InvestMacro

By Ino.com

Controlling portfolio beta, which measures overall systemic risk of a portfolio compared to the market, on the whole, is essential as these markets continue to display bouts of extreme volatility. Containing volatility while generating superior returns relative to the market is the goal with an options-based portfolio. Mitigating risk within a portfolio can be achieved via a blended options-based approach where cash is held in conjunction with stock positions and an options component. Options alone cannot be the sole driver of portfolio appreciation; however, options can play a critical component in the overall portfolio construction to control risk and volatility.

Generating consistent monthly income while defining risk, leveraging a minimal amount of capital, and maximizing returns is the core of the options-based portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. Over the past 24 months (April 2020 – March 2022), 419 trades were placed and closed. An options win rate of 97% was achieved with an average ROI per trade of 4.4% and an overall option premium capture of 50% while outperforming the Dow Jones throughout these two years. The performance of an options-based portfolio demonstrates the durability and resiliency of options trading to drive portfolio results with substantially less risk. The options-based approach attempts to circumvent market drawdowns and generated a return of 62.2% relative to the Dow Jones’ 58.2% (Figures 1, 2, and 3).

Figure 1 – Overall option metrics from May 2020 to March 2022 available via a Trade notification service


Figure 2 – Overall options-based performance compared to the Dow Jones from April 2020 to March 2022

Figure 3 – Overall option metrics from May 2020 to March 2022

Results

Compared to the broader Dow Jones index, the blended options, long equity, and cash portfolio have outperformed this index overall and outperformed during negative return months. In even the most bullish scenario, post-pandemic lows where the markets erased all the declines and blew past previous highs via V-shaped recovery, this approach has outperformed the Dow Jones returns through March 2022 with substantially less risk (Figure 2).

Overall, from May 2020 through March 2022, 419 trades were placed and closed. As a result, an options win rate of 97% was achieved with an average ROI per trade of 4.4% and an overall option premium capture of 50% while outperforming the broader market (Figures 4 and 5).

Figure 4 – ROI per trade over the past 419 trades

Figure 5 – Percent premium capture per trade over the last 419 trades

Consistent Income Despite Market Declines

September 2020, October 2020, January 2021, September 2021, and February 2022 declines provide a great opportunity to demonstrate the durability and resiliency of an options-based portfolio. Positive returns for the options portion of the portfolio were achieved in all of these negative months.

The positive options returns were in sharp contrast to the negative returns for the overall market during these negative months. Generating consistent income without guessing which way the market will move with the probability of success in your favor is the key to options trading. However, the January 2022 market declines did result in option losses.

10 Rules for an Agile Options Strategy

Throughout the past 24 months of the post-pandemic rebound, a disciplined approach to an agile options-based portfolio has been essential to navigate pockets of volatility and circumvent market declines. A slew of protective measures should be deployed if options are used to drive portfolio results. When selling options and managing an options-based portfolio, the following guidelines are essential:

• 1. Trade across a wide array of uncorrelated tickers

• 2. Maximize sector diversity

• 3. Spread option contracts over various expiration dates

• 4. Sell options in high implied volatility environments

• 5. Manage winning trades

• 6. Use defined-risk trades

• 7. Maintains a ~50% cash level

• 8. Maximize the number of trades so the probabilities play out to the expected outcomes

• 9. Place probability of success in your favor (delta)

10. Appropriate position sizing/trade allocation

Conclusion

Controlling portfolio beta to reduce systemic risk in relation to the broader market while generating superior returns can be achieved via a blended options-based approach via cash held in conjunction with long equity and an options component.

An option-based strategy has been key in circumventing market declines and reinforce why appropriate risk management is essential. An options-based approach provides a margin of safety while mitigating the impacts of drastic market moves and containing portfolio volatility. In the face of volatility, consistent monthly income has been generated while outpacing the Dow Jones. Moreover, a cash, long equity, and options hybrid portfolio demonstrates its durability even when compared to the most bullish conditions post-pandemic bull market.

Following the 10 rules in options trading has generated positive returns in all market conditions for the options segment of the portfolio over the past 24 months, with the exception of January 2022. Moreover, the positive options returns were in sharp contrast to the negative returns for the overall market in down months. This demonstrates the durability and resiliency of an options-based portfolio to outperform during pockets of market turbulence. To this end, portfolio agility is required to mitigate uncertainty and volatility.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital, and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected]. The author holds shares of AAPL, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, CRM, DIA, DIS, FB, FDX, FXI, GOOGL, GS, HD, HON, INTC, IWM, JPM, MA, MS, MSFT, NKE, NVDA, PYPL, QQQ, SBUX, SPY, SQ, TMO, TWTR, UNH, V and WMT.

