Options: How About Wealth & Income?

Transcription

1 Options: How About Wealth & Income?

2 Disclaimer U.S. GOVERNMENT REQUIRED DISCLAIMER COMMODITY FUTURES TRADING COMMISSION FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REW ARDS, BUT ALS O LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE W ILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON T TRADE W ITH MONEY YOU CAN T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION I S BEING MADE THAT ANY ACCOUNT W ILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED IN THIS TRAINING. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS H AVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESU LTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN E XECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF AN Y, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PRO GRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED W ITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT W ILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOW N. ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY. TRADERS SHOULD PAPER TRADE ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

3 Options: The Good, The Bad & The Ugly The Good o Leverage o Fast Gains o Index ETF best trading entity to learn how to options The Bad o More Variables to manage (Greeks, Volatility and more) o Increased Management Time o Fast Loses The Ugly o 100% Loss of a known amount o Complex Strategies (High Probability of losing money) Copyright Active Trend Trading

4 Option Basics What are Options? o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Why do people trade options? Perceived benefit of Leverage & Variable Strategies New Vocabulary More Variables than just trading stocks (can work for or against the trader) Copyright Active Trend Trading

5 Resources Chicago Board of Options Exchange Think or Swim Training Books: The Option Advisor, Author: Bernie Schaeffer Options as a Strategic Investment, Author: Lawrence G. McMillan The Option Course, Author: George A. Fontanills Copyright Active Trend Trading

6 Vocabulary Option Basics Contract: Typically controls 100 shares (Mini s Control 10 shares) Obligation: Typically the responsibility of the seller Rights: Typically the benefit to the buyer Premium: Price of the Option Greeks: Variables used in the Black Scholes Option Model Implied Volatility: Established based on various inputs including Market Volatility Expiration Month: Month the Option will expire typically on the Friday after the 3 rd Thursday (Settles on Saturday for non-european Options) Strike Price: Contract Price of underlying stock/etf Open Interest: Contracts currently open Bid/Ask Spread: The price difference between the Bid & Ask Intrinsic Value: The positive price difference between Strike and Stock $ Extrinsic Value: Time Value (influenced by Vega & Gamma) Exercise: Put to me or Called away Copyright Active Trend Trading

7 Vocabulary (Cont) Option Basics Theoretical Value: Theoretical Price of an Option determined by an option calculator Time Decay: Amount price goes everyday (Theta) At the Money (ATM): Price of option strike that is closest to the price of the stock/etf In the Money (ITM): Price of option strike that has Intrinsic Value Out of the Money (OTM): Price of option strike outside the parameters of the trade Volatility Inflation: Volatility is growing due to VIX or other events like earnings Volatility Crunch: Volatility deflation due to falling VIX or event passes Leaps: Options that expire in January each year and are more that 6 months in the future Option Chains: List of option strike prices and months presented in a table Directional: Option trades placed in the direction of the trend Spreads: Credit or Debit two option trade with limited upside and fixed downside Condors: Exotic type option trade selling premium with a very low Delta Butterflies: Exotic type option trade made up of three separate options of the same type Copyright Active Trend Trading

8 What are Options? Option Basics o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Types: Puts & Calls, American, European, Mini s, Standard & more Time: Weekly, Monthly, Leaps Variables: Greeks (Delta, Gamma, Theta, Vega, Rho) Model Options Calculators: Black Scholes, Binomial, Brownian & Others Copyright Active Trend Trading

9 Option Basics Variables: Greeks (Delta, Gamma, Theta, Vega, Rho) - Delta: How much price increases or decrease per dollar movement in the underlying. Also tells us how many equivalent shares of stock one contract actually approximates. 50 delta is approximately like 50 shares of the stock - Theta: How much value the options looses every day this is a complex equation and not straight line decay - Vega: Price variation due to Volatility - Gamma: How much Delta Changes per dollar increase or decrease in movement of the underlying stock/etf - Rho: Associated with interest rates Model Options Calculators: Black Scholes, Binomial, Brownian & Others Copyright Active Trend Trading

