Which Comes First: Pick the Stock or Choose the Strategy?

Hi Mark,

Here is my suggestion for Expiring Monthly:

It would be an on-going series; Title:

What Would be a Good Option Strategy… and Why!

month, take a fairly liquid underlying and form an option strategy
around it & explain why you would do it [as opposed to a different

Good luck with the inaugural issue & I hope I win!

JC, Florida


Interesting suggestion.

Most traders make decisions based on having an opinion on how the stock market, or a specific stock, is going to perform going forward.  [Sometimes it's only a one- or two-minute forecast.]  The size of the move or perhaps the timing of the move may be a bit fuzzy, but when the opinion is strongly held, it's natural for the trader to try to profit from that opinion.

Besides shorting or buying the stock, options can be used to capitalize on that expectation.

Thus your idea – pick an appropriate strategy based on your expectations for the stock – is sound.  The one problem is that you did not mention the concept of market expectations.

That makes me wonder if you are suggesting that we pick a strategy in vacuo, based on 'the stock' and ignoring market prognostication.  I assume that is not your suggestion. 

All strategies perform best when specific market events occur.  My most frequently used strategy – the iron condor – earns money when the stock trades within a narrow range.  If I were to choose an iron condor, I'd only earn a profit if the stock behaved.

That's true for most trade techniques.  Make a bullish play and the market must rise.  I make a market-neutral trade and the market must not move higher or lower by a significant amount.  All trades have a built-in market bias.

On the other hand, if bullish (equivalent trades for bearish), I could buy a call spread, open an OTM call butterfly or calendar spread.  There are other choices, such as buy calls or sell OTM put spreads.

I don't believe it's educational to discuss alternative strategy choices that surround a given stock.  Any discussion of 'why' a specific strategy is recommended over another must depend on the trader's outlook for the stock.  With 'outlook' being such a significant factor, a discussion of which strategy to choose loses much of its importance.  If the prognostication is inaccurate, then the strategy does not work.  It has nothing to do with the strategy and everything to do with predicting market direction.

Thus, it's not a true discussion of strategies. However, I do appreciate the suggestion


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