Options and CANSLIM Investing A BEGINNER'S PERSPECTIVE LAURENCE CHAN FREMONT IBD MEETUP GROUP

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1 Options and CANSLIM Investing A BEGINNER'S PERSPECTIVE LAURENCE CHAN FREMONT IBD MEETUP GROUP

2 Options and CANSLIM Investing A Beginner's Perspective Disclaimer My Background Why Option Trading? Why NOT Option Trading? Option Basics Options with CANSLIM Stocks Resources to get started Conclusion

3 Disclaimer I am not a professional trader! My presentation is for education purposes only. Options are NOT suitable for all investors. Using Options may expose you to potentially rapid losses! Any investment decisions you make in your self-directed account is solely your responsibility. BE CAREFUL read, learn, paper trade, consult a professional advisor, understand the risks involve in the trades you do before investing using Options.

4 My Background Have IRA, Non IRA and 401K investment accounts. Previously investing Mutual Funds and financial advisor assisted accounts. Relatively new self directed investor initially with Dividend stocks and ETFs. Stumbled on Option Trading about 15 months ago. Learning from live classes and most importantly new generation online resources and daily practice. Got rid of our financial advisor accounts ~6 months ago, I still have Mutual Funds. Now about 90+% of my broker transactions are with Options. Join IBD last month after one IBD I appreciate the passion that Ken and Ashish have for IBD CANSLIM and the meetup groups. I am learning a lot everyday from IBD interactions. CANSLIM focusing on investing in "best of the best" "making most amount of money on your best stock"... all makes a lot of sense. I am already convinced that I can benefit from IBD CANSLIM. I expect the combination of Options strategies knowledge and IBD CANSLIM methodology will even be more rewarding for my investment life.

5 Why NOT Option Trading Option Trading is not as easy or profitable as you think. Option Trading can be very high risk. Wrong strategy: repeated losses adds up. Its easy to lose lot of money very quickly: 100% if you are buying an Option and you are wrong. Can be Infinite if you are selling a naked Option. Options are not available for all underlying's (stocks). Low volume, less liquid Options can be costly getting in and out you end up not making much money for the extra complexity. Options trading is too complex. There s a lot to knowledge needed. Option trading requires you to learn a different mindset, new set of rules, new set of discipline. It s just too much to learn for the potential reward!!!

6 Why Option Trading Wide array of strategies to profit from bullish, bearish or neutral stock outlook. More predictable outcome: You can pick a strategy that s pure speculation with low probability of profit (POP) or you can pick a strategy that has limited gains but have high POP. Can be more forgiving: with some strategies you don t have to be 100% right to make money. Leveraged: you can make more money with less! Leaving more in cash. New generation online learning reduces learning curve. Ongoing provide valuable best practices with their analytical studies on Option Strategies. New generation Option Trading Tools provides individual investors more powerful platform to be successful with investing with Options. Like CANSLIM, the right set of Option Trading strategy can give you an edge in the Game of probability.

7 Option Basics Illustrated with Dough Dough is a new Option Trading platform from the makers of Thinkorswim and creators of Tastytrade*. Works with TD Ameritrade brokerage accounts. In Beta since early IMHO the most advance Option trading platform available. Web based, ipad, iphone, Android (soon) *Tastytrade = a free online real financial network

8 Intro to Options Dough / Tastytrade Intro to Options videos: Stock Option Basics Basic Option Trades: Calls and Puts

9 Option Basics: Option Contracts, Calls and Puts "An Option is a contract that lets the owner buy or sell an underlying (stock) at the strike price, until expiration 1 contract = rights to 100 shares. Open Interest = The total number of outstanding option contracts on a given series or for a given underlying stock. Since Options have prices, we can buy or sell calls and puts any time before expiration. You can trade Options just like you trade stocks. Calls give the owner the right to buy stock at a set strike price, for a set time. Puts give the owner the right to sell stock at a set strike price for a set time. Buying and Selling Calls and Puts are the building blocks for all Options Strategies.

Demo of Option Basics using Dough: Calls and Puts www.dough.

