Wednesday, February 21, 2018

How to trade options and still have a life...

Option selling allows me to have a life, to get out during the day and not have to watch my monitor all day. I can put on my trades and spend a short amount of time monitoring them.
I've tried day trading. I've tried jumping in and out of the market trying to make $1 on this stock, and 50 cents on that one, only to have my head handed to me on a silver platter. The most I made on a day trade was $800. I bought 100 shares of a stock and was waiting for it to move up. What I didn't know what the market was only open for half the day because it was the day before a holiday and the market closed while I still owned the stock. When the market reopened, the stock opened up $8 and I got out. It could just as easily gone down $8. Pure luck. I don't day trade anymore.
My trading style does not require you to be at the computer all day. You don't jump in and out. You don't have to pay thousands in commissions. You don't even have to be home all day. Nowadays you can take your laptop with you. I will email you when it is time to adjust a trade. You can then adjust the trade on your laptop or when you get home. My broker even allows customers to place trades using cell phones. Don't even need the laptop anymore.
Here is a real life trade we did so you can see how much time it will take you to implement my system.
On October 20, 2008 we did an Iron Condor trade using the RUT (index).
Here is the trade:
  • Sell 1 NOV 660 Call at $1.98
  • Buy 1 NOV 670 Call at $1.58
  • Sell 1 NOV 380 Put at $4.05
  • Buy 1 NOV 370 Put at $3.50
The total credit we received was 95 cents per option. Our maximum loss was $9.05 per option. So our max potential return would be 10.5%.
For 7 days we didn't have to do anything. But the RUT was trending down.
On the 28th we made an adjustment. The RUT was too close to our Puts.
  • Buy 1 NOV 380 Put at 14.43
  • Sell 1 NOV 370 Put at 12.33
Total debit of $2.10
  • Sell 2 NOV 310 Put at 4.53
  • Buy 2 NOV 290 Put at 3.18
Credit of $2.70
Also, our Calls had gone done a lot in value so I decided to buy them back to protect our profit. We could have bought these back and sold calls with a lower strike for more credit but we did not.
  • Buy 1 NOV 660 Call at .18
  • Sell 1 NOV 670 Call at .10
Total debit of .08
Again, several days go by without us having to do anything. In fact, we could have left the trade alone and our Puts would have expired worthless. But on November 5, I exited the trade.
  • Buy 2 NOV 310 Put at .22
  • Sell 2 NOV 290 Put at .12
Total debit of .20
We were in the trade from October 20 until November 5. That's 17 days including weekends. We made a profit of $127. That is more than we originally were going to make. Because of the adjustment, we had to increase our risk. If we had not adjusted, we would have lost around $200. Our adjustment not only saved us from losing money but made us more than we expected.
Members of my newsletter that did this trade, actually had to do three trades:
1. Put on the trade Total time: 10 minutes (until you know what you are doing)
2. Make adjustment on 10/28 Total time: 10 minutes
3. Exit trade on 11/05 Total time: 10 minutes
Here's how it would work.
On 10/20, you would get an email that a new trade is on. You log into the website to see the trade and any notes I have made about how to get in. You go to your broker's website and enter the trade either during the day for immediate fill or after hours to be filled the next morning.
On 10/28, you get an email saying we need to adjust and the exact adjustments to make. You log into your broker's website and enter the adjustment trade.
On 11/05, you get an email to get out of the trade. If you choose to do so you log into your broker's website and enter the trade to exit.
During this trade, RUT went from 546 all the way down to 448. That's an 18% move. For an index, that is HUGE. But members did not worry. We had our protection in place. We knew when we were going to make adjustments. And I was watching the situation for them.

Trade Like The Casino (Be The House!)

