Options Article

What are the lowest cost options to trade?

Last Updated: September 29, 2020

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What are the lowest cost options to trade?

Options are highly levered and generally low cost. There are a few that are very low cost that I can highlight namely Out of the Money (OTM) Calendar spread.

In these trades you will sell either a near term put or call to offset the premium paid for buying the same strike put or call at a later date. The further you go away from the stock price the cheaper these spreads will be.

It's important to note that such trades are very low probability, so while you don't spend much to enter them you are much less likely to make money.

There are other trades that are negative cost (i.e. You receive money when you put on the trade) but it's important to understand that just because you receive a credit doesn't mean that the trade doesn't have a cost to carry. What happens is that you are obligated to set margin aside in your account to cover the risk associated with the trade moving away from you.

Examples of these are credit spreads, ratios, and strangles/straddles.

No strategy is without risk and generally focusing on low cost is a good way to go broke slowly. Image buying lottery tickets each day. Yes you won't lose much, but you may lose a lot over time.

RELATED READ  What does it mean to be "long gamma" in options trading?

Look instead for strategies that meet your risk-reward profile you are looking and that balance the conflicting criteria inherent in all options trades.

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