10 Demo of Option Basics using Dough: Calls and Puts Choosing a contract type: Calls, Puts Choosing a strike price Choosing an expiration date Profit zones Max loss, Max Gain, breakeven point Probability of Profit (POP) Probability of Many Webinar on using Dough and trading Options:

11 Option Basics: ATM, OTM, ITM, DITM You can buy or sell an Option at a set strike price. The strike price can be: "At the Money" = At or near the current price of the stock. "Out of the Money" = Above the current price of the stock for a Call Option, or Below the current price of the stock for a Call Option "In the Money" = Below the current price of the stock for a Call Option. or Above the current price of the stock for a Put Option. Deep In the Money" = Deep below the current price of the stock for a Call Option. or Deep above the current price of the stock for a Put Option. Show ATM, OTM, ITM, DITM using Dough / ThinkorSwim

12 Option Basics: Intrinsic and Extrinsic Value Intrinsic value: The in-the-money portion of an option's premium. Extrinsic value (aka Time value): The part of an option's total price that exceeds its intrinsic value. Intrinsic value is zero for Out of the money options. It is all time value. The further out the expiration, the higher the Time Value. Time value erodes as time passes. It is zero at expiration. Show Extrinsic value using Dough / ThinkorSwim

13 Option Basics: Option value decay (Theta) In the Money Option has less Time Value ( Premium ) than At The Money Option Deep In the Money Option has even less Time Value Option value rate of delay increases more rapidly as it approach expiration

14 Option Basics: Delta "A measure of the rate of change in an option's theoretical value for a oneunit change in the price of the underlying stock" Delta is the option's sensitivity to the underlying price. The delta tells us how much an options price will change with a $1 move in the underlying. At-themoney options have a delta of roughly.50 and therefore will change roughly $.50 for every $1 change - up or down - in the underlying stock." ATM =.50 Delta OTM = <.50 Delta ITM = >.50 Delta DITM = >.70 Delta Puts = negative Delta, Calls = positive Delta Show Delta on Dough / ThinkorSwim

15 Option Basics: Implied Volatility (IV) IV Rank, Volume Implied Volatility is a measure of volatility of the stock with a given period. IV rank simply tells us whether implied volatility is high or low in a specific underlying based on the past year of IV data. Most important thing to know about IV, IV Rank: impacts pricing of Options and what best Option Strategy to use. Volume: per strike and per expiration

16 Options Strategies Buy, Sell a Call Buy, Sell a Put Vertical Spread, Strangle, Iron Condor, Covered Stock, Butterfly, Jade Lizard All Options Strategies are just a combination of Buying and Selling Calls and Puts. Depending on market condition and your market outlook one strategy may give you a better probability of profit vs. another.

17 Options with CANSLIM stocks Some Basic Strategies 1. DITM Call how using Options can be used to reduce the capital needed for initial position and for add on purchases. 2. Buying a Protective Put on a high gain CANSLIM stock position. 3. Using Options to increase your gains as you "leg out" of CAN SLIM stock position. 4. Selling a Put to take in premium.

1. Buying a DITM Call - AAPL Scenario: I am Bullish on AAPL. I don t want to lay out the cash needed to buy the stock = 100 shares = $13028.

18 1. Buying a DITM Call - AAPL Scenario: I am Bullish on AAPL. I don t want to lay out the cash needed to buy the stock = 100 shares = $ Want to defer the right but not obligation to buy AAPL without giving up too much the benefit of owning the stock Buy the 115 Oct 16th expiration Call Option Cost = $17.70 Delta =.8: Every dollar move in the stock should move the Option value by ~0.8. Option behaves almost like stock Theta = -.02 increases near expiration Bid / Ask = 17.50/17.70 Breakeven = $ If stock is above this price this Option makes money. Max loss = $ even if the stock price of AAPL goes down to zero! Cost = 15% of cost of stock. You can utilize the save capital for another investment or leave it in cash. This is a good strategy to consider for CANSLIM stock Add-on s and initial stock buys

19 Options with CANSLIM stocks AMBA A GREAT CANSLIM Stock 300% increase in 10 months (Last August to now)!! Let s look at a few scenarios Options can enhance your position.

