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Trade Mechanics: Entry Criteria

Best Practices

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

The only time we can truly control something in a trade is at order entry. The two things we can control are our probability of profit and our loss potential.

The first consideration should be liquidity. The more liquidity a stock has, the less your slippage costs will be. Higher amounts of liquidity also makes entering and exiting positions easier.

The primary liquidity metrics are open interest, volume, and the bid/ask spread. The dough platform ranks stocks by our proprietary liquidity indicator which factors in open interest, volume, and the bid/ask spread of options.

Implied volatility (IV) and implied volatility rank (IVR) should be the next step. Since we are usually selling premium, we prefer high IV.

The underlying's price is the next consideration. High priced stocks will generally have less liquidity in the options, and therefore wider bid/ask spreads. Also, the margin for undefined risk positions will be higher.

Strategy selection is the final step. A table of different option strategies was displayed. The table included the strategy, the preferred IVR, directional bias, probability of profit and buying power reduction.

Watch this segment of “Best Practices” with Tom Sosnoff and Tony Battista for the valuable takeaways and other important information regarding order entry.

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