2018 Copyright ETNtrade. Where the Elite Trade. January 2, 2018

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1 Where the Elite Trade Introduction to Basic Options and Option Application January 2, 2018 Today s Presenter: Dave Meldeau ETNtrade President By printing and/or using these templates, you agree to read the following disclaimers and understand that the rules, information and guidelines provided in the following slides are not trading recommendations. The Purpose of ETNtrade Webinars is Education. ETN Traders Do NOT Provide Trading Recommendations ETN Recommends that you Start with a Demo Account. Do not Risk Real Money while in Learning Mode. ETNtrade Traders/ Educators are not Licensed Brokers or Financial Advisors. You Agree to Terms of Service at Please Read the Characteristics and Risks of Standardized Options here: Any reproduction or distribution of any audio, video or materials without the express written consent of ETNtrade is strictly prohibited. Today s Agenda: Introduction Terminology How to Place a Trade Basic Options Application Effect of Expiration on Options Debit Spreads Introduction Action Plan/ Homework

2 An Option is the Right But not the Obligation To Buy or Sell a Stock At a Specific Price On or Before a Specific Date XYZ Stock = $100: Buy: Right to Buy $100 for 1 Month Cost = $5.00 XYZ = $150 Option = $ Profit = $45 (900%) XYZ = $50 Option = $0 Loss = $5 PUT CALL

3 Strike Price Expiration Weekly Monthly Quarterly LEAPs Premium Bid Ask Capital Requirement Contract Open Interest Filled Exercise Assignment Option Chain Risk Curve The Greeks Theta- Value of Time Vega- Volatility Delta- Change in Price Gamma- Delta of the Delta Rho- Interest Rate 2 Components Intrinsic Value Time Value Intrinsic Value + Time Value = Premium Intrinsic Value Calculation: Call: Stock Price Strike Price Put: Strike Price Stock Price At-the-Money (ATM) In-the-Money (ITM) Out-of-the-Money (OTM) EXAMPLE: $100 Stock $95 Strike $10 Call Option

4 Debit Trade Long Calls and Puts No Obligation Time Decay Volatility Capital Requirements Cost of the Trade = Maximum Risk Credit Trade Writing (Short) Calls and Puts Covered Uncovered (Naked) Have Obligation (Assignment) Time Decay Volatility Capital Requirements Cost of the Trade = Maximum Reward Potential Value of Position Time Decay Time (in months) Expiration

5 Expiration Strike Price Open Interest Bid/ Ask Spread Greeks (Advanced) Expiration Weekly (7 DTE) or +1 Month Strike Price 1 to 3 Strikes OTM Open Interest 100+ or 10% Rule (Excluding Weeklies) Bid/ Ask Spread <$1 Option: $.05 or Less $1-$5 Option: $.10 or Less $5-$10 Option: $.15 or Less >$10 Option: Split the Spread Leverage Risk not Reward Potential! Risk = Cost of Trade Reward Potential = Unlimited (Calls) or Price of Stock (Puts) Only Sell if Position is Covered! Expiration 30 DTE or Less (Ideally Use Weeklies) Strike Price ATM (More Time Value) or OTM (Less Risk) Open Interest 100+ or 10% Rule (Excluding Weeklies) Bid/ Ask Spread Same as Buying Options Leverage Risk not Reward Potential! Reward Potential = Premium Collected Risk = Unlimited (Calls) or Price of the Stock (Puts)

6 A Spread Trade is a Combination of Two or More Option Trades at the Same Time on the Same Stock. Bought a Call Expires OUT-OF-THE-MONEY Expires IN-THE-MONEY Long the Stock at the Strike Price Sold a Call Expires OUT-OF-THE-MONEY Expires IN-THE-MONEY Short the Stock at the Strike Price Bought a Put Expires OUT-OF-THE-MONEY Expires IN-THE-MONEY Short the Stock at the Strike Price Sold a Put Expires OUT-OF-THE-MONEY Expires IN-THE-MONEY Long the Stock at the Strike Price

7 Buy and Sell Calls or Puts Different Strike Prices Same Expiration Date Debit Trade (Pay up Front) Time Decay- Typically Works Against You Volatility- Typically Want Lower or IV Skew Capital Requirements Cost of the Trade = Maximum Risk Strike Price Buy Either 1-3 Strikes ITM or OTM Sell Strike 1-4 Strikes Further OTM Buy 1-3 Strikes ITM/ Sell ATM for Optimum Time Decay Expiration Less Than 180 DTE Same Expiration on Both Exit Strategy Percentage Gain/ Loss Sell on a Certain Date Hold to Expiration Strike Price Buy OTM Short of the Expected Move Sell $1-$5 Further OTM Sell Strike Where We Expect Stock to Expire or Less Expiration Less Than 14 DTE (Ideally Front Month) Same Expiration Date on Both Exit Strategy Hold to Expiration If Stock Price is Not Achieved in Time Frame Percentage Gain/ Loss

8 Bull Call Spread (Buying a Call Spread) Buy Call and Sell Further OTM Call Rule of Thumb: Buy Strike Always More Expensive Same Expiration for Both Bear Put Spread (Buying a Put Spread) Buy Put and Sell Further OTM Put Rule of Thumb: Sell Strike Always More Expensive Same Expiration for Both XYZ $98.00: Buy: 100 $6.50 AND Sell: 105 $3.00 Net Result: $ Max Risk: $ Reward Potential: $ Exit Strategy Example: Hold to Expiration What do you want Stock to do? ETNtrade.com Glossary & Risk Curves Earnings Whispers FreeStockCharts.com Market Resources Financial News FDA Calendar Economic Events With Definitions

9 ETNtrade.com Your Broker s Website (Virtual Trading) CBOE (cboe.com/data) OptionSlam.com MSN (moneycentral.msn.com) FinViz.com 1. I will always have a trading plan. 2. I will not break my trading plan. 3. I will continue to virtual trade. 4. I will always be a disciplined trader. 5. I will always diversify. 6. I will not be greedy. 7. I will not over-manage my account. 8. I will journal my results. 9. I will not be an emotional trader. 10. I will set precise and achievable goals. Re-Watch this Training if Necessary Register for Upcoming Sessions Study and Master the Terminology Homework (Following ETNtrade Rules): 1. Look Up AMZN and MSFT: Place Virtual or Paper Long Calls on Each 2. Look Up GOOGL and JNJ Place Virtual or Paper Long Puts on Each 3. Look at AAPL: Attempt to Place Virtual Debit Spread You Choose Put or Call Spread

10 HAPPY TRADING!