Casinos have the odds stacked in their favor. Some people get lucky and win more than they lose, but casinos know that over the long term they will make money. That's their edge. Our edge is the same. As option sellers we can stack the odds in our favor.
I view myself as a casino owner. Well, maybe not the owner because I don't own the stock exchange. But I do play the role of the "house". With close to 80% of all options expiring worthless, option buyers are basically gamblers looking to buy a lottery ticket. And I don't mind selling it to them.
Now keep in mind, that sophisticated traders also use options to protect their other investments but we can sell options to these guys too. That's why I say you can own a casino.
What I like to do is sell out of the money options. There are three types of options when it comes to price. In the Money, At the Money, and Out of the Money. An example will help clarify things.
IBM is at $50. An At the Money Call option would be the one with the $50 strike price because that is where IBM is right now. If IBM expires today, this option would be the closest to making money.
All of the Call options with strike prices above $50 are Out of the Money. So the 55, 60, 65, 75, and 100 are all out of the money. These have no value except for time value (because they have time before they expire).
All of the Call options below $50 are said to be In the Money. Such as the 45, 40, 35, etc. If IBM expired today, the people owning these options would exercise them to buy IBM stock at lower than market price.
In the last lesson, I mention the Iron Condor trade. With the Iron Condor we sell options that are way out of the money. I use my statistics and probability calculations to decide exactly which options I want to sell. Because the options we sell are Out of the Money we receive less premium (money) for selling these options because the risk is less. You can also sell At the Money and In the Money options for a lot more money, but you would also lose a lot more often. Selling Out of the Money is the way to go in most cases.
The people who buy the options I write are gambling that IBM will get to the strike price I sold. If it does, good for them, I will just adjust my trade to protect myself. It if doesn't I keep the entire amount I was paid for the option.
Choosing the right option to sell is the tricky part of option selling. Sell the wrong one and you could lose a bundle. Anyone can understand how options work and start selling them, but knowing which ones to sell and then how to adjust the trade when it goes against you is what I help you with. That's one of the reasons my members pay me: to watch over their trades so they don't have to.
It's great to have someone on your team that knows what he is doing in good and bad markets.
When I first started this, I didn't know what I was doing. I lost over $5,000 on just one trade selling APPL options. If I had someone with me whose shoulder I could watch over or bounce trading ideas off of, I would not have lost so much money.
At first I thought I just got unlucky, so I sold options on FXI, but then lost another $6,000. I lost on other trades too, until I figured out what I was doing wrong. It was a very expensive education. Putting on the trades is the easy part. Adjusting the trade when it is in trouble is where the professional traders separate themselves from the amateurs.

Earn Profit In Any Market!

If we sell a call option (I'll explain what a call option is in this lesson), we win if the stock goes down or sideways, but we can also position our trade to work if the stock goes up only a little.
When you buy a stock you make money only when it goes up. If it goes down you lose money. And if it just sits there like a lazy dog, your money is just tied up, unless you get dividends. Normally if a stock you own moves sideways, it is called "dead money" because not only are you not making money, but you are not making the interest you could be making if the money was invested somewhere else. You lose twice.
But what if you could come out ahead no matter which way the stock went? Interested?
Let's use Google for our example. Let's say Google is at $300. If you think Google is going up you can buy it for $300 a share. Or you can buy a "Call" option for $30. A "Call" option is the option you buy when you think a stock will go up in value. The other type of option is the "Put" option, which goes up in value if the stock goes down.
By buying a Call, we need GOOG to move up. Instead of that let's sell some options.
We can sell a "Put" option. This means we will sell an option to someone who thinks GOOG is going down. Let's sell the put at the $250 strike price for $2. This mean we get $200 for the option and the option will expire worthless if GOOG stays above $250. We think GOOG is going up so we are fine with that. The option will expire in 30 days.
Now if GOOG goes up, or sideways, and even down to $250 we still make money. This type of strategy works great when stocks are trending, meaning they continue to go in the same direction.
But sometimes we don't know which way a stock is going to go. What do we do then?
We can sell Calls and Puts at the same time.
Ok so GOOG is at $300. In 30 days we think GOOG is going to move up and down but we don't know where it will stop exactly. But are pretty sure it is going to be in a $100 range, so either up to $350 or down to $250. We can figure this out by technical analysis or using statistics and probabilities. (I'll show you more in a future lesson.)
So what we do in this case is we sell the $240 Put for $1.50 and we sell the $360 Call for $1.25. So we get a total of $2.75 or $275. Now as long as GOOG stays in between $240 and $360 we profit on both sides. Where it gets tricky is when GOOG breaks out of the range. That is the only way you can get hurt and if that happens you have to either adjust the trade, or exit..
Considering the fact that stocks move in a sideways direction about 75% of the time, this strategy can make you some nice dough on a stock that is just bouncing up and down in its range. I personally wouldn't do this strategy on GOOG because it moves up and down too much, but it is easily done on indexes and ETFs.
In fact, this is one of the strategies we use every month. It's called the Iron Condor. We do basically what I described above but add in some risk and loss management. We don't win every month, but we limit our losses in the months we do lose. In a future lesson I will walk you through an actual Iron Condor trade that I have done.

