Option Income Trades - ACTIVE TREND TRADING.COM™ · TSLA at 305 with expectation it will fall or...

Option Income TradesActive Trend Trading: Dennis W. Wilborn

“Observe things how they are;

See things how they can be!”

Disclaimer

Copyright ATTS 2007-2017

• U.S. Government Required Disclaimer – Commodity Futures Trading Commission Futures

and Options trading has large potential rewards, but also large potential risk. You must be aware

of the risks and be willing to accept them in order to invest in the futures and options markets.

•

Don’t trade with money you can’t afford to lose. This is neither a solicitation nor an offer to

Buy/Sell stocks, futures or options. No representation is being made that any account will or is

likely to achieve profits or losses similar to those discussed in this training. The past performance of

any trading system or methodology is not necessarily indicative of future results.

• CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT

REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE

RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN

MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN

GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF

HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY

TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

• All Materials presented are for training purposes only . Traders should paper trade any new

method prior to risk of personal capital.

- Founder & Lead Technical Analyst for Active Trend Trading - Certified Candlestick Technician- Affiliate of Market Technician Associations- Guest Speaker on IBD How to Make Money in Stocks Radio Show- Highlighted in the book “How to Make Money in Stocks-Success Stories”- Publish “Art & Science of Active Trend Trading—Trader’s Report” Weekly- Host “How to Make Money Trading Stocks Show” Weekly- Systems Researcher- Former Forbes Contributor

- Retired US Navy, Commander- Civil Engineer- Adjunct Professor MBA Program Chaminade University, Oahu, Hawaii- Started Trading in 1989- Started Trading For a Living in 2006

- Research Colleague Mike Trager, Dallas, Texas

Our Motto: Clarify, Simplify & Multiply


How it was & How it is…

Options are a contracts with rights and obligations. Options introduce additional variables in the trade. Options can expire worthless. Some strategies they call “High Probability” will break your account!

How it was—Monthly Covered Calls, Monthly Spreads and Monthly Naked Positions

- Traders would tend to give credit positions a lot of room for breathing during the 2-6 weeks the position was open. Target return 1-3% per month.

How it is—Weekly Covered Calls, Spreads and Naked Positions

- Traders provided greater flexibility because risk is reduced due to shorter hold period. Target return 0.7 – 1.5% per week.


Option Income Trades

Market timing


1. Covered Calls: Own the stock or ETF. Sell monthly or weekly option premium against the long position.

• If stock or ETF is rising quickly limits potential gains!

• If Option exercised, the stock/ETF is take away!

• Selling too far out of the money provides small downside protection!

How it works: TQQQ bought at 85.50, when price of ETF is at 87.75 sell the 28Apr 88C for 1.60

If position is called away we earn $88 – 85.50 = $2.50 + $1.60 for a total gain of $4.10

One week return of 4.10/85.50 = 4.79%

If position closes the week below $88 we keep the $1.60 or 1.60/85.50 = 1.87% for the week. This reduces the cost basis of the position by 1.60

If position drops below $85.50, it stays profitable if it remains above 85.50 – 1.60 = $83.90

Drawbacks = Requires $8550 investment to earn $160 for the week.

If we do this for the month the return would be 7.48%


Market timing


1. Spreads - Many Types but the most popular and easiest to understand is the Vertical Spread.

• Same Expiration but different Strike Prices

• Can be either Credit or Debit Spreads

• Debit Spread can be done in the direction of the trend and caps loss at cost of spread

• Credit Spread can be done in direction of the trend, selling put spread in an uptrend

2. Pros & Cons • 3 out of 4 moves can be profitable. Position will either not move, move for you, move

slightly against you or move against you

• The further out of the money the higher the probability of closing worthless, but if it goes against you represents the largest loss potential. Some do exotic option positions that are complicated and then repair the position if it goes against them—but!

• Paper Trade, Paper Trade, Paper Trade


Market timing



TSLA at 305 with expectation it will fall or that its at strong resistance

• Sell a Call Spread or Buy a Put Spread that expires 28Apr

• Sell the Call Spread: How Far Out of the Money - ATM• 28Apr 305 x 310 Call spread = Credit of 2.20 per contract pair or $220 for the week

• Risk is capped at $5 – 2.20 = 2.80 or $280

• Greatly reduces capital needed to do covered calls. To own 100 shares of TSLA would cost $30,000, the spread $280

• Buy a Put Spread: How Far out of the Money - ATM • 28Apri 305 x 310 Put Spread = Debit of 2.80 per contract pair or $280 max loss for week

• Must close below 305 to be profitable. Max Profit $2.20


Market timing



TSLA at 305 with expectation it will fall or that its at strong resistance

• Sell a Call Spread or Buy a Put Spread that expires 28Apr

• Sell the Call Spread: How Far Out of the Money – 1 Strike OTM• 28Apr 307.5 x 312.5 Call spread = Credit of 1.79 per contract pair or $179 for the week

• Risk is capped at $5 – 1.79 = 3.21 or $321

• Greatly reduces capital needed to do covered calls. To own 100 shares of TSLA would cost $30,000, the spread $321

• Buy a Put Spread: How Far out of the Money – 1 Strike OTM• 28Apri 307.5 x 312.5 Put Spread = Debit of 3.11 per contract pair or $311 max loss for

week

• Must close below 307.5 to be profitable. Max Profit $1.89


Market timing

TSLA at 305 with expectation it will fall or that its at strong resistance go out of the money on Strike and reduce the spread

• Sell the Call Spread: One Strike OTM w/Reduced Spread• 28Apr 307.5 x 310 Call spread = Credit of 1.00 per contract pair or $100 for the week

• Risk is capped at $2.5– 1 = 1.50 or $150

• Must close below 307.5 for max profit of $1.00

• Buy a Put Spread: One Strike OTM w/Reduced Spread• 28Apr 307.5 x 310 Put Spread = Debit of 1.50 per contract pair or $150 max loss for

week

• Must close below 307.5 to be profitable. Max Profit $1.00

If the Stock or ETF is expected to move up, just reverse the above.



