First off, welcome to the board. It's a great question! There is no easy way to answer it but I will try.
Personal choice.....
I don't want to make light of this. I have traded options for a few years now. It encompasses about 95% of all my trades. But from where I sit I see two different types of traders. There are those that just jump right in totally defenseless against the vultures in Wall Street just waiting for the naive to dream of millions to be made in the market overnight.
You know the type. They are usually real cocky, real loud, real young and usually real ignorant to how much work it takes to get things done. Ummmm, errrr, I come from that camp. I stumbled onto options kinda by mistake after years of losing money on penny stocks. The worst day of my life was my very first options trade. I made $2,300 in 2 days!
How can that be bad? Well, I thought it was always going to be that easy and I spent the next year sticking every dollar I had into the markets. I won some and lost some. My losses however always wiped out any gains I worked so hard to get. I was on the same rat wheel with the penny traders. There had to be a better way.
The next type of trader I have worked with are those that are frightened of their own shadow. They just can't pull the trigger when the time is right, yet they can look at a chart and tell you why they should have got into a trade about a month ago. These folks are usually the mutual fund babies that believe that this stuff is just too difficult and others know more so why not just let them have our money. My parents preach this crap to me all the time.
My mother loves to tell me how she didn't lose any money in her portfolio when the market crashed in 2008. Her reasoning is because she ONLY puts her money in bonds. She's been doing that for years! My Step Father goes the other route. He loves AT&T. He bought a boatload way before Ma Bell was broken up by the Feds. He loves the dividens they pay. Period. He would never dream of selling and buying back later. That just might stop that check from coming that is currently at about $0.40 per share every quarter. Again, there has to be a better way.
I try to melt both. I speak alot about options here but the fact is, I try to do other things as well. Now back to your question. Why August for my choice in month. I try to use a certain part of my portfolio for nothing but options. This is the "speculation" part of my overall holdings. When I first really researched the options, I was quick to discover that originally, this "options" concept was a type of insurance for of all things, tulips. It later transformed into insurance for our holdings.
My family's holding in T is a great example. If the price goes down with the shares, we get nothing. We just get the same white bread we have eaten for years. But if we had bought one (1) PUT contract for every 100 shares we own, we could still have our holdings and made money when the price went down.
This PUT contract costs money. Money that would need to come from our pockets. Here's when it hit me. What if I sold a CALL contract to cover the cost of the PUT? BINGO!! That's it! So I started to sell CALLS against the shares I owned to pay for the PUTS. I was now covered no matter what happened.
Sure I might need to sell my shares of T if it ran higher than the strike price I sold them. But that price would be higher than the price I paid for the shares. I make a profit. I could always buy the shares back later if I wanted to capture the dividend.
So I started to plat the front month when choosing a month to play. It was a little easier to picket target prices because the support and resistance points were fairly clear. Who knows what will happen 3 months or 6 months from now. So if I can't forecast the targets as easily in the outer months as easily as I could in the front month, why pay for the "time premium" associated with the outer months?
Also, the front months tend to move quicker to the day to day price fluctuations of any stock we want to play. And as a trader, we want movement! Give me a well defined trend, and I will show you the money. Many times those "well defined" trends can't be seen on the daily chart but are crystal clear on a lower timeframe like the 30 minute chart.
Playing the front month allows us a chance to play the same stock over and over each time. I love picking a strike price, buying 10 contracts and cashing in the next day or two for huge profits. I can do it all over again with the same amount of capital as I first started with and I only need to change to a higher strike. This practice locks in profits all the way up!
I hope this helped.....
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