Weekly Options SAMPLE INVESTING PLANS

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Patricia Griffith
5 years ago
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1 Weekly Options SAMPLE INVESTING PLANS

2 Disclosures All investing plans are provided for informational purposes only and should not be considered a recommendation of any security, strategy, or specific portfolio allocation. Investing plans are provided for students to better understand how they may build their own plan that may best fit their own personal investing style. Carefully consider investment objectives, risks, and expenses before investing. Neither Investools Inc. nor any of its officers, employees, representatives, agents, or independent contractors are, in such capacities, licensed financial advisors, registered investment advisers, or registered broker-dealers. Investools Inc. does not provide investment or financial advice or make investment recommendations, nor is it in the business of transacting trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client s situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement, or offer by Investools Inc. of any particular security, transaction, or investment. Options trading is generally more complex than stock trading and may not be suitable for some investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Granting options and some other options strategies can result in the loss of more than the original amount invested. Options trading privileges may be subject to your broker s review and approval. Before trading options, a person should review the document Characteristics and Risks of Standardized Options, available from your broker or any exchange on which options are traded. Carefully consider the investment objectives, risks, charges, and expenses of any mutual fund or exchange-traded fund (ETF) before investing. To obtain a prospectus containing this and other important information, contact your broker. Please read the prospectus carefully before investing. Delta is a measure of an option s sensitivity to changes in the price of the underlying asset. Gamma is a measure of delta s sensitivity to changes in the price of the underlying asset. Vega is a measure of an option s sensitivity to changes in the volatility of the underlying asset. Theta is a measure of an option s sensitivity to time decay TD Ameritrade IP Company, Inc. All rights reserved. Terms of Use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. 1

3 Weekly Covered Strangles Sample Investing Plan WEEKLY OPTIONS Objective To generate regular income by selling premium. Additionally, this strategy allows you to obligate yourself to buy stocks when they appear oversold and sell stocks when they appear overbought, which can be used to add or subtract to a position. Watch List Criteria Stocks/ETFs: Equities you already own or are willing to buy and sell. Equities in a slow-and-steady uptrend. Options: Tight bid/ask spread (liquidity) Penny-increment options Weekly options available Entry Rules Expiration Selection: Select options with 11 to 15 days to expiration. Strike Selection: Sell calls and puts with a delta between.20 to.40. Money Management Rules Position Size: Number of contracts you sell should be based on the margin requirement for the short puts and the number of shares you own. Margin requirements for the short puts will vary by broker. Commonly, this is 20% of the potential maximum loss. Be aware of a position s total allocation within a stock portfolio. If the short call is exercised, you ll have to sell 100 shares of your position. This scenario may create a smaller position than what you originally position sized. If the short put is exercised, you ll have to add 100 shares to your position. This scenario may create a larger position than you originally position sized. Additionally, you ll have to raise enough capital to purchase 100 shares of the stock at the strike price. 2

4 Exit Rules When options are OTM within three days of expiration: If you wish to roll the trade, open the new trade when the current options have achieved 80% or higher of maximum gain. Otherwise, let the options expire worthless. When options are ITM within three days of expiration: Roll the trade if the credit received for the current trade is greater than the transaction costs of the roll order. If not, let options expire to add to or subtract from your current position. Take into account any assignment fees and capital requirements. Routines Daily: Weekly: Monitor positions for large stock moves. Three days before expiration, investigate opportunities for rolling the trade. Analyze current stock positions for new entry opportunities. Quarterly: Check strategy performance against a benchmark, like the CBOE S&P 500 BuyWrite Index (BXM). 3

5 Weekly Double Calendars Sample Investing Plan WEEKLY OPTIONS Objective Generate returns in a low or rising volatility environment with a high probability of success. Watch List Criteria Stocks/ETFs: Actively traded stocks (average daily volume greater than 1,000,000 shares per day) Low-volatility instruments like index ETFs or index options High-priced stocks and ETFs that can offer higher premiums Options: Low bid/ask spread spread should be 10% or less of the ask price for each short option Penny-increment options preferable Weekly options available Entry Rules Short Options: Expiration selection: Select options that expire in seven to 10 days. Strike selection: Sell calls and puts with a delta between 0.30 and Long Options: Expiration selection: Select options that expire in 21 to 31 days (two to three weeks later than the short options). Strike selection: Select the same strike as the short options. Money Management Rules Position Size: Formula: Portfolio risk / trade risk = # of spreads Portfolio risk: 1% to 2% of active trading portfolio per trade Trade risk: The debit paid for purchasing both calendars 4

6 Exit Rules If options are OTM: Exit spread or roll short options once the trade achieves 80% or more of maximum gain. Consider taking profit early if a volatility spike leads to profits of 30% or more of maximum gain within the trade s first two or three days. If options are ITM: If three days or less until expiration, exit spread or roll short options. Consider closing the trade if the underlying stock or ETF makes a big move (e.g., two to three standard deviations) at any time during the trade. Routines Daily: Monitor positions for exit or rolling opportunities. Weekly: Search for new opportunities. Quarterly: Check strategy performance against benchmark. 5

7 Weekly Straddle-Strangle Swaps Sample Investing Plan WEEKLY OPTIONS Objective To take advantage of the volatility skew that occurs around big events like earnings announcements. Watch List Criteria Stocks: Options: Actively traded stocks with an upcoming event sideways-trending stocks and ETFs Low bid/ask spread (liquidity) Penny-increment options Weekly options available Volatility skew present of at least 10% between the nearest expiration and the average of the longer expirations Entry Rules Enter trade one to two days before event Short Options: Expiration selection: Select the weekly options expiration that s closest to the upcoming event. The second-closest expiration can also be used if you wish to stay in the trade longer. Strike selection: Sell an ATM call and an ATM put. Long Options: Expiration selection: Select options that are two to four weeks further to expiration than the short options. Seek options with implied volatility levels similar to those for longer-dated options. Strike selection: Select strikes above and below the ATM calls and puts. The goal is to create a range of prices that you think the underlying stock or ETF will stay within after the event. 6

8 Money Management Rules Position Size: Formula: Portfolio risk / trade risk = # of spreads Portfolio risk: 3% to 5% of active trading portfolio Trade risk: Maximum loss of both diagonals (spread width on both sides [i.e., calls and puts] - credit) Exit Rules After the event passes and implied volatility drops, exit the trade. If long options end up ITM, consider staying in the trade for up to another week. However, consider the commissions of exiting the trade early versus the potential for additional loss, assignment costs, and margin requirements you might incur if you hold the trade to expiration. Routines Daily: Monitor open positions. Weekly: Identify potential upcoming event-related opportunities that exhibit implied volatility skew. Quarterly: Check strategy performance against a benchmark. 7

Access to this webinar is for educational and informational purposes only. Consult a licensed broker or registered investment advisor before placing

Access to this webinar is for educational and informational purposes only. Consult a licensed broker or registered investment advisor before placing any trade. All securities and orders discussed are tracked