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few friends and I engaged in a risky options strategy we dubbed “options Friday.” This strategy involved buying slightly out-of-the-money call options on their Friday expiration day of stocks we perceived as having a potential to climb during the day. As these options were out of the of the money and almost had no time value, we were able to buy them cheap, for example at $1/16 or $1/8 premiums. If those stocks had moved up two or three points, they would have broken through the strike price and our options would have made it in the money by perhaps $1. This would have meant that the $1/16 premium we had paid for those contracts would have now been worth $1, 16 times the original premium in just a few hours! We never made the right picks, however, and invariably we ended up with losses. I can certainly admit that at this stage we were not trading, we were simply gambling.

The point is that options offer a wide variety of trading strategies to traders, from those who seek the thrill of gambling to those who are over-cautious with every investment.

Options As Indicators

Whenever investors want to get a feel for where a stock or the market as a whole is headed in near term, the options market is high on their list of indicators to study. Remember that options are traded based on future speculation by people who put their money where their mouths are. So options may give us a preview of things to come. Many traders and analysts routinely analyze options activity to get a sense of where a certain stock or a certain sector may be headed. For example, they may look at the volume ratio of puts to calls on a certain underlying stock in an attempt to forecast a general direction for that stock. If a certain stock is seeing a higher than usual put activity in relation to its call activity on near-term options, this may signal that many are betting that …