2. Buying a protective ATM Put AMBA Scenario: 2 days before earnings. AMBA was bought last Sept at $40. I am worried there would be a big drop in AMBA @earnings.

20 2. Buying a protective ATM Put AMBA Scenario: 2 days before earnings. AMBA was bought last Sept at $40. I am worried there would be a big drop in I don t want to sell it due to large short term capital gain. To protect my position buy a 90 Put expiring in June 19th expiration Cost = $5.20 Bid / Ask = 4.80/5.20 Breakeven = $84.80 Max loss = $520 = cost of Option = ~ 6%!!! If AMBA stays near the same price after earnings I may be able to close the Option not at a full loss. If you don t mind the possible loss this is a reasonable strategy. It is better to add Option Strategy by selling additional premium to finance the protection (e.g. Collar).

21 3. Selling a Call to Leg Out of a position - AMBA Scenario: You have a position in AMBA. You think the stock will drop when earnings is announced. You would like to sell some of your position just before earnings. Instead of selling the stock you can sell a Call Option near or even In The Money in the near week after earnings. If you sell a 88 Call Option, if stock price drops below $88 at expiration you keep the Premium and your existing AMBA position is untouched. If the price of the 88 Call Option is Your net yield is 7.20 /93.54 = ~7.7% if the stock gap down. If stock price is higher than the Call Strike price at expiration and you sold one 88 Call contract 100 shares of AMBA would be called away from your account for $88/share*100 plus you would still keep the entire premium earned = $8800+$720 = 9520 a little more than if you had sold the stock on Jun 1st. Since AMBA gapped up after earnings, it is certain that the Call Option would be exercised and 100 shares of AMBA will be called away from your account. Note: if you sold a 95 Call expiring June 5th instead your net gain would be higher since the stock gap up after earnings. The price of 95 Call on June 1st end of day was $3.00. Since AMBA end price on June 5th is Your Call Option will be exercised and 100 shares would be taken from your account. The net addition to your account would be $ $300 (for the Option sold) = $9800. You are better off NOT selling the Option since there was a big gap up. However you still gain more than if you had sold the stock on 6/1.

4. Selling a Put to take in premium AMBA Scenario: you have AMBA in your portfolio that s doing GREAT. You don t mind owning more shares of the stock if the price drops below a certain strike price.

22 4. Selling a Put to take in premium AMBA Scenario: you have AMBA in your portfolio that s doing GREAT. You don t mind owning more shares of the stock if the price drops below a certain strike price. You can Sell a Put Option. Giving someone the right to put to you the stock at a set price. If the stock goes up or at least stay above the strike price you keep the premium entirely at expiration. If the stock goes down before expiration you can close the Put at a loss, or be assigned the stock at a discount from the strike price at expiration. Since AMBA gapped up after earnings this is a full win. You will not have additional shares assigned to you, you keep the entire Option premium sold.

23 Selling a Put AMBA Profit profile

24 Selling a Put AMBA Profit profile 71% Probability Of Profit (POP) $295 earned if AMBA is above $84.05 breakeven. If AMBA is below $84.05 at expiration you would be assigned the stock. Your cost = $8405 which is a $295 discount had you bought the stock outright vs. selling the Put. P50 % = Days to Probability of 50% profit. It is a Monte Carlos simulation showing you number of days it may take for you to realize 50% of profit ($295/2). Note that you can close the Option at any time before expiration and just take in the current profit. You don t have to wait for expiration!

25 Options with CANSLIM stocks More scenarios Other cost reduction strategies e.g. Covered Calls. Zero Cost protection (Option Collar strategy) Collect upside gains and extra credit without changing risk. Rolling Option to turn around a bad Option trade. Rescuing a stock position that s gone the wrong way. Use Options as Synthetic stock replacement attend next week s Sunnyvale IBD Meetup!!! Min will be presenting. Let me know your scenario and I can try to come up with more examples of how Options can be used vs. simply buying and selling a stock position.

