p Ken Trester, Managing Editor p Jeff Carter, Senior Editor p Ron Jackson, Publisher

Hitting Home Runs: The Key Option Trading Goal
by Ken Trester

And the key to hitting home runs is to buy extremely cheap options. This technique is called "bottom fishing."

When you buy options for speculation I believe that bottom fishing is the best approach to follow. It is the approach we follow in The Complete Option Report

Cheap options have the potential for spectacular gains. But finding real cheap options that are underpriced and have the potential for a home run is not easy.

You need tremendous patience.

You may have to enter a lot of orders before you get one filled at your price. Most cheap options expire worthless, so you must have the patience, discipline and resources to keep trying for a home run.

Try to find options that are priced under 1.5 and the strike price is close to the stock price. Make sure the options are underpriced and have a probability of profit of at least 20%. Try to buy options on stocks that have the potential for surprise volatility.

To get your best deal try to buy put options on stocks that are rallying and call options on stocks that are falling.

Also, stocks tend to fall much faster than they rise, so buying put options tends to be a better bet on surprise volatility.

The market is dominated by institutional money managers, and as these managers move in and out of stocks a lot of surprise volatility develops. 

For example, a negative earnings report or news item might cause many institutions to sell all at once. On the upside a stock may become the target of a merger or buyout. Both of these situations can create a lot of surprise volatility.

One place to look for stocks with surprise volatility potential is in momentum industries such as technology, biotech and telecommunications stocks that are traded on the over-the-counter market. 

The smaller capitalizations of these types of stocks make them more volatile.

Other candidates include small stocks with heavy institutional ownership, stocks that have received too much hype, stocks rumored to be takeover candidates, and foreign stocks (ADRs) in unstable countries.

When you're looking for options on momentum plays such as these, you will probably have better luck taking the "opposite side" of what the crowd is doing.