By Ino.com – See our Trader Blog, INO TV Free & Market Analysis Alerts

Source: Navigating Volatility – Risk-Controlled Portfolio

By Ino.com

– Cash is a critical component to any portfolio strategy to reduce volatility, seize opportunities, lower cost basis of a long position and avoid full exposure to the equity markets. Controlling portfolio volatility is essential as the broader markets continue to undergo a sea change from high beta/richly valued technology stocks and into value names. The past four-month stretch from September 2021 – January 2022 serves as a prime example of extreme market volatility. The markets pushed to new all-time highs early in September 2021, then suffered a significant selloff in the same month where the Dow Jones was down as much as 6%. October 2021 saw a bounce back into positive territory with new all-time highs set. Then the November/December 2021 stretch saw a sharp dichotomy between the tech-heavy Nasdaq and the Dow Jones, with these indices experiencing relentless selling and heavy buying, respectively.

Amid the bifurcated market, entire sectors have been decimated, and some companies have lost swaths of market capitalizations. Even many well-established, profitable large-cap companies have seen their market capitalizations reduced in a meaningful way. Entire sectors of the market have been wiped out, specifically the fintech space and some pure stay-at-home plays. Given the market backdrop, the cash portion of the portfolio can come in handy to seize unique opportunities to bolster a portfolio. In addition to cash, a conservative options strategy can offer additional mitigation against these pockets of extreme volatility.

A Holistic Approach

Proper portfolio construction and optimal risk management is essential when engaging in options trading to drive portfolio results (Figure 1). Managing a long-term successful options-based portfolio requires a risk tolerance balance between cash, long equity, and options. Ideally, an options-based portfolio should be broken out into the below structure (This is an example breakdown, and percentages can be modified):

• 1. ~50% Cash Position – maintaining ample liquidity provides the ability to rapidly adjust when faced with extreme market conditions such as COVID-19.

2. ~30% Long Equity – exposure to long equity via broad-based ETFs (i.e., DIA, QQQ, SPY, and IWM) allows participation in market movements in areas that are not covered by cash or options. This enables broad market coverage, and it’s recommended to reinvest all dividend payouts to lower cost basis over time.

3. ~20% Options – options provide outsized gains; thus, it’s not necessary to overleverage one’s portfolio to options trading. This is especially important as markets decline and trades become challenged. Balancing option losses with option wins, long equity, and cash is essential.

Figure 1 – Portfolio performance comparison between an options-based portfolio approach and the Dow Jones. The performance data over a 21-month period of April 2020 – December 2021 is overlaid. These data demonstrate consistent portfolio appreciation, largely matching and/or outpacing the broader market returns. These results were achieved with a target portfolio mix of ~50% cash, ~30% long equity, and ~20% options in an effort to reduce portfolio risk overall beta. The target portfolio mix is dynamic, may change at any time, and is contingent on market conditions. Options trading services are available via – Trade Notification Service

Options-Based Risk Mitigation

Risk mitigation can be achieved via a blended options-based approach where the portfolio is broken out into three components. Cash, long equity exposure, and an options component are the three pillars of an options-based portfolio strategy. Options alone cannot be the sole driver of portfolio appreciation; however, options can play a critical component in the overall portfolio construction to mitigate volatility and mitigate risk.

In addition to cash, an options component can allow one to define risk, leverage a minimal amount of capital and maximize return on investment. These elements are at the core of an options-based portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate income in a high probability manner in various market scenarios. An options-based portfolio provides durability and resiliency in the face of market volatility with substantially less risk.

The Cash Component

Holding ~50% cash as a protective measure is essential when faced with unpredictable outlier situations such as COVID-19. A cash position this high is possible because options are a leveraged vehicle; thus, minimal amounts of capital can be deployed to generate outsized gains with predictable outcomes. Even deploying all the protective measures outlined above won’t offer the protection required during a black swan event. During these black swan market meltdowns, all sectors and stocks homogenize and naturally correlate together in a downward spiral. Cash is the safest way to immunize a portfolio from these types of market crashes. This cash position also provides optionality to go long stock in high-quality names when faced with extreme selloffs.

