Taking Another Look at the Basic Long Position

About 75% of all long calls and puts expire worthless. So why do traders bother with them if the odds are against them? Perhaps the statistics deserve another look. There might be serious reasons to speculate in long or short calls. Consider the following:

If you are swing trading and using reliable and confirmed reversal signals, your odds of having good timing go up. Buying calls at a short-term low or puts at a short-term high can greatly increase your chances of being successful.

Also, with swing trading, using very short-term long options is very sensible. Swing traders expect a three- to five-session turnaround. So options expiring in three or four weeks, opened at the money, are going to be most responsive to price movement in the underlying. Long puts are bearish plays at the top of the swing, but are vastly less risky and cheaper than shorting stocks. That alone makes the long option swing trade a worthwhile endeavor; and because options are so much cheaper than shares of the underlying, options open up the way to better diversification as well.

If you use other reliable reversal signals, like some candlesticks for example, you can really beat the odds. Strong candlestick reversals like the engulfing pattern are extremely reliable, and when confirmed, give you a much better chance for short-term profits.

Long positions can also serve a purpose beyond mere speculation. For example, if you are long a stock and you experience a sudden decline, buy calls not only to ride the wave back up, but make a little extra profit at the same time. If the price has soared and you expect some retracement, a long put can be profitable and can provide you with insurance for those paper profits.

Buying calls or puts can be done for many reasons and can be integrated into broader strategies. In practice, long positions often end up as one side of more involved spread or straddle positions. For example, if you are short an option and the underlying moves against you, the added risk is efficiently and affordably offset by a long option. This sets up a spread or straddle against the original short position without the complexity of closing down or rolling the risk and replacing it.

By taking a new look at long options, you may come to believe that the 75% rule mentioned earlier is just an average and can be beaten. In addition, long options are very effective when used to manage your portfolio, create short-term profits, or swing trade. For swing trading, long options are better leverage than shares of stock, and are lower risk. A wise rule of thumb when it comes to options is to not rely on the common “knowledge” about risk levels. The more you study options, the more twists and turns you discover. Risk is not a fixed and unchanging feature to all options. What matters is how and when you use them.