Getting Started in Options : [PDF Download]

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“Keep themajor market theories in mind when you analyze stocks, and remember that exceptionally rich option premium is not a dependable standard for stock selection. Moderate volatility in a stock’s price levels may work as a positive sign for options trading, as it demonstrates investor interest.

A stock that has little or no volatility is, indeed, not a hot stock and such conditions will invariably be accompanied by very low volume, a consistently low P/E ratio and, of course, lower option premium levels.

So some short-term volatility might demonstrate not only that investor interest is high, but also that option activity and pricing will be more promising as well. As a technical test of a stock’s price stability, volatility should be analyzed in terms of both short-term and long-term levels.

Ideally, your stocks will contain long-term stability but relatively volatile price movement in the short term. With the distinctions in mind between different causes and patterns of volatility, the selection of stock may be based on a comparative study of the past 12 months.

First, ensure that the stocks you are considering as prospects for purchase contain approximately the same causes for their volatility. Then apply volatility as a test for identifying relative degrees of safety.”

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