The great primer on trading options is here.
And I want to add few lines on my own. I want to suggest another trading rule, which is not popular at all.
I think when you buy out-of-money options you must treat it strictly as insurance, i.e. you hope to lose money on that position, not earn. Compare it to life insurance. When you buy life insurance your goal is to actually see it to expire worthless 
If you want to actually win on your option trade you must buy a deeply in-the-money option that is actually above (or below) all reasonable resistance (support) levels so that it expires worthless only in the case you’ve made some exceptional, spectacular mistake and not just being a bit unlucky
April 21, 2008 at 2:18 pm
Btw, anyone has any idea what’s happening with Downey? They have no news and down 11.5%
April 21, 2008 at 5:37 pm
They have been run up at opex fairly consistently only to plummet in the days following. This looks like more of the same. If you look at last week they had some big up and down days – again on no announced news. Tough to borrow shares so I’m not sure how easy it is to squeeze out shorts.
Best case scenario for DSL is they end up like NCC.
April 21, 2008 at 8:11 pm
From BRIEFING.COM
DSL Downey Fincl reports Q1 (Mar) results; Board also decided to suspend future dividend payments (13.83 -2.32)
Reports Q1 (Mar) loss of $8.89 per share, includes charges, not be comparable to the First Call consensus of ($1.08). A significant factor contributing to the unfavorable change in net income/(loss) between first quarters was the recording of a $111.3 mln valuation allowance against deferred tax assets in the current quarter within income taxes due to uncertainty regarding their realization. In addition, the $309.7 mln unfavorable change in pre-tax income/(loss) between first quarters. In addition, the Board of Directors has declared a quarterly cash dividend of $0.12 per share payable on May 20, 2008, to shareholders of record on May 6, 2008. The Board also decided to suspend future dividend payments.
April 21, 2008 at 9:47 pm
Actually, you are not quite correct. It all depends on the environment we are in and how/which direction the risk has been mispriced.
Shankar
April 22, 2008 at 7:06 am
Btw, anyone has any idea what’s happening with Downey? They have no news and down 11.5%
The news is out now, and obviously some people had a whiff of it beforehand. But don’t hold your breath waiting for the SEC to investigate.
April 22, 2008 at 10:03 am
Something interesting to learn:
I’ve checked at Yahoo boards about Downey and they say that the volume today is so big that many shared that were lended to shorts are now called back because the original owner wants to sell.
That produces the artificial short covering and the stock is down only 3%. What good for shorts is that they are kicked out at profit, not loss. They will wait for entry point and re-short again.
So it seems to me that the stock decline will be delayed. It’s not tanking at the open.
April 22, 2008 at 11:59 am
DSL has been heavily shorted for a long time — I have not been able to short shares for about 8 months. Which makes me very nervous about shorting even if I could get the shares. I have made nice money on May $30 puts, which I bought back in early February. Right now my interest in DSL is pretty low — the puts are (still) rather expensive, and it seems like a tired story at this point. I’d be interested in other ideas about how to play it though.
A useful site: shortsqueeze.com.
In general once 25% of the float is short, I lose interest in shorting because the short squeezes can be murder.
April 22, 2008 at 5:38 pm
Watch this:
http://www.thestreet.com/_tscnav/video/marketupdates/index.html?clipId=1373_10368891&channel=Cramer+On+Demand&cm_ven=&cm_cat=&cm_ite=&puc=&ts=1184875288687&bt=NS&bp=WIN&bst=FF&biec=true&format=flash&bitrate=300#10368891
April 22, 2008 at 10:17 pm
DSL is just downgraded from investment grade to junk. I think banks with junk rating do not hold for a while.
April 23, 2008 at 8:58 am
[...] Theroxylandr adds, buy deep in the money options above (or below) resistance (or support.) This protects from considerable possible damage. [...]
April 24, 2008 at 5:01 am
Your tip might surely make good sense in some cases but I wouldn’t make it a general trading rule though, circumstances and conditions always apply. Thanks anyway.
April 24, 2008 at 11:15 pm
Roxy,
I have to disagree with you on a least one point here. It is true that the production of meat requires more grain input. However part of what I believe we are seeing here is driven by peak oil and drought. Food which is a commodity, is produced using oil in the production of fertilizer, in use of farm machinery, and lots of water. Food is also being converted into fuel. Oil and gold both are suffering from the ills of inflation. Oil and gold have increased in price by a factor of four since 2001. Food has increased by at least a factor of four since then. these commodities have maintained a relatively stable cost ratio with each other (i.e. 2001, oil at $25/barrel, gold at $250/oz, implying a 10 to 1 ratio between gold and oil, today gold at $1000/oz, oil at $110/barrel, with approximately 10 to 1 ratio). This points to simple plain dollar devaluation due to mis-management of the dollar by the Fed and the Treasury. I would also add that most hoarding is being caused by nations trying to limit the cost of food, not necessarily an actual shortage in those nations. There is a lot of farmland that can be put into production if there are profits to be made,..