Option Strategy — aka (DD)²

[netwrangler]

Options give the trader and investor additional tools to work with as they fashion their financial fortune. But it also creates additional work in the Due Diligence (DD) area.
This is illustrated elegantly in the Option Strategy Map on the home page of Morningstar's Options tab.



The rows deal with the price/value of the underlying security. Is the security undervalued?...fairly valued?...overvalued?

The columns deal with the implied volatility of the option. The implied volatility is a key variable in the option premium.
Thus the columns provide a measure for whether the option is undervalued?...fairly valued?...overvalued?

The logic is fairly straight forward here.

If something is undervalued, you buy it.
If something is overvalued, you sell it.

With options available, there are several ways to buy or sell.

The various strategies are described in more detail on the Morningstar site and either directly or indirectly in other posts here on the OTF.
The point is, in order to make a rational decision on an option trade you need to

• Perform DD on the stock to determine if the PPS is fairly valued;
• Perform DD again on the option volatility to determine if the option premium is fairly valued;
• Use the double DD results to see where you are in the Option Strategy Map;
• Select a strategy that is appropriate to your investment goals.

If you're just looking for a stock tip, you ain't going down this path. It's too much work.
Put another way, if you don't perform the (DD)² and study up on how the option strategies work, you are giving up a huge edge in your trades to the folks who did their homework.

The plus side here is that options give some really great tools to contrarians who are willing to do the DD.