Is it time to sell or hold?

As an option gets closer to expiration, it losses value. So by selling options, everyday that goes by, makes your trade more profitable. I call it Selling Time.
Have you ever heard the song, Time is On My Side by The Rolling Stones?
If yes, then you know what it feels like to be an option seller. Everyday that goes by, the options I sell lose value.
Let's use an example:
ABC stock is at $80. I sell you an option that expires in 30 days that allows you to buy ABC at $100 ($100 is the strike price of the option.). I charge you $1 for this option.
Now each option controls 100 shares, so this option worth $1 actually costs you $100. The only way you will make money is if ABC goes above $101 ($100 plus the $1 cost of the option) within 30 days. If ABC stays below $101, I make money.
The clock is ticking. Tick tock. Time is on my side. By the way, even though the markets are closed Saturdays, Sundays, and Holidays, options still lose value on those days. So the 30 days until expiration is 30 calendar days, not 30 trading days. Cool huh?
The seller of an option attempts to benefit from the decay of the option's time value. Time value captures the possibility, that the option may increase in value due to the changing value of the underlying stock. This value depends on the time until the expiration date and the volatility of the underlying stock's price.
If the underlying stock's price has not been reached by the strike price of the option, the option is considered to be out of the money. As time passes, if the option remains out of the money, the option gradually loses its time value.
The time value of an option is always positive and declines exponentially with time, reaching zero at the expiration date. Upon expiration, if the option is still out of the money, the option will have no value left, and it will expire worthless. Its holder will simply abandon the option leaving the option seller with the premium. (Premium is jargon for amount paid for the option.)
The entire premium for which I sold the option will be in your account, less commissions and fees. At that time, your position closes out automatically.
The graph above illustrates the accelerated decline of time value as expiration draws near. The graph allows you to see why an option is considered a "wasting asset". Time value erodes as each day passes. The rate at which the time value is eroding increases as the option's expiration nears. Notice that the time value decays the fastest during the last days of the option's life.
Notice how the option loses value fastest in the last 30 days. Because of this, we sell options no longer than 50 days left to expiration. We want our options to expire 50 days from now or sooner. The amount depends on the strategy used. Sometimes we can make 20% in a couple weeks, other times we make 10% in 40 days. It depends on the market and strategy used. But it is best to sell options 60 days or less to expiration to get as high a theta as possible. Theta is jargon for the amount an option loses value each day. So if an option has a theta of 10, that means that option will decline in value $10 each day.
In many cases, we don't even need to wait until the option expires to get out of the trade. Let's say we sell an option for $1, and 21 days later the option is worth 10 cents. We just made 90 cents. We should just buy back the option we sold for 10 cents and move on to the next trade. Even though we can make another 10 cents, it might not be worth it. We might find another trade that we can better use our money for. Getting out also locks in our profit.
So let's say we do a trade that has a maximum return of 12% in 50 days. If after 30 days we are up 9% it might be best to take the money and run. Instead of making another 3% in 20 days, we can probably find another trade that can generate a better return in the same amount of time.

Getting Rich With Options?

What the heck is an option and why do we want to sell these things?

