5 Favorite Options Setups

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My Five Favorite Option Trades

John F. Carter

TradeTheMarkets.com

SimplerOptions.com


Options

There are hundreds of books written about options.

There are hundreds of strategies a trader can do with options.

For my style of trading, there are 5 basic strategies that I like to follow.

Lets Dive In . . .


Strategy #1

Directional Swings

Trades That Last a Few Weeks


Buying Options

Main thing is to have a setup on the underlying stock.

Squeeze on the daily chart works really well. Think of it this way you are just using the

option as a CHEAPER WAY to buy the stock.

$16 for an option is a lot cheaper than $160 for the stock.

1 option = 100 shares of stock. $16 option = $1600 out of pocket cost.

Key is buying IN THE MONEY strike prices


Buying Options

Squeeze fires off long on MA at $170

July options at this point only have 1 week left.

TWO OPTIONS:

Buy DITM July Options like $155

And if trade is still valid at expiration sell these options and then buy the Aug 155s.

Or just start off with the Aug 155s.


Buying Options

Exit strategy same as stock Im looking to scale out.

Stop on option is 50% of the value.

$16 option, then $8 stop.

First target is 50%, for 1/3. So $24.

Second target is 100% for 1/3, $32.

Last hold on for squeeze loss of momentum, TTM Trend change etc.


Buying Options

1 option at $17 = $1700 cost

1 option at $55 = $5500 in proceeds

Proceeds $3800 per contract


Strategy #2

Directional Swings

Trades That Last a Few Days


GS Call Option Trade Setup

This is one of my favorite trade setups.

It generally lasts 1 to 2 days.

The signal is taken off the hourly chart but it has to be in alignment with the daily

chart.

BONUS if its also in alignment with the weekly chart.


GS Call Option Trade Setup

I want to go in the money on the calls with an option delta of at least (or very close to)

70.

In this case, the Nov 155 calls had a delta of 68, which is close enough to 70.


Stop & Target?

Stop is just below support at 156.00.

Target Squeezes on average last about 6 bars.

If the stock moves 1.75%, I look to start scaling out of the position.

GS at $161. 1.75% move = $2.82

On $2.82 stock move, Delta 70 option move = $1.97


Strategy #3

Directional Day Trades

Trades That Last a Few Hours


Criteria for Directional Day Trades

There is an established swing high or low on the stock that has been established.

We are approaching that swing high or low.

There is a squeeze setting up on a 15 minute chart.

Target is a 1.272% extension of that swing


Mastercard (MA) Example

SETUP:

Stock jumped up after earnings and

then pulled back.


Strategy #4

Selling Credit Spreads

on Weekly Options


Criteria for Selling

Weekly Credit Spreads

Actively traded stock that, of course, trades weekly options. AMZN is the

example we will use today.

Stock is at a key extended support or resistance level.

Reversion Bands are good levels for this.

No squeeze setting up.



Weekly Credit Spreads

Looking to sell the at the money strike, and but the next one out for protection.

This generates a credit

Ideally able to sell for half the strike. So on a stock with $5.00 strikes, then sell for

$2.50.

More likely it will be lower than that. $1.50 and above is ok



Weekly Credit Spreads Exit? In a perfect world the spread expires

worthless and you collect the whole premium.

In the real world, once you make about 70% of your profit target, its a good idea to just get out.

So if you sell a spread for $2.00 (so your max profit is $2.00), and it gets to the point where the value is $0.60 cents its a good idea to take the money and run.

At $0.60, there isnt much more upside to your profit but there is $4.40 worth of downside!

GET OUT!


Strategy #5

Implied Volatility (IV) Crush

On Bad News


Criteria for BNIVC

(Bad News Implied Volatility Crush)

Looking for stocks that are gapping down on bad news. Earnings or some other sort of bad news.

Typically the bulk of this down move is already priced in pre-market before the cash session opens.

Panic at the open Implied Volatility explodes for the first 5 to 10 minutes of trading.

5 Favorite Options Setups

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