26 Resources to get started Think twice before paying for expensive Options courses. There are plenty of good quality education for free!!! Options Industry Council online and live free classes. Lots of good learning resource: Doughjo Options Basic Classes Dough Blog Many quick videos and blogs on Option Trading click older at the bottom of the page to see more. Tastytrade Thousands of hours archived online education. 7+ hours daily educational shows for every level of investors not only for Options trading. All for free!!! click Show Archives to see more.

Doughjo Option Classes Short You Tube style classes. Email I got from Linda S.

27 Doughjo Option Classes Short You Tube style classes. I got from Linda S. I Meet-up SF last Saturday: I ve learned more from 2 hours of listening to the videos vs reading books and asking friends to explain.

Getting Started Option Trading Account 8 set of quizzes in Dough. On completion you can generate a broker certificate as proof of Option knowledge to your broker.

28 Getting Started Option Trading Account 8 set of quizzes in Dough. On completion you can generate a broker certificate as proof of Option knowledge to your broker. I am pretty sure you can use it for your existing broker vs. just TD Ameritrade as proof of your knowledge to enable your account for Option Trading. Brokers are protecting you from high risk Option trades based on your experience and questions that you answered when you apply for Option Trading. Best Option Trading Level to utilize all the available Options Strategy is Tier 3 Speculative and having a margin account. You can request these during your application or as you gain more experience. Just because you have the right does not mean you have to utilize the more speculative strategies. Having a margin account will reduce the capital requirement for trades. With an account opened via Dough / Tastytrade there is a special commission rate from TD Ameritrade: $1.50 / contract. This privilege can be enabled for existing TD Account after getting a new account via Dough / Tastytrade. If you are transferring a large amount of money from a non TD account (e.g. Rollover IRA transfer), there are ways to get special additional transfer bonuses. Don t just blindly transfer $ over without negotiating a bonus!

29 Conclusion Options trading is a powerful arsenal to add to your investment tool chest. The right Options Strategy can complement CANSLIM investing. Good Option practice and discipline are keys to success. Good education resources and tools makes a big difference for you to ramp up!!! Option trading is not easy but can be very rewarding. There s a LOT to learn. Take your time!!! Learn the disciplines. Follow good practices and come up with rules to apply to CANSLIM stocks and stick by them. Stay SMALL to start. Learn by practicing. Do Post Game Analysis like you would with CANSLIM. Please feel free to contact me re: questions or ideas you have related to using Options for CANSLIM stocks. I am sure there are many expert Option traders around who are more experience than I am. It would be great to share ideas especially with IBD stocks using Options. If you are interested please contact me at mwclccfin@gmail.com

30 Additional material Removed from live presentation due to time

31 Options: Important Key Concepts Option Contract, Calls and Puts, Strike price, Expiration Weekly, Monthly Options Option Pricing and expiration Option Pricing: volatility, supply and demand Option Pricing around earnings Liquidity, Bid/Ask Spread, Open Interest Intrinsic and Extrinsic Value ATM / OTM / ITM / DITM Buying vs. Selling Options Implied Volatility, Historic Volatility The Greeks: Delta, Theta, Gamma Different Option Strategies for low volatility and high volatility environments Look them up on Tastytrade watch the videos, or do a search on OIC or search with Google

32 Options: What to watch out for Don t just look at the max profit, think about what the max loss may be and how you would manage your Option position. A lot can happen before expiration. A winner can become a loser quickly. A loser may be a winner before expiration. Using Options increases complexity of your investments - understand your risks! Stay small to start. May not work well with low Option volume environment - e.g. IPO or newer stocks Understand the impact of Option pricing around binary events such as earnings Just because it's cheap doesn't mean it's good for the investment situation Watch for liquidity, bid/ask spread, open interest. Large spreads between the bid and ask prices will increase your costs. Commission cost

Buying DITM Calls: TASR Initial and Add-ons capital reduction Ken s TASR position. 4/9 TASR retakes 50-DMA. Initial position On 4/16 good volume up day Add-on: purchase price $27.75.