The Options Component

Options are great for defining risk, leveraging a minimal amount of capital, and maximizing return on investment (Figure 2). Options need to be deployed in a responsible manner, via always risk-defining trades and keeping portfolio allocation reasonable. A disciplined approach to an agile options-based portfolio is essential to navigate pockets of volatility and circumvent market declines. A slew of protective measures should be deployed if options are used to drive portfolio results. When selling options and managing an options-based portfolio, the following guidelines are essential.

Figure 2 – May 2020 – January 2022 Return on Investment (ROI) per trade. All options trades are risk-defined in order to leverage a minimal amount of capital to maximize ROI. The ROI target per trade is 5-15% at a delta of ~0.15 or ~85% probability of winning the trade at expiration. Options trades are spread across a wide array of tickers to maximize sector diversity across uncorrelated stocks while maximizing the number of trades. Options trading services are available via – Trade Notification Service

Conclusion

Controlling portfolio volatility is essential as markets and whole sectors are whipsawed. The recent September 2021 – January 2022 stretch is a prime example and reinforces why appropriate risk management is essential. An options-based approach provides a margin of safety while circumventing the impacts of drastic market moves as well as containing portfolio volatility. This is achieved via a blend of long equity, cash, and options with long-term target weighting of 20%, 50%, and 30%, respectively. An options, cash, and long equity hybrid portfolio provide durability and resiliency during pockets of market turbulence. A disciplined approach to an agile options-based portfolio is essential via an array of protective measures that are required to be deployed if options are used to drive portfolio results.

Noah Kiedrowski
INO.com Contributor

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected]. The author holds shares of AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY, and USO.

By Ino.com – See our Trader Blog, INO TV Free & Market Analysis Alerts

Source: Extreme Volatility: Options-Based Portfolio Approach

By Ino.com

Introduction

Controlling portfolio volatility is essential as the broader markets continue to break record high after record high along with violent pullbacks. The past three-month stretch of September-November was a prime example as the markets pushed to new all-time highs early in September then suffered a significant sell-off in the same month where the Dow Jones was down as much as 6%. October saw a bounce back into positive territory with new all-time highs set. Then November saw a dichotomy between the Nasdaq continuing to break out to new highs while the Dow Jones experienced significant weakness.

Amid this mixed market and broader index bifurcation, entire sectors were decimated. The payment space was heavily impacted with PayPal (PYPL) and Visa (V) taking huge market capitalization reductions by 37% and 21%, respectively. Quarterly reports have been detrimental for companies that report slight misses or in-line numbers with poor guidance. Disney (DIS) and International Business Machines Corporation (IBM) saw their stocks plummet 24% and 20%, respectively from their 52-week highs. An options-based portfolio can offer mitigation against these pockets of extreme volatility while generating consistent and smoother returns.

Options-Based Risk Mitigation

Risk mitigation can be achieved via a blended options-based approach where the portfolio is broken out into three components. Cash, long equity exposure, and an options component are the three pillars of an options-based portfolio strategy. Options alone cannot be the sole driver of portfolio appreciation. However, options can play a critical component in the overall portfolio construction to control volatility and mitigate risk.

Generating consistent results while defining risk, leveraging a minimal amount of capital, and maximizing return on investment is the core of an options-based portfolio strategy. Options can enable smooth and consistent portfolio appreciation without guessing which way the market will move. Options allow one to generate consistent monthly income in a high probability manner in various market scenarios. An options-based portfolio provides durability and resiliency in the face of market volatility with substantially less risk.

The Options Component

Options are great for defining risk, leveraging a minimal amount of capital, and maximizing return on investment. However, options need to be deployed in a responsible manner, via always risk-defining trades and keeping portfolio allocation reasonable. A disciplined approach to an agile options-based portfolio is essential to navigate pockets of volatility and circumvent market declines. A slew of protective measures should be deployed if options are used to drive portfolio results. When selling options and managing an options-based portfolio, the following guidelines are essential:

• 1. Trade across a wide array of uncorrelated tickers

• 2. Maximize sector diversity

• 3. Spread option contracts over various expiration dates

• 4. Sell options in high implied volatility environments

• 5. Manage winning trades

• 6. Use defined-risk trades

• 7. Maintains a ~50% cash level

• 8. Maximize the number of trades, so the probabilities play out to the expected outcomes

• 9. Place probability of success in your favor (delta)

