If you have been trading options for quite a while then you would have realized that the options that you are buying come in different prices. Unlike stocks, option premium are influenced by several factors. Implied Volatility is one of the main culprits.

The best strategy to use on bearish reversal trades is a straight put making full use of the leverage that it can offer for this a short play, maximum holding period is usually two weeks. It is always wiser to check on the IV so as not to pay for overpriced options as time decay is against you.

If the premiums on the puts are expensive, always avoided these trades no matter how good they may look simple because the risk and reward ratios are unfavorable. The lower the put premium you pay, the more money you are able to make when it goes in your favor. Likewise, if the trade doesn’t go your way, then less money is at risk.

For a $2 option an increase in $1 is 50.0% ROI, $2 at risk.

For a $3 option an increase in $1 is 33.3% ROI, $3 at risk.

For a $4 option an increase in $1 is 25.0% ROI, $4 at risk.

Always go for the near-the-money options, know how much you are paying for the time value if you choose the in-the-money puts as it can be expensive. Never go a few strikes out for it might look cheap but the delta is very low. What we want to achieve here is high leverage and reasonably priced options.

“Risk is good. Not properly managing your risk is a dangerous leap” - Evel Knievel

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