I usually trades options that expire in greater than 2 weeks, which is often the “front month” (the closest month of expiration). Monthly options expire the 3rd Friday of every month, but there are weekly options for many listed securities also. I normally do not trade weekly options, as they are more volatile and there is not enough time for the trade to work for you. If there is a high probability trade, sometimes I will make an exception to that rule.
I normally trade options that are 1-3% in the money. What does that mean?
That means if a stock is selling for $500, I would look at the strikes that are $5-$15 (1-3%) below the market price of the stock. In this case, that would be the 495,490 or 485 strikes. I would now be looking at March contracts, as the February options expire this Friday(3rd Friday this month). Usually a 3% in the money(ITM) strike will give me a .70 delta . What is that? Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. This means the option should move 70% of the move of the underlying stock. The more ITM the options are, the higher the delta.
Example: A stock is trading for 500, and you buy ITM calls by 3% (485 strike) at $18/contract and the stock gains +10 (to 510). Your 485 calls should move .70 x 10 , or $7 (to $25 or +38%) So, using this example if your stop was 490 (10 stop in the stock), you would place your stop in the option at .70 x 10=7 below the entry price. So, if you bought those calls for $18, then your stop would be 18-7=$11.00 ( -38% loss) This was just an example of the huge risk, and huge reward in options. That is why I scale out a portion of my position relatively fast(after the option has moved 3-5% in my favor), to reduce risk. If you scale out of 1/2 the position, you reduce risk and are still involved with the trade (your runner).
Also, there is time decay with every option. This will affect the price of the option with the fluctuation of the underlying security. This is referred to as Theta. Theta is a measure of the rate of decline in the value of an option due to the passage of time. The Delta will change based on the time expiration of your options. So, if you go out past the front month expiration, the 3% ITM options will have a lower Delta than .70(depending on how far you go out).
The above scenario was just an example. It is very important to understand trading options is very risky.