10. Appropriate position sizing/trade allocation

Figure 1 – Options-based portfolio rules for the options trading component of the portfolio when combined with long equity and cash components compared available via a Trade notification service – Trade Notification Service

Conclusion

Controlling portfolio volatility is essential as markets and whole sectors are whipsawed. The recent September-November stretch was a prime example and reinforces why appropriate risk management is essential. An options-based approach provides a margin of safety while circumventing the impacts of drastic market moves as well as containing portfolio volatility. An option, cash, and long equity hybrid portfolio provide durability and resiliency during pockets of market turbulence. A disciplined approach to an agile options-based portfolio is essential via an array of protective measures that are required to be deployed if options are used to drive portfolio results. When selling options, the 10 rules must be exercised for each options trade that is executed.

Disclosure: Stock Options Dad LLC is a Registered Investment Advising (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Advising (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected]. The author holds shares of AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY, and USO.

By Ino.com – See our Trader Blog, INO TV Free & Market Analysis Alerts

Source: Navigating Volatility: Options-Based Portfolio

By TheTechnicalTraders 

– What if the market comes apart, how can you protect yourself using options?

Ok, so we have FOMC Wednesday, September 22.  What do we do and what can we expect?  First, let me start by saying I don’t think the FED will say anything that will be earth-shattering.  They already pushed the dreaded tapering off until Nov and they will probably use the transitory term to lighten the concerns of inflation, the US, and world economies (think of China).  I also think they will point to better-than-expected inflation numbers and how things were not as bad as projected.  SO what is one to do?

If you are a stock trader chances are you may still have considerable risk on the table.  With the recent semi-market meltdown (Note the markets only fell about 5% since the market high about 2 weeks ago) there may be traders stuck in long positions.

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So this begs the question.  What do you do?  Are you sucked down into oblivion with the impending black swan?  Do you cut your losses now and get out and hide?  Or do you try to find a way to protect yourself and minimize your losses?  If you are like me you never like to lose and I am one to never throw in the towel.  If this is you then you can “leverage” options to hedge.  The problem here is most do not understand how to hedge with options.  So here are some “options” on how to use options to hedge.

1. Use the VIX!  We have all heard this before but the cold truth is many do not understand volatility nor how to hedge with the VIX.  The best way is to use the actual VIX not the spin-off derivative products like UVXY and VXX.  What I do is I will buy a debit spread 6 months out and then finance it by selling a put credit spread.  Yes, this is a 4 leg custom position but usually, if you do this right you can do this for little to no cost and sometimes for a small credit.
2. Use BackRatio spreads!  Most have NO idea what this is or how they work.  If you are that person check out our service we do these all the time.  You essentially sell an ATM option and then buy two OTM options but to the downside.  The key here is you can do BackRatios to the upside but when volatility crushes (you are a net buyer in this spread) you get sucked into what I call the negative valley of death.  The reverse is true to the downside.  As the underlying goes down volatility rises and thus this expansion helps your positions (because we are net buyers).
3. Break up your options positions if you are in spreads.  Get out of positions when they are favorable for that part of your spread think the legs of an iron condor.  Or you can roll the unchallenged leg of the iron condor.  You can break up butterflies and sell the profitable parts then when the stock reverses for a day you get out of the other side without the boat anchor pulling you down.

Every day on  Options Trading Signals we do defined risk trades that protect us from black swan events 24/7.  Many may think that is what stop losses are for.  Well, remember the markets are only open about 1/3 of the hours in a day.  Therefore, a stop loss only protects you for 1/3 of each day.  Stocks can gap up or down.  With options, you are always protected because we do defined risk in a spread.  We cover with multiple legs which are always on once you own.

Enjoy your day!

Chris Vermeulen
Founder & Chief Market Strategist

TheTechnicalTraders.com

By TheTechnicalTraders 

– In the past week, we have seen the Nasdaq and the S&P reach all-time highs.  Since the covid crash, we have seen some massive movement to the upside.  I believe there are several factors driving these markets up.

First, let’s look at the covid crisis and how it played a role. As a result of the shutdowns, the FED took a really aggressive stance with its quantitative easing measures.  Lots of money printing to pay for massive stimulus payouts.  The worse news we hear historically is that the markets will react sharply to the downside.