10 Option Basics Call Options: Rights & Obligations Long: Expect Stock Price to go up Rights & Obligation: Buyer has the right to buy the stock/etf at the agreed on price. Seller is obligated to sell stock/etf at the agree on Price Short: Expect Stock Price to go down or stay at or slightly above current levels Rights & Obligation: Buyer has the right to buy the stock/etf at the agreed on price. Seller is obligated to sell stock/etf at the agree on Price The Catch: All Options are made up of both Intrinsic and Extrinsic Value If an option has high Extrinsic Value due to High Implied Volatility I want to be a seller and not a buyer because even if the price of the stock goes up, the value of my option can go down! Copyright Active Trend Trading

11 Option Basics Put Options: Rights & Obligations Long: Expect Stock Price to go down Rights & Obligation: Buyer has the right to sell the stock/etf at the agreed on price. Seller is obligated to buy stock/etf at the agree on Price Short: Expect Stock Price to go up or stay at or slightly below current levels Rights & Obligation: Buyer has the right to sell the stock/etf at the agreed on price. Seller is obligated to buy stock/etf at the agreed on Price Copyright Active Trend Trading

12 Intrinsic + Extrinsic = Option Price Intrinsic: Price of the stock/etf less the Strike Price Extrinsic: Primarily Time Value impacted by Implied Volatility & Time Decay If a stock s price is currently at $75 Intrinsic Value of a $70 strike price would equal (75-70) = $5.00 If the $70 option is selling for $7.50 the Extrinsic Value would be: Extrinsic Value = Price of the option Intrinsic Value (7.50 5) = $2.50 If the stock stays at $75 until expiration you loose $2.50 on this trade. Copyright Active Trend Trading

13 Fatal Mistakes 1. Trying to trade options before having a strong System Foundation Develop a clear & simple option strategy Buying too far Out of the Money (too much Extrinsic Value) Not buying enough time Selling too much time and too little volatility (can be an emotional roller coaster) Buying too much Volatility (earnings are especially risky to buy premium) Not knowing that option market can open up to minutes after the regular market Risky for Market orders Not knowing that volatility is inflated at the beginning of the day Chasing the Bid/Ask Place your order at the Mark and it gets filled or doesn t Copyright Active Trend Trading

14 Break Copyright Active Trend Trading

15 How to Trade Weekly Options for Wealth & Income 1. Long Call &/or Put LEAPS in an Index ETF or Strong Stock 2. Sell Weekly Index ETF s/stock Calls and/or Puts against the long LEAPS But Which Weekly Options? What Day? Fire & Forget Approach - Use Weekly Option Chain to determine which options will do 2 things - First Pay For the Long Positions during the life of the LEAPS x 2 - Use Intraday, Daily and Weekly Charts to determine which Weekly to sell - Preferably sell on Thursday or Friday Unless the Technicals are not in your favor - Sell with the technical in your favor! But Is this Strategy Worth Your Effort? Copyright Active Trend Trading

16 How to Trade Weekly Options for Wealth & Income Some of the plusses 1. Weekly trades that generates cash in a challenging market 2. Develops Patience & Persistence 3. Develops Technical Skills 4. Target Return is 100% over the life of the long option (the LEAPs) 5. Less Capital required than buying the Stock/ETF and writing covered calls Greater Leverage Challenges 1. The underlying option (LEAPs) may expire worthless! Change in Mind Set 2. Trade goes against you during the week 3. Short option assigned (Over 4 years I ve had three options exercised) 4. Timing (Target Shoot) Copyright Active Trend Trading

17 How to Trade Weekly Options For Wealth & Income Generation IWM Example Average Cash per Week = $40.92 About 5.5% per Week. Approximately $168 per Month Note that the underlying is almost worthless, but I can sell weekly s 15 more times! Scalable this is just 1 Contract

