Guide to Executing Cabot Options Trader Strategies

Size: px

Start display at page:

Download "Guide to Executing Cabot Options Trader Strategies"

Rosemary Lucas
6 years ago
Views:

1 Guide to Executing Cabot Options Trader Strategies By Jacob Mintz, Chief Analyst, Cabot Options Trader

Thus, whether you are new to options or experienced, it s important to understand an options strategy and to know how to implement it in your brokerage account.

2 Options order entry and execution is an intricate part of trading options. In the last few years, the options industry has added many new products and options expirations, making order entry a slightly more difficult process. Thus, whether you are new to options or experienced, it s important to understand an options strategy and to know how to implement it in your brokerage account. In addition, you will want to be familiar with the way Cabot Options Trader presents the trade recommendations to you, and how you are expected to act on them. Also, note that some rules about options trading and some aspects of order entry may differ among brokerage firms. I strongly advise that you check with your brokerage if you have any questions about its trading platform or rules. Please take your time and double check your order entry before executing. Even seasoned professionals make mistakes when rushing to place orders. If you have any questions, please don t hesitate to me at Jacob@cabotwealth.com. Your guide to successful options trading, Jacob Mintz Chief Analyst, Cabot Options Trader - 2 -

3 Getting Started The securities industry requires that your account be pre-approved for options trading by your brokerage firm, so consult with your broker to submit the necessary option papers. When you re approved, you ll be assigned to one of three or four risk levels that allow you to execute specific option strategies. The lowest risk level will allow you to buy Put and Call options and execute Covered Call Writing the strategies in Cabot Options Trader. (Brokers may have slightly different rules about what they allow for trading at different risk levels and what options strategies they allow in an IRA account. It may be helpful to inquire about their rules before applying.) When buying Put or Call options, you must always pay for your position in full with cash in your account. (Options may not be margined.) The price of an option is quoted on a per share basis, with 100 shares represented by one standard option contract. Therefore, if your option is quoted at a price of 3.45, each option contract (whether a Put or a Call) will cost $ plus applicable transaction costs. Cabot Options Trader does not specify the exact number of contracts for purchase, as it will differ among subscribers depending on their risk tolerance and portfolio size. Therefore, the quantity for each trade is up to you. These are also individual decisions based on how aggressively or cautiously you prefer to play it. Cabot Options Trader will attempt to execute the trade at the specified price (or better) for its own tracking purposes. If I cannot execute the trade in my actual account, I will consider the recommendation unopened. If I can execute at a better price, I will indicate that for tracking purposes. Your execution price can be different from mine as prices change continually during the trading day. Subscribers should recognize that Cabot Options Trader recommendations are made for a wide range of subscribers, each of whom should use these recommendations as a guide to developing their own trading plan. If you are not comfortable with a Cabot Options Trader recommendation or do not understand it, you should refrain from implementing it. Be sure to double-check every order. Make sure you have the correct underlying symbol, expiration, strike price, type of option (Put or Call) and action (Buy or Sell) before submitting. Even the pros make mistakes on order entry! - 3 -

4 Buying Call and Put Options The simplest option strategy is the purchase of a Put or a Call option i.e., the long put or long call strategy. Long purchases will be the most commonly recommended strategies in Cabot Options Trader. (The term long means you will own or hold the option and it is reflected in your account as an asset. It has nothing to do with the amount of time you hold the option or how much time remains before expiration.) The objective of the long Call or long Put purchase is to profit from an upward movement (Call purchase) or downward movement (Put purchase) in the underlying stock. Example of a long Call trade: Buy XYZ Jan 35 Call at 2.65 (or less) Expires: 1/19/13 Strike: 35 The following characteristics of Put and Call purchases should be noted: Long Put or Call recommendations will either be issued by Cabot Options Trader at a specific price or designated at market. When there is a specific price, I suggest using Limit Orders in which you specify your price, and when the recommendation says at market, I suggest using a Market Order. When Cabot Options Trader specifies a price, I suggest that you not pay more than that price to execute the trade. If you can purchase the recommended option for less than the limit specified, you should certainly do so. On occasion, Cabot Options Trader may specify a price below the current market price. (Example: Buy XYZ Jan 35 Call at even as the current market price for the option is 2.65.) This would represent an attempt to buy an option only if it drops to the lower price. In such instances, you should place your limit order to buy the option at the specified price (2.25 in this example) and leave it there for the day to see if it executes. If it does not, Cabot Options Trader will issue a price update or cancel the recommendation. Cabot Options Trader may issue such recommendations when it feels there is a possibility the option will trade lower but not necessarily remain there for long and wants subscribers to have their orders in at the lower price on the chance it trades there. Cabot Options Trader recommendations will be relatively short in duration, ranging from a few days to a few weeks. This will be the case even if the recommended option doesn t expire for several months