In this market, they did the opposite because many in the market viewed the bad news as a sign the FED will keep its foot on the gas with their aggressive quantitative easing.  The markets love this as they see it as huge economic growth with less risk, even when things were shut down.  Many people were at home and had nothing to do but spend their stimulus money.  The markets loved this.  That is why we saw massive growth in AMZN, FB, GOOGL, and MSFT.  Other stocks favored from staying at home were ZM, NFLX, and TTD.

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Now how do options fuel the markets?  Well, when an underlying stock has options there is a secondary derivative market that has its own supply and demand outside of the stock.  This can cause market makers to balance those demands.  How do they do this?

They do this by taking the difference of the total contracts bought and sold and adjust accordingly.  So for example let’s look at SPX.  In the below picture you can see Put volume is roughly half the call volume.  In this case, the market maker would engage in an activity called delta hedging where they would buy shares of stock to offset the difference between the Put and Call contract volume.  Since the market maker is only interested in the arbitrage between the bid and ask of these contracts, they want to stay delta neutral or, in other words, not be affected by stock price movement.  When they buy to offset, this can drive the price of an underlying stock up.  This is one reason why so many traders watch unusual options activity.

Every day on  Options Trading Signals we do defined risk trades that protect us from black swan events 24/7.  Many may think that is what stop losses are for.  Well, remember the markets are only open about 1/3 of the hours in a day.  Therefore, a stop loss only protects you for 1/3 of each day.  Stocks can gap up or down.  With options, you are always protected because we do defined risk in a spread.  We cover with multiple legs which are always on once you own.

Enjoy your day!

Chris Vermeulen
Founder & Chief Market Strategist

TheTechnicalTraders.com

By TheTechnicalTraders 

Trading, especially options, can be very exciting and rewarding. Having said that, you should not be trading options before learning at least the basics about how to trade them. Options are very different from stocks and there are more factors that go into the pricing.  Many view it as a get-rich-quick scheme while others think it is gambling. I am here to say it is neither but you have to know the rules before you can trade them if you want to be successful.  Last week I covered some little-known basic facts. This week I am covering 8 Do’s and Don’ts for options traders.

1. Do not always swing for Home Runs or put all your money into one position

Do not buy options contracts way out of the money with hopes that it will turn $100 into $5,000.  When you do this you have a very small chance of winning long-term and most would say this is gambling.  If by chance you do strike it rich, you will give it back eventually as this is not a winning strategy.

2. Do go for base hit trades with a consistent and steady return

These trades have a high probability of winning and a low chance of losing.  Stick with 5%-10% allocation per trade.  Make sure you properly hedge or one bad trade could result in giving back all your profits.

3. Do not change your strategy based on commissions your broker may charge or to accommodate a small account

If you take a trade or don’t take a trade because you don’t have a big enough account, wait until you have the proper funding to execute your trading strategy.

4. Prove out your trading strategy with a sim account

This is always the best practice.  I have seen new traders lose lots of money just trying to understand the platform with which they are trading on.  Also, they make strategy mistakes.  Go in sim until you are profitable for consecutive months.  Don’t go to the school of hard knocks and lose money while you learn.

5. Do not trade on margin if you don’t understand it

If you don’t know how margin works do not use it to trade.  Early on I had a margin call and these are never fun trying to find the money to make your brokerage whole.  It can mess up a lot of your existing trades if you have to liquidate.

6. Fund your account over what you intend to trade with

Give yourself a buffer here.  If you intend to trade $5,000 put $7,000 in your account.  The more the buffer the better off you will be especially if your first few trades are losers.

 7. Do not expect to get rich quickly or any significant income from a small account

Start little, save, then get big as you grow.  Too many times I have seen new traders put everything into one trade. When that trade goes south, they lose lots of money then double down with higher risk. When this to is lost, they are done trading.  Don’t be that person!

8. Move on from losing trades – do not chase

If you see a big move that a stock has already made and you want to join the party, think twice.  Once an underlying is extended, there are low-risk trades. If you are leveraged with options, it is an even lower chance to win.  Many traders make money by jumping on the train late. Sooner or later, if you do make money this way, you will give it back over time.  This is a losing strategy.

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Options when BOUGHT are purchased at a DEBIT to the buyer and should be considered assets. So when you buy options, the money is debited from your brokerage account. It’s exactly like buying a stock.

As mentioned above you can also sell an Option, without owning the shares. Options when SOLD are sold at a CREDIT to the seller. When you sell an option it should be considered a liability and money is added to the brokerage account at the time of sale. Not many things are guaranteed in the market, but this is.  However, you can’t withdraw this money until the trade has been closed. Usually, this money is used to offset the margin required for selling the options.

