential through a call option. For example, a 2% bounce wouldn’t be worth trading in a conventional stock trade. But that 2% can quickly translate into a double-digit winner through the profit-multiplying power of an option. It also works on the downside when using options as a hedge, as a small 5% dip in a stock can result in a 20%+ gain in a put option.

As I said, it’s all about timing and the best way to maximize our return on that short-term pop. It’s also where chart reading comes into play so we can more accurately determine the action ahead.

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