5 Buy-Write (Covered Call Writing) A Buy-Write (Covered Call) consists of buying the stock and selling (i.e., shorting) a call option on that stock. This type of strategy is more akin to purchasing stock than it is to purchasing a Put or Call option and requires much more capital, but is also much more conservative. Example of Covered Call Write: Buy XYZ Sell XYZ October 40 Call at a Net Price of Expires: 10/22/12 Strike: 40 Since a Call option represents 100 shares of the underlying stock, you can write one Call on each 100 shares of stock you own or purchase. By owning the stock, your short position in the option is covered by the stock, thus eliminating the margin requirement normally required to maintain a short option position. A short option position by itself (without the stock) is very risky and requires a substantial margin balance. A short Call on stock in your account, on the other hand, is a very conservative strategy and requires no margin. I price them together rather than individually, since they are really a combined position. If the stock is and the call option is say 2.00, you would be buying stock at 40 and selling an option for 2. The sale of the option represents a credit to you in your account, so you pay 40, but take back in 2, so the net price you pay is really 38. If the stock goes up or down slightly, the option will also, so I give you a Net Price as a target. It really doesn t matter if you pay 40 and receive 2 or if you pay 40.2 and receive 2.2 the Net Price is the same 38. Most brokers accept a combined order to buy the stock and sell the option (sometimes called a Buy-Write order). You can enter the order as a single trade and use my suggested limit price. You will either get both at the Net Price (or better) or you will not execute anything. The alternative is to purchase the stock and then sell the Call option separately. You may or may not get the Net Price that way. The Covered Call recommendations made by Cabot Options Trader will generally be to purchase stock and sell a Call option on it at the same time. Follow-up alerts will provide guidance on either closing the entire position or closing the option and rolling to a different option as it approaches expiration. In this manner, you may purchase the stock and write a number of Call options on it over time before eventually selling the stock. The following characteristics of Covered Call Writing should be noted: In the example above, the stock should be purchased and the Call option sold for a combined net price of or less for both together. The Net Price may be achieved by paying for the stock and selling the Call for or paying for the stock and selling the Call for 1.00, or any other combination that achieves the net price specified

6 Initial Covered Call Writes may be executed together in one order at most brokerages. Sometimes they are referred to as Buy-Write orders. By placing a single order for both the stock and the call, the buyer can specify a net price and have that price serve the same function as a Limit Order on an individual stock or option. If the Covered Call Write cannot be executed at your Net Price, your order is not executed at all. Your alternative is to first purchase the stock and then sell the Call option, but you may not achieve the Net Price in that manner, or may purchase the stock, but not execute the option. (Never sell the option until you have executed the stock purchase first or already have the stock in your account!) Be sure at all times to make sure you own 100 shares of stock for each Call option contract you sell, and to own the shares first or simultaneously. To sell the option before owning the stock may subject you to a margin violation. Though unlikely, you may be assigned on your stock prior to expiration if the stock is selling above the strike price of the option. This means that a holder of that option exercised it and the Options Clearing Corp. assigned you. The result of an early assignment is that your position is then closed and the stock sold from your account. Most of the time, this is favorable news as the strategy achieves its maximum gain when the stock is assigned or called away at expiration of the option, and it means you achieved maximum gain on the strategy without having to wait until expiration! For all open Covered Call Writes, Cabot Options Trader will monitor the positions every day and recommend follow-up actions as the option approaches expiration. These may include: Doing nothing (in which case either the stock will be called away or the option will expire worthless), which is a good thing. Closing the short option position and opening a new short option with a different expiration. (This is referred to as rolling the option.) 176 North Street P.O. Box 2049 Salem, MA Cabot Options Trader is published by Cabot Wealth Network, which is neither a registered investment advisor nor a registered broker/dealer. Neither Cabot Wealth Network nor our employees are compensated in any way by the investments we recommend. Information is obtained from sources believed to be reliable, but is in no way guaranteed to be complete or without error. Recommendations, opinions or suggestions are given with the understanding that readers acting on the information assume all risks involved. Options and other investments are subject to risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options prior to trading options. There is no guarantee that any of the strategies or services promoted will result in the desired outcome. This content provided is for general education and information purposes only. No statement contained herein should be construed as a recommendation to buy or sell a security or to provide investment advice. All readers should consult with an independent financial advisor with respect to any investment in the securities mentioned. In no event should the content of this report be construed as an express or implied promise or guarantee from Cabot Wealth Network or RHL Capital LLC that you will profit or that losses will be limited in any manner whatsoever. Any opinions, projections and predictions expressed are statements as of the date of this publication and are subject to change without further notice. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of past recommendations. Information for Cabot Options Trader is provided by Richard Lehman, a California Registered Investment Advisor. Some recommended trades may involve securities held by RHL Capital LLC, its officers, employees or clients, and their investment decisions may be inconsistent or even contradictory with the recommendations in this report

Guide to Options Trading

Guide to Options Trading Easy Strategies that will Put You in the Money Fast By Jacob Mintz, Chief Analyst, Cabot Options Trader As a subscriber to Cabot Options Trader, I hope you will benefit from my