18 How to Trade Weekly Options For Wealth & Income Generation SPY Example Average Cash per Week = $ About 2.9% per Week. Approximately $506 per Month Scalable this is just 2 Contracts

19 How to Trade Weekly Options For Wealth & Income Generation TSLA Example Average Cash per Week = $ About 2.9% per Week. Approximately $ per Month Scalable this is just 2 Contracts

20 How to Set Up the Shorts Copyright Active Trend Trading

21 How to Setup the Trade 1. Choose a very liquid Stock or ETF that has both LEAPs & Weekly Options Index ETF s are a good starting vehicle because there are no EARNINGS!!! 2. Buy an ATM or Slightly OTM LEAP or long term option out 6 months or longer Variation: Buy a significantly OTM LEAP, but requires more margin 3. Find a weekly Option that is either OTM, ATM or ITM OTM if a stock/etf is Trending in favor of the long LEAPs ATM & ITM if stock/etf is Trending or Range bound with a bias against the long LEAPs 4. Place the Order When filled immediately place a GTC order to buy back at The buy back can be adjusted if an ATM or ITM position will more than cover the desired weekly premium Copyright Active Trend Trading

22 SPY Example Closed Friday 10-3 at Buy an ATM Jan C Current Quote: x Place order to buy at a limit of Determine how much premium needed per week to pay for position by Expiration on Jan 20 th 2017 How Many Weeks are there until expiration: Go to the Option Tables 476 Calendar Days until expiration 476/7 = 68 Weeks Cost of LEAPs/Number of Weeks Until Expiration 15.55/68 = $0.22/week will pay for the underlying To Double Multiply by 2 = $0.44 per week 3. Determine if Objective is doable & reasonable with Weekly Options available Copyright Active Trend Trading

23 SPY Example Closed Friday 10-3 at Determine if Objective is doable with Weekly Options available The ATM Oct2 SPY 195C = 2.01 The OTM Oct2 SPY 198.5C =.53 Criteria Met!!! Note the Low Volatility! But is it time to sell the weekly and establish the Spread? Your Choice, but. Copyright Active Trend Trading

24 SPY Example Closed Friday 10-3 at 195 But is it time to sell the weekly and establish the Spread? Your Choice, but. SPY 1 Hour Intraday 8/25 10/02/ Th Fr Th Fr Th Fr Th Fr Th Fr Th Fr Copyright Active Trend Trading

25 How to Trade Weekly Options For Wealth & Income Generation Things to consider: 1. This approach works best when TSI is close to Would like to trade on Thursday or Friday but.sometimes the signals are not there 3. These setups can also be used for directional option trades 4. Stocks should be very liquid with great Weekly Options 5. Weekly options are different than monthly options and require a slightly different mindset (This isn t the old monthly covered call strategy!) Copyright Active Trend Trading

26 How to Trade Weekly Options For Wealth & Income Generation Questions? Copyright Active Trend Trading

27 Clarify, Simplify & Multiply This has been the Motto of Active Trend Trading from the beginning! We continuously work to Clarify & Simplify through refinements to the system to make it objective and easy to both learn and use. The purpose of all presentations is to provide our fellow Active Trend Trader Members a jump start to accelerate progress up the Learning Curve. We welcome suggestions on how to improve the learning process! Trade Wisely & Profitably, Dennis W. Wilborn Founder & Lead Technical Analyst

28 ATTS Objectives: Provide a clear & simple trading systems for busy people! So they can become Wise, Profitable and Winning Traders! The ATTS Motto: Clarify, Simplify & Multiply 1. Active Trend Trading Membership: $49.99 per month but you save 40% limit time: $ Early Warning Alerts for Index ETFs: Yearly membership $899 limited time: $349.00/Year Save more than 50% Thank you for viewing this Tech Tip! Find out more about Active Trend Trading at: