Entries - specifics

Once you find the set up, you now must make sure that you use the right instrument to make the trade.

In my style of trading, I'm first buying (going long) an option on the stock.

**We are at a very important point.  If you aren't completely comfortable with how options work, including the greeks on the options, then don't go any further.  Instead look up options and learn the basics (including greeks).****

Here's a link from Investopedia about Basic Options.  Make sure you first understand about basic options.  If not, then keep researching on the internet about basic options.

After you understand Basic Options, then you'll want to get a good understanding about the Option Greeks.  Here's a link from Investopedia about Option Greeks.

After you finish the Option Greeks link, then go to this link from Investopedia for Getting to Know the Greeks.

***AGAIN - STOP HERE BEFORE CONTINUING IF YOU DON'T UNDERSTAND ABOUT OPTIONS AND THEIR GREEKS***

Onto the Specifics.  These are what I'm looking for regarding the particular trading instrument once I get an entry signal:

Stock Volume:

I want the volume of the stock to average at LEAST 500,000 shares traded daily.  The reason for this is because I want to make sure that there are enough people trading this stock that it will be less likely to be manipulated by individuals and that when I'm ready to sell my option, there'll be a demand for it.

Delta of the Option:

I want a Delta of my particular option to be at least 0.70 for a call option and -0.70 for a put option.  This means that for every $1 move in the stock, I get a 70 cent move in the option price.  As the stock price moves in my favor, the delta will increase.

Option Strike Open Interest:

I want the Open Interest of the particular option I buy to be at least 500.  This means that there are basically 500 options that are active.  This again deals with volume, the higher the better so you aren't faced with manipulation and you can sell the option easier.  See Bid/Ask next for further info on this.

Bid/Ask Spread:

This is the price that you can buy a particular option and the price that you can sell the same option.  The market maker is responsible for this.  You want the difference between what you can buy the option for and what you can sell the option for no more than 30 cents.  This goes along with volume, the more volume (i.e. Open Interest) you have the smaller the Bid/Ask Spread.  The less Open Interest you have, the wider the Bid/Ask Spread.  

Expiration Month:

You want 90 - 120 days (3-4 months) of time until your options expire with my style of trading.  I'll go more into this later.  If you can't get into this time range, then go with whatever Expiration Month is closest.

Well, there you have it, the specifics of my entries.  We'll go into an example next.