Copyright 2018 Craig E. Forman All Rights Reserved. Why Trade Options?

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Moses Jenkins
5 years ago
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2 Disclosure All investments involve risk and are not suitable for all investors. The past performance of a security, industry, sector, or market of a financial product does not guarantee future results or returns. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options. Copies may be obtained from your broker or the Options Clearing Corporation at OPTIONS or visit Any strategies discussed here, including examples using actual securities and price data, are strictly for illustrative and education purposes and are not to be construed as an endorsement, recommendation or solicitation to buy or sell securities. The author of this presentation, and the content of the website are in no way approved, endorsed, supported, or affiliated with tastytrade. We are a third party with interest in the tastytrade content, and the purpose of the information presented here is for education only. The ideas presented here are solely the views of the author, and are meant to enhance the ability of the individual investor in managing personal investments using the strategies and ideas set forth by tastytrade. 2

3 As investors, the goal is always the same Desired shape of Profit/Loss Curve How do we get there? 3

4 Calls and Puts A CALL is the right to buy the underlying at a fixed price from now until the expiration of the contract. A PUT is the right to sell the underlying at a fixed price from now until the expiration of the contract. If you are an airline and your biggest cost is jet fuel, how would you use CALL options to smooth out your P/L? If you are a farmer and you grow wheat, how would you use PUT options to smooth out your P/L? 4

5 Historic Options 5

6 Today s Options Market The CBOE (Chicago Board of Options Exchange) was formed in This created a standard way to trade CALL options on a public exchange. PUT options were added in Over 16 Million option contracts (avg) traded DAILY in Options are listed on thousands of underlyings, including Stocks, ETF s, Stock Indices, and Futures. One major brokerage reports that options and futures trades accounted for 41% of daily trade volume in most recent quarter. 6

7 Why would we want to use options in investing? What is your probability of profit trading stock? 47% 53% Current Price Stocks move up about 53% of the time, down 47% of the time. How can we improve our chances of success? 7

8 How can we increase the probability of success? We do this by using the options market. We can t do this by trading stock. We can place option trades that can profit in various scenarios. Strategy Most Likely Result of Strategy with Market Move Up Neutral Down Summary Buy Stocks (long) Profit Breakeven Loss We profit in only 1 of 3 directions Strategic Options (probability based) Ability to profit Ability to profit Ability to profit We can profit with a move in any direction, or no move at all 8

Traditional financial media would like you believe that It is very difficult for an individual investor to beat the returns of the broad market indices.

9 Traditional financial media would like you believe that It is very difficult for an individual investor to beat the returns of the broad market indices. Individual (retail) investors cannot outperform institutional investors. You are better off paying a professional 1% per year fee to manage your portfolio than trying to manage it yourself. Buy and hold (passive investing) will do better than active trading. Using derivative products like options and futures are way too complicated for the individual investor. WE DON T HAVE TO BELIEVE EVERYTHING WE ARE TOLD 9

10 So what are Derivatives? DEFINITION OF DERIVATIVE (from Investopedia) A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. 10

Understand techniques to become an active rather than passive investor.

11 How can individual investors do better? Understand why individual investors underperform. Understand how we can become more financially literate with derivatives. Understand techniques to become an active rather than passive investor. The more I learn, the more I realize I don t know. Albert Einstein We can beat the average retail investor if we learn to understand financial products, derivatives, and trading strategies. 11

12 Can we really use options to improve as investors? If you have the desire, and you are willing to invest time and effort to educate yourself, you can outperform the average retail investor. Learn New Skills Build Expertise Create a Plan Execute Your Plan 12

13 Is it difficult to learn to trade options? If you can order a pizza, you can trade options Tom Sosnoff founder of Think or Swim (1999) founder of tastytrade (2011) 13

14 What is tastytrade? A Real Financial Network Founded by Tom Sosnoff, 2011 Geared towards individual investors 8.5 hours of daily live programming All episodes archived for playback Absolutely free, no commercials Broadcast from tastytrade studios in Chicago Over 100,000 regular daily listeners (multiple hours per day) The largest digital financial network in the world Created a new trading platform & brokerage tastyworks in

15 Starting a Searching on tastytrade 15

16 Searching the show archives by Segment Title You can type in an archived show Title in the search bar here. Use the Title, not the Show Segment Click on the Search button to start a search 16

17 Find and Play the archived by Segment Look in the results box for the videos, check the title and date, and click on the show you want to watch 17

18 The tastytrade Learn Tab The Learn tab is a good place to start for key concepts, and has links to shows 18

19 What if we had a trading platform that made it simple to trade derivatives like options? When Sosnoff started tastytrade, he had a dream. Give investors the knowledge to confidently to take control of their portfolios, and make all the probabilities inherent in options trading transparent and easy to understand. Suppose we could instantly see the following at trade entry: Easy to follow graphical diagram of the trade Maximum profit at expiration Maximum loss at expiration Probability of Profit (making at least 1 cent on the trade) Return on invested capital, assuming we have a successful outcome With trading platforms TOS and tastyworks, we can do all this & more! 19

20 Get familiar with both trading platforms TOS tastyworks 20

21 Is this too complicated for me? Featured Trader Alex Alex is 17 years old. He started trading at age 9. He trades on his i-phone between classes. 21

22 Why does trading options make sense now? The technology for trading and analysis is now free and very powerful Markets are commoditized and commissions have never been lower. The markets are efficient and we can find plenty of opportunities to trade liquid products with reasonable bid-ask spreads. Trading can be fairly mechanical by having a plan and following it. To be good at anything, you must be a doer, not a dreamer; it does take commitment and learning new ways of thinking about investing. 22

Warning Warning There is risk in all types of financial investment, and trading options is no different. You can lose some or all of your invested capital.

23 Warning Warning There is risk in all types of financial investment, and trading options is no different. You can lose some or all of your invested capital. 90% of all retail traders lose money over time; only 10% are profitable. Full-time retail traders last an average 18 months before they either give up or lose all their dough. Why is this? There are many reasons; but one main reason is that our brains are wired to want to be right; we stay with losing positions way too long and cash out on winning positions too early due to fear of giving up profits. 23

24 Conclusions PUT THE PROBABILITIES IN YOUR FAVOR We can understand our probabilities by using free software tools that help us visualize a trade before actually entering the trade. Many trading platforms even allow you to trade with paper money to get practice before you take any real risk. By understanding probability based trading, we can improve chance of success with any market assumption; bullish, bearish, or neutral. tastytrade is an excellent way to expand your financial knowledge. Tune in anytime to learn about trading options. 24

25 For More Information (my FREE website; find class notes here) (FREE tastytrade website) (FREE ThinkorSwim(TOS) trading platform (FREE tastyworks trading platform) Questions? me (Craig Forman) at 25

26 Homework Why Trade Options 1. Think about discussion questions on next slide. 2. If you haven t already, go to tastytrade.com and open a free account. 3. If you don t already have one, open a FREE paper trading account on TOS, so that you can practice trading without risking real $$. 4. If interested apply to open up an account on tastyworks, It s FREE. 5. Get familiar with either TOS or tastyworks or both. 6. Watch these tastytrade segments: Options Jive 12/14/15 Theory Behind Trade Small, Trade Often What Else Ya Got 12/16/14 Pundits 26

27 Discussion: Questions to Think About What is your theoretical probability of profit (POP) when buying stock? Is there any way to increase your POP when buying stock? How can you make money in a neutral or down market buying stock? What sort of Return on Capital would you like to see from your portfolio? Is it better to be a passive or active investor? How will a typical 401K plan perform in an up market, a down market? If you own mutual funds, how have they performed relative to the S&P 500? 27