33 Buying DITM Calls: TASR Initial and Add-ons capital reduction Ken s TASR position. 4/9 TASR retakes 50-DMA. Initial position On 4/16 good volume up day Add-on: purchase price $ Let s assume 100 shares purchased. Cost Basis = $ (ignoring commissions) Assume sell date is today price of TASR = $ Unrealized gain = = $383 Return on capital used = 13.8%

TASR Add-ons with Options Buying DITM Call Buy a Call Option Strike: 20 Call expiration Jan 2016. Ask price = $8.50 Reason for buying 20 Call vs. ATM 27 Call: high Delta =.83.

34 TASR Add-ons with Options Buying DITM Call Buy a Call Option Strike: 20 Call expiration Jan Ask price = $8.50 Reason for buying 20 Call vs. ATM 27 Call: high Delta =.83. The Option behaves more like stock vs. ATM (.50 Delta) Call Option. Reason for buying January (or at least a few months out): reduce theta decay impact and more time to be correct. Cost = $850 (ignoring commissions). Compared to buying the stock at $2775 cost basis we have a near 3x reduction in capital used.

35 TASR Add-ons with Options DITM Call Behavior + ROC The 20 Call Jan 16 Option initial Delta value is.83. When the stock goes up/down by $1 the value of the Option goes up/down by ~.83. When the stock price goes up or down in general the Delta also goes up or down in conjunction with the stock movement. Currently the stock price is at $ The Delta of the 20 Call Jan 16 Option has increased to.91 behaving even more like the stock. The current value of the Option is: 12.0/12.6 Bid/Ask Unrealized gain = = $350 (ignoring commissions) = close to $383 with stock purchase. ROC = $350/1200 = 29.16%

36 TASR Add-ons with Options DITM Call Disadvantages Bid / Ask spread can be very wide. It is NOT as easy to get in and out of vs. stocks. Although if you have big gains it doesn t matter as much. You should pick an Option that has lots of Open Interest (many contracts). Need to watch out for Option delay as the months pass. Should sell and rebuy further out if you want to hold on for further gains. Option price can fluctuate with volatility although not as much when Option is in a far month. This strategy may not work well with stocks that have low Option volume e.g. IPO stocks.

37 TASR Selling In addition to buying a DITM Call Option consider also Selling an OTM Put. Puts give the owner the right to sell stock at a set strike price for a set time. Reason: you are convinced that the stock will go up significantly at the Add-on buy point. From your own conviction to add-on to your position you don t mind getting more stocks at the strike price. So why not get a discount by giving the Put Option buyer the right to give you shares at the strike price for the premium paid. Downside you will get more shares than you planned: shares with the Call Option and shares if the stock price goes down and you are Put the stocks. Key: sell an OTM Put that you think the stock will not go down to so that you can realize the full premium at expiration. You can also close the Option before expiration for less gains (or reduce potential Strike price 26 Put Option Bid/Ask is 1.10/1.25. Additional premium earned = $110. Combined with DITM Call Option the gain = = $350 + $110 = $460, 20% more gain than just with stock purchase. Disadvantage: the naked Put Option will need to be cash secured in an IRA account as if you had bought an additional 100 shares of the stock. In a Reg-T account it will contribute to the margin requirement for your account.

TASR Legging Out with Options Selling ITM Call Option Sell 1 ITM 31 Call Option expiring in July Premium earned = $220 If TASR remains above $31 at July expiration full premium is earned at

38 TASR Legging Out with Options Selling ITM Call Option Sell 1 ITM 31 Call Option expiring in July Premium earned = $220 If TASR remains above $31 at July expiration full premium is earned at expiration. 100 shares are Called Away. Ignoring commission and exercise fee, the realized gain assuming Cost Basis $27.75: ( )* = 603 higher than if sold stock outright (gain = $383). If stock tumbles and is below $31 at expiration full premium is earned. The stock remains with you that you can close out or you can sell another Call another month out. Instead of ITM Call Option you can sell an OTM Call Option for less premium with higher chance that you will be keeping the stock at expiration = Covered Call strategy!!!

Learn To Trade Stock Options

Learn To Trade Stock Options Written by: Jason Ramus www.daytradingfearless.com Copyright: 2017 Table of contents: WHAT TO EXPECT FROM THIS MANUAL WHAT IS AN OPTION BASICS OF HOW AN OPTION WORKS RECOMMENDED