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Market lesson: Buy options that attract a high level of interest

Davis MartinDavis Martin ·

What people ask me: Traders ask me questions about options all the time, most often asking me to look at specific options. Generally, this means a quick look-see at the expiration date and strike price of the underlying security.

What I see/what I say: For swing trades, the expiration date usually is the third Friday of a month. Sometimes, the open interest is zero.

Stay away. Don’t touch it; don’t even look at it. If it’s zero, it’s likely a 100 percent bad option. Open interest is the orders yet to be exercised on a particular option. Others don’t want it, so you shouldn’t either.

I look for at least 1,000 in open interest.

Moral of the story: It’s really tough to make money on a lot of options, so look for options – typically at-the-money or in-the-money (but not deep in-the-money) that tend to be much more reliable. Those are usually were you find 1,000+ in open interest, which highlights just how dumb it is to jump at options where there’s no interest.

When orders are exercised in stocks with a healthy interest level, they become total volume on your options chain. As the session goes on, total volume is likely to increase as well, which will help you if you are eyeing a breakout or gap trade.

See how Davis Martin applied this thinking in an options trade on BABA

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Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades individual stocks and stock options.

 

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