Transcription
5 Secrets To Trading OptionsJust Like A Professional TraderJay SoloffOptions Portfolio ManagerEditor – Options Profit Engine, 30 Day Dividends
To Get A Copy Of This PresentationTextJayTo213-516-9803In less than a minute you should receive a response with a link to thepresentation that you can read later, download, and save. Also, if I see anyinteresting trades I want to share with you, I’ll send them out. 4-6 textmessages per month, Msg. & Data rates apply.
About Me 20 years of experience trading options 8 years of online research & options services CBOE floor trader and market maker – provided liquidity on thelargest options exchange in the world for stocks like Amazon Hedge fund analyst, options portfolio MBA, MSIM, Arizona State University BA Economics, University of Illinois
Options Trading Online Resources Marketchameleon.com (analytics, screener) Cmlviz.com (backtesting) Cboe.com (videos, education) Optionseducation.org (education) Finviz.com (screener, charts) Vixcentral.com (volatility)
What Does This Show?
How Market Returns Really Look1975-2011 time period (looks about the same if you go backfurther or extend to today)
So What Does It nsteadof-normal/- Why is the market like this?- Why do many market risk models still usethe normal distribution?- What can we do to take actual market riskinto account?- This is where options trading comes in
Options Trading Secret #1 Prioritize Risk Management Follow the risk management advice you’re about to receive in thispresentation regardless of your risk tolerance level Utilize standard risk management practices (trading plan, entry/exit points,positions sizing, etc.) Risk management doesn’t have to be one size fits all – you can alter your planbased on the type of trades you’re using or the market environment At least consider using a portfolio hedge at all times, but particular if themacro environment is uncertain
Options Trading Secret #2 TRADE YOUR EDGE There are many different ways to successfully trade options Options strategies can vary in success based on your personality and tradingstyle I’m a volatility trader (usually a seller) that likes self-hedged trades (like iron condors) I get into trouble when I start to lean towards heavily directional trades If you find something that works for you, it can’t be the “wrong” strategy That doesn’t mean you should ignore basic risk management and trademanagement best practices
To Get A Copy Of This PresentationTextJayTo213-516-9803
Options Trading Secret #3 Use covered calls as often as possible In most years, you are better off with covered calls versus only long stocks(plenty of data to support this, not to mention – just look at block trades) Covered calls are very easy and take very little time to implement Perfect complement to dividend collection A covered call is when you write a call versus every 100 shares of astock you own to help amplify the yield Example: An actual Apple (AAPL) covered call trade on May 7th Purchased 100,000 shares of AAPL at 186 Sold 1,000 May 18th 192.5 calls for 0.84 (collecting 84,000)
Covered Calls Payoff scenarios Scenario 1: Apple is at 186 on May 18tho Stock gains 0o Option gains 84,000 (10 days)o Return 0.5% (84,000/18,600,000), monthly 1.5%, yearly 18% Scenario 2: Apple is at 192.5 or higher on May 18tho Stock gains 650,000 ( 6.5 move x 100,000 shares)o Option gains 84,000o Return 4% (734,000/18,600,000), monthly 12%, yearly 144% Scenario 3: Apple is at 185.16 on May 18thooooStock loss 84,000 ( 0.86 move x 100,000 shares)Option gains 84,000Return 0%Any lower price would result in a loss
Covered Calls Pros Works in almost any environment Easy to do Consistent income generation (even more so than dividends) Cons Can cap earnings in a high growth environment (note that you aren’t losingmoney) Takes a fair amount of capital (not a con if you already own the shares)
Covered Calls Results (5% OTM/45 Delta)5 years back30 day holding periodHeld to expiration
Options Trading Secret #4 Use long vertical spreads for directional trading For any short or medium-term directional trade, using vertical spreads isalmost always a good idea My rule of thumb is any option that costs more than about 0.75 should becountered with a short option to reduce costs For long-term options (LEAPS), using naked options is okay because it’s morelike a stock purchase (basically trading dividends for leverage) A vertical spread is simply buying and selling a call or put in the sameexpiration, but using different strikes. Long (debit) verticals are whenyou are buying the closer to the money options and selling the fartherout ones
Vertical Spreads: AAPL Example Apple stock at 185.50 on May 8th Bought 1,000 September 195 calls for 5.52 Sold 1,000 September 200 calls for 3.93 Total cost is 1.59 Breakeven point is 196.59 Max profit is 5 (gap between strikes) - 1.59 cost 3.41 That’s 341,000 or 214% gains Max loss is 159,000 Conversely if you bought the 195 calls for 5.52 Breakeven is 200.52 Max loss is 552,000
Vertical Spreads Pros Reduced risk (due to lower premium costs) Higher returns (lower costs means bigger percentage gains) Cons Can cap gains
Vertical Spreads – Facebook (FB)Naked CallsCall Vertical Spreads
Vertical Spreads – Tesla (TSLA)Naked PutsPut Vertical Spreads
Options Trading Secret #5 Use short vertical spreads for credit trades A short vertical spread is when you sell the closer to the money option andbuy the farther out one to cap risk – the exact opposite of the long verticaltrade. This a credit trade where you collect premium. However, rather than directional in nature, short verticals can be used to sellvolatility Does have some directional bias, but far higher probability than debit verticals Eventually, as you get comfortable with selling vertical spreads, you canstart using iron condors (which is simply selling a put vertical spread andcall vertical spread at the same time) I mix short iron condors and short vertical spreads in my trading service, with theoccasional long trade
Short Vertical Spread Example IWM at 165 on July 5th Sold 19,250 July 20th 163 puts for 1.42 Bought 19,250 July 20th 155 puts for 0.31 Total premium collected 1.11 Breakeven point is 161.89 Max profit is premium collected or 1.11 ( 2.1 million) Occurs if IWM is above 163 on July 20th expiration Max loss is 8 (gap between spreads) – credit received ( 1.11) 6.89 Max loss is 13.2 million IWM would have to drop 6% in two weeks Don’t forget that just sitting still will do the trick (which is basically what happened) The long strike is key as it reduces risk and margin requirement
Short (Credit) Vertical Spreads Pros Can be a good way to trade volatility with a slight directional bias Works in a sideways/neutral market Depending on how far out of the money you go, can be very high probability Cons Requires a margin account (usually a minimum of 2,000) Max loss is much greater than max gain (trade off due to high probability)
Short Vertical Spread Results (30 delta)30 days to expirationHeld to expiration3 years backRemember, some directional bias is needed
Bonus Trading Tips! Six tips to improve your success rate: Trade liquid options – bid/ask spreads are narrow Look at the tape – big trades (block trades) generally come form savvy sources Option Sentiment (calls versus puts) can be a useful directional indicator Check out Marketchameleon.com Timing a direction is always tough but sentiment can help you determine when a changemay be coming Don’t trade “teenies” Selling options for credit is high probability, but understand your risks Remember, trade your edge! Always understand the underlying product you are trading options on
Summary Proper risk management makes all the difference in options trading Trade your edge There are many ways to make money trading options, but always try to focuson what you do best Use covered calls whenever possible Use vertical spreads for directional trades Short vertical spreads are a good way to collect a credit Remember the six tips for options trading success
Q&ATo Get a Copy of This Presentation1. Text the word Jay to213-516-9803.2. You’ll get a response with the presentation link.3. I’ll also send a couple of updates on options trades I’mwatching.
There are many ways to make money trading options, but always try to focus on what you do best Use covered calls whenever possible Use vertical spreads for directional trades Short vertical spreads are a good way to collect a credit Remember the six tips for options trading success
