Buy low sell high--volatility that is. One real secret to success in options is to master the idea of volatility. Buy the low volatility, and sell the high. You'll have to do a bit of research to find the right one though. In my situation, however, I am writing covered calls. I am selling volatility, but I am also long the underlying security, so there is another risk to contend with.
In the covered call situation, the call can provide some downside protection (whereas a simple naked put does not). I found that Lehman Brother's after the end of the first quarter, were getting some unfavorable news coverage, with some nasty news about first time losses, negative earnings, and so on. I felt that the news was unwarranted. Volatility was rising.
The thing I wish I could have done was trade a collar or a strangle. This would have been the ideal strategy for this situation, and would have been very, very lucrative. However, my only option was a covered call.
I bought 100 shares of LEH at 32.49, and wrote an ATM call (I learned from my deep ITM calls) for that month for 3.55. This was a nice fat premium.
A week later, seriously downer news came out about LEH Monday morning before the bell. I decided it was time to unwind the trade, as LEH was gapping down. I sold the stock for a loss, but I ought back my call for .9, giving me a profit on my option of 2.65. This was more than enough to offset my losses on the underlying.
I'll go ahead and say that this was a successful failure. The trade did not turn the 10% profit I was hoping for, but it was managed to prevent serious losses.
Again, this trade needed a differant strategy, collar/strangle, where direction did not matter, but again as a first time trader, I was limited by the tools I had available. I just chalked this one up to as a good learning experience.
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