I like to think of an option as a coupon. Let's say you are thinking of buying a watermelon in the not too distant future. And you think that the price of watermelons is going to increase. So you want to lock in today's price.
In this case, I agree to sell you a coupon (option) to buy a watermelon from me for $1.00 which is today's price. But I will charge you 10 cents for this coupon and it expires in 90 days.
Let's say 89 days go by. Your coupon expires tomorrow. If the price of watermelons is more than $1.00 and you still want your watermelon you should use the coupon. If the price of watermelons is below $1, you should forget the coupon and just buy a watermelon at the market price. This will allow the coupon to expire worthless and I would make a nice profit of 10 cents.
But what if you didn't want the watermelon but the price went up to $2. You could either buy the watermelon yourself using the coupon and sell it to someone else for $2, making you a nice 90 cents profit. (Remember you paid 10 cents for the coupon.) Or you can sell the coupon to someone else, for $1, also making you 90 cents. Either way you win, and I lose.
It's the same with stocks. Thousands of stocks, indexes, and ETFs have options available to trade. Options are gaining in popularity because of the immense leverage. In our example, all you have to invest was 10 cents to control $1 worth of watermelon.
Let's look at our example above again. You buy an option for 10 cents, and you later can sell that option for $1 making you 90 cents. That's a 900% return on your money. If instead you had bought a watermelon at $1 and sold it later at $2, you would have made $1, or 100% return. 100% is great, but not compared to 900%.
What about me, the option seller?
In this scenario I would have to sell you a watermelon at $1. If I had one, you could have it. But if I did not have one, I would have to buy one in the market at $2 and sell it to you for $1.
Let's look at the other side. What if prices went down? Imagine prices went down to 50 cents. Your option that you bought for 10 cents would be worthless and you would have a loss of 10 cents. But what if instead, you had bought the watermelon at $1? You would have a 50 cent loss!
As the option seller, I keep the entire 10 cents you paid me.
As you can see, options are cheaper to invest in, they limit your loss, and they also provide leverage for higher percentage of profits.
Sounds like the perfect investment right? Let's go out and buy a bunch of these suckers.
In our example prices went way up to $2 and way down to 50 cents. But what if prices didn't move much at all? What if the price stayed at $1? Then your option would expire and you would lose your 10 cents.
That would be the perfect scenario for the option seller. And guess what? This is what happens most of the time. In the news, you hear about the wild fluctuations of the markets. You hear about the stock that went from $10 to $100 or the ones that went the other way from $100 to $0. But these are the few exceptions amongst the thousands of stocks that trade everyday. The majority of stocks move very little at all. Sure they move up, but then they also move down. Overall the move is measured in small percentages. If a stock moves 10% in a year it's a big deal.
Options need big moves to make money. That's why according to industry sources, 80% of all options expire worthless!
In the following lessons, we will cover
Lesson 2 - How options are a decaying asset. As an option gets closer to expiration, it losses value. So by selling options, everyday that goes by, works in your favor. I call it Selling Time.
Lesson 3 - Trades that work if the stock goes up, down or sideways. If we sell a call option (I'll explain what a call option is in this lesson), we make money if the stock goes down or sideways, but we can also position our trade to make money if the stock goes up only a little. Making money three ways is much better than buying a stock and praying it goes up.
Lesson 4 - Your Own Casino. Casinos have the odds stacked in their favor. Some people get lucky and win more than they lose, but casinos know that over the long term they will make money. That's their edge. Our edge is the same. As option sellers we can stack the odds in our favor. How does 80% probability of success sound to you? I'll show you how.
Lesson 5 - Not being glued to the screen all day. This is not daytrading. I don't have to watch my monitor all day. You can put on my trades and spend about 15 minutes monitoring them a day.
Lesson 6 - No guesswork. You don't need to guess which way a stock will move, or use fancy technical or fundamental analysis. Don't need to know how to read the MACD or Stochastic or other indicators. I use simple statistics to figure my probabilities and can manage my positions using concrete math, not voodoo or guesswork.
Lesson 7 - Limiting your risk. In this lesson I will show you how to limit the risk on every option trade you do. I hate losing money. So every trade I put on has limited risk. I know what my maximum loss can be on every trade, and if the trade goes against me, I make adjustments to my position to protect myself. Even with an 80% probability of success, you will still have 2 out of 10 trades go against you. I do not believe in putting on a trade and not protecting it.
Lesson 8 - Sure, steady, reliable results. In this lesson I will give you examples of trades that make 10% in a month. It's possible and there are people, like me, doing it each and every month. You can either leave your gains in the account and let it grow or withdraw it to live on.
Lesson 9 - We couldn't do this a couple years ago. Up until recently only market makers and very large traders could do these trades. The reason: commissions. As soon as three to four years ago you would have to pay $30-$40 to buy or sell a single option. Now you can to the same trade for less than $1. Online trading and lower commissions have allowed regular people like you and me the same opportunities as money managers.

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