5 Secrets To Trading Options Just Like A Professional Trader Jay Soloff Options Portfolio Manager Editor – Options Profit Engine
About Me • 20 years of experience trading options • 8 years of online research & options services • CBOE floor trader and market maker – provided liquidity on the largest options exchange in the world for stocks like Amazon • Hedge fund analyst, options portfolio • MBA, MSIM, Arizona State University • BA Economics, University of Illinois
Lessons From February 5 th Feb 5 th: Short volatility ETPs got crushed but institutions didn’t lose money. So who did?
Options Trading Secret #1 • TRADE YOUR EDGE • There are many different ways to successfully trade options • Options strategies can vary in success based on your personality and trading style • 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 trade management best practices
Options Trading Secret #2 • Use covered calls as often as possible • In most years, you are better off with covered calls (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 100 shares (at least) of a stock you own to help amplify the yield • Example: An actual Apple (AAPL) covered call trade on May 7 th • Purchased 100,000 shares of AAPL at $186 • Sold 1,000 May 18 th 192.5 calls for $0.84 (collecting $84,000)
Covered Calls • Payoff scenarios • Scenario 1: Apple is at $186 on May 18th o Stock gains = $0 o 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 18th o Stock gains = $650,000 ($6.5 move x 100,000 shares) o Option gains = $84,000 o Return = 4% (734,000/18,600,000), monthly = 12%, yearly = 144% • Scenario 3: Apple is at $185.16 on May 18th o Stock loss = $84,000 ($0.86 move x 100,000 shares) o Option gains = $84,000 o Return = 0% o 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 losing money) • Takes a fair amount of capital (not a con if you already own the shares)
Covered Calls (5% OTM)
Options Trading Secret #3 • Use vertical spreads for directional trading • For any short or medium-term directional trade, using vertical spreads is almost always a good idea • Any option that costs more than about $0.50 should be countered with a short option to reduce costs (in most cases) • For long- term options (LEAPS), using naked options is okay because it’s more like a stock purchase (basically trading dividends for leverage) • A vertical spread is when use buy and sell a call or put in the same expiration, but using different strikes
Vertical Spreads: AAPL Example • Apple stock at $185.50 on May 8 th • 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 Calls Call Vertical Spreads
Vertical Spreads – Tesla (TSLA) Naked Puts Put Vertical Spreads
Options Trading Secret #4 • Use straddles or strangles if you think a stock is going to move but don’t have a directional opinion • This happens a lot more than you realize • Doesn’t have to just be an earnings scenario • Can be very good for index/ETF trading as well • Straddle versus strangle depends on the cost of the options • A straddle consists of buying a call and put at the same strike in the same expiration • A strangle consists of buying a call and put at different strikes in the same expiration
Straddle/Strangle Examples • Groupon (GRPN) • May 11th • Visa (V) Strangle • June 2019
Straddle/Strangle • Pros • Don’t have to pick a direction • Can show big returns • Cons • Can be expensive • Lower probability (due to cost)
Strangle (5% OTM) Gains: 100% capped Losses: 35% capped
Option Trading Secret #5 • Six tips to improve your success rate: • Trade liquid options – bid/ask spreads are narrow • Look at the tape – big trades generally come form savvy sources • Don’t trade “ teenies ” • Selling options for credit is high probability, but understand your risks • I’ll discuss this a lot more tomorrow at 1:15! • Never trade binary options • Always understand the underlying product you are trading options on
Summary • Trade your edge • 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 • Straddles and strangles are the best bet for trading movement • Remember the six tips for options trading success
Thank You! Let’s take some questions now. For more information, go to www.OptionsProfitEngine.com
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