Every day on  Options Trading Signals we do defined risk trades that protect us from black swan events 24/7.  Many may think that is what stop losses are for.  Well, remember the markets are only open about 1/3 of the hours in a day.  Therefore, a stop loss only protects you for 1/3 of each day.  Stocks can gap up or down.  With options, you are always protected because we do defined risk in a spread.  We cover with multiple legs which are always on once you own.

Enjoy your weekend!

Chris Vermeulen
Founder & Chief Market Strategist

TheTechnicalTraders.com

By TheTechnicalTraders 

– Trading Options can be very exciting and rewarding but it is not without risk. If you are becoming interested in trading Options, you need to learn the basics about Options and how to trade them before jumping in with both feet. Options are very different from stocks and there are more factors that go into the pricing.  For reference, you are welcome to read the following articles posted to our Free Research Blog:

• July, 10, 2021 – Top Five Reasons To Be An Options Trader
• July 3, 2021 – Don’t Ever Trade Blind – Understand The Difference Between Stocks, Options, And Futures

Many view trading Options as a get-rich-quick scheme while others think of it as gambling. I am here to say it is neither. What I will say, is that you have to know the rules before you begin trading if you want to be successful.  Keep reading as I cover some little-known basic facts that, if you are new, will surely spark your interest.

There are Options on More Than Just Stock

Most people hear of options and think they only apply to stock.  In reality, you can trade options on futures, Forex, Bonds, and even the index themselves.  Most assets have options available.

Options Symbols

The OCC option symbol can consist of up to 4 parts:

• Root symbol of the underlying stock or ETF, padded with spaces to 6 characters
• Strike price, as the price x 1000, front padded with 0s to 8 digits
• Expiration date, 6 digits in the format YY/MM/DD
• Option type, either P or C, for put or call

Examples:

• AAPL:  AAPL210723C145 – This symbol represents a call on Apple, expiring on 23 Jul 2021, with a strike price of $145.
• AMZN:  AMZN210917P3700- This symbol represents a put on Amazon, expiring on 17 Sept 2021, with a strike price of $3,700.

Buying an Option

If you own an option, you are not obligated to buy the underlying instrument; when you buy a Call Option, you have the right to BUY stocks at your option’s strike price.  You can also sell the option itself before expiration.

Similarly, when you buy a Put Option, you have the right to SELL stocks at your Option’s strike price through exercising it but like Call Options you can sell the put contract as well before expiry.

Selling an Option

First, you can sell an option you don’t own stock in!  However, if you sell a Call Option, you are obligated to deliver the underlying asset at the strike price at which the Call Option was sold if the buyer exercises his or her right to take delivery. If they do not exercise then you keep the premium you sold the option for.  Put Options are the reverse, if you sell a Put Option, you are obligated to buy the underlying asset if exercised.

Selling Means Credit And Buying Means Debit

Options when BOUGHT are purchased at a DEBIT to the buyer and should be considered assets. So when you buy an option the money is debited from your brokerage account. It’s exactly like buying a stock.

As mentioned above you can also sell an Option, without owning the shares. Options when SOLD are sold at a CREDIT to the seller. When you sell an option it should be considered a liability and money is added to the brokerage account at the time of sale. Not many things are guaranteed in the market but this is.  However, you can’t withdraw this money until the trade has been closed, usually, this money is used to offset the margin required for selling the options.

Every day on  Options Trading Signals our resident specialist, Neil Szczepanski, does defined risk trades that protect us from black swan events 24/7.  Many may think that is what stop losses are for.  Well, remember the markets are only open about 1/3 of the hours in a day.  Therefore, a stop loss only protects you for 1/3 of each day.  Stocks can gap up or down.  With options, you are always protected because we do defined risk in a spread.  We cover with multiple legs which are always on once you own.

My team and I have been building and developing fully systematic algorithmic trading strategies for many years and can tell you that unless you have a solid foundation related to knowing when and where opportunities exist in market trends, you are likely churning your money in and out of failed trades. Though I have already completed the first live presentation, I will be hosting one more at the July Wealth365 Summit on July 16th at 12 pm. The Summit is free to attend and offers unparalleled opportunities for learning…plus a potential prize or two!

Have a great day!

Chris Vermeulen
Founder & Chief Market Strategist

TheTechnicalTraders.com