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