Derivatives in general...my info comes from my experience as a stock option trader excusively, but should help.
I never ever SHORT Calls or Puts, with the exception of credit spreads (read more on that elsewhere). I do buy straight Calls and Puts because the only risk is the premium I pay to own the "right, but not the obligation" to either buy "X shares" or sell "X shares" at a predetermined price (strike price) on or before a given day (expiration date).
Options can be either ATM (At-the-money where Strike price = Mkt price of instrument) or ITM (In-the-money where Strike price is > Mkt price for Puts and < Mkt price for Calls) or OTM (Out-of-the-money where the strike price is < Mkt for Puts and > Mkt for Calls).
Options also lose time value (theta) as they progressively get closer to expiration date, losing a great majority at an exponential rate the last 90 - 60 - 30 days. I always exit an option 31 days prior to expiration or whenever the trend ends, whichever occurs first.
I always purchase ATM or NTM (near the money) options with an expiration date of 6+ months, but not LEAPS.
As I mentioned, there are inumerable ways to use options with different spreads for different purposes, but I find that following the larger macro price trends with ATM 6+month options creates a preferred risk:reward ratio for "ME". Your risk tolerance will be different and you will need to adjust accordingly.
The problem with options is time, direction, and volatility. It is possible to get 2 of 3 correct and still lose. But don't think for 1 moment that the option must be held by expiration date!!! In all instances, I always exit my options well before expiration, almost always for profitable gains. But that has to do with the fact that i remove as much of the time decay factor as possible, plus I follow macro price trends rather than scant daily swings. I choose ATM because in the event that a GAP occurs (cannot be predicted/avoided), my option will lose far lass value than the OTM.
Please, I implore you and others...paper trade for 1 year before committing funds. paper trade to establish risk:reward tolerance, strategies, and to create a criteria for why you enter/exit. You must develop a roadmap or recipe. Sometimes the eggs break, but at least your decisions will be based on math, probability, and objective criteria, NOT raw emotions (greed/panic).
No luck in investing - it's calculated. Do your homework!
