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From Theory To Practice

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Directional Trades: Building an Assumption

From Theory To Practice

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

Building a market assumption (bullish, bearish, or neutral) can be an intimidating process, especially if you're new to trading. But, it's important to remember that nobody really knows where any stock, index, or asset is going, so breathe easy. Still, it's important to learn how to develop your own assumptions, when it comes to market direction.

First and foremost, you should focus on the most liquid underlying instruments only and be aware of the volatility in that instrument, or the marketplace as a whole. Different levels of volatility will warrant different strategic positioning. Next, traditional techniques (like fundamental analysis or technical analysis) are really difficult to actually apply to a real trade and are not really helpful in making investment decisions. Instead, Jim weighs the mathematical support of two opposing forces: skew, kurtosis, and price impact asymmetry versus positive drift over time. Money can be made on either side of the market, but he much prefers to maintain short delta almost indefinitely.

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