Market timing


Other considerations:

1. Assure the underlying has liquid weekly options

2. Exit Strategy to pull out partial profits, i.e. on a multiple contract position pull some profit off at 50% max gain

3. Have a solid stop loss if trade goes against you. If this happens it will be gradual at first due to Time Value (Extrinsic Value) of the options. With Weekly Options the time value starts falling dramatically on Thursday & Friday

4. Stay Small—if I gain an extra $100 per week that adds to $5200 over a year.

5. Look at these Trades as Icing on the Cake-but not the Cake!

6. Apply ATTS Rules to trade Option Spreads


Market timing

Going Naked!

1. Most pros sell naked Puts – Why?• They actually want to buy the underlying

• Selling Puts reduces Cost Basis

• May not get the underlying but still are able to participate in the bullish move

• Margin Accounts or IRA’s with approval-but different rules

With Margin Accounts the amount of cash needed is .25-.50 the cost of buying the underlying

With IRA Accounts must have full cash value of the shorted underlying

2. Don’t mess with shorting Calls



Market timing

Option Basics

Is it worth the hassle?

Presented by: Dennis W. Wilborn

DISCLAIMERU.S. GOVERNMENT REQUIRED DISCLAIMER – COMMODITY FUTURES TRADING COMMISSION

FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALS O LARGE

POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN

ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS.

DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION

NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION I S BEING MADE

THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE

DISCUSSED IN THIS TRAINING. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR

METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS H AVE CERTAIN

LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESU LTS DO NOT


RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF AN Y, OF CERTAIN

MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PRO GRAMS IN

GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT

OF



ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY . TRADER S SHOULD

PAPER TRADE ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

Option Basics

What are Options?o A Contract or Agreement between two partieso Each Option Contract comes with Rights and Obligations

Why do people trade options? Perceived benefit of Leverage & Variable Strategies

New Vocabulary

More Variables that just trading stocks (can work for or against the trader)

Copyright 2014--Active Trend Trading

Resources

www.cboe.com Chicago Board of Options Exchange

Books:

The Option Advisor, Author: Bernie Schaeffer

Options as a Strategic Investment, Author: Lawrence G. McMillan

The Option Course, Author: George A. Fontanills


http://www.cboe.com/

Option BasicsVocabulary

Contract: Typically controls 100 shares (Mini’s Control 10 shares)

Obligation: Typically the responsibility of the seller

Rights: Typically the benefit to the buyer

Premium: Price of the Option

Greeks: Variables used in the Black Scholes Option Model

Implied Volatility:

Expiration Month: Month the Option will expire typically on the Friday after the 3rd Thursday

(Settles on Saturday for non-European Options)

Strike Price: Contract Price of underlying stock/ETF

Open Interest: Contracts currently open

Bid/Ask Spread: The price difference between the Bid & Ask

Intrinsic Value: The positive price difference between Strike and Stock $

Extrinsic Value: Time Value (influenced by Vega & Gamma)

Exercise: Put to me or Called away


Option BasicsVocabulary (Cont)

Theoretical Value: Theoretical Price of an Option determined by an option calculator

Time Decay: Amount price goes everyday (Theta)

At the Money (ATM): Price of option strike that is closest to the price of the stock/ETF

In the Money (ITM): Price of option strike that has Intrinsic Value

Out of the Money (OTM): Price of option strike outside the parameters of the trade

Volatility Inflation: Volatility is growing due to VIX or other events like earnings

Volatility Crunch: Volatility deflation due to falling VIX or event passes

Leaps: Options that expire in January each year and are more that 6 months in the future

Option Chains: List of option strike prices and months presented in a table

Directional: Option trades placed in the direction of the trend

Spreads: Credit or Debit two option trade with limited upside and fixed downside

Condors: Exotic type option trade selling premium with a very low Delta

Butterflies: Exotic type option trade made up of three separate options of the same type


Option Basics

What are Options?o A Contract or Agreement between two parties

o Each Option Contract comes with Rights and Obligations

Types: Puts & Calls, American, European, Mini’s, Standard & more

Time: Weekly, Monthly, Leaps

Variables: Greeks (Delta, Gamma, Theta, Vega, Rho)

Model Options Calculators: Black Scholes, Binomial, Brownian & Others


Option Basics


-Delta: How much price increases or decrease per dollar movement in the underlying. Also tells us how many equivalent shares of stock one contract actually approximates. 50 delta is approximately like 50 shares of the stock

-Theta: How much value the options looses every day this is an a complex equation and not straight line decay

-Vega: Price variation due to Volatility

-Gamma: How much Delta Changes per dollar increase or decrease in movement of the underlying stock/ETF

-Rho: Associated with interest rates



Option Basics

Call Options: Long: Expect Stock Price to go up

Rights & Obligation: Buyer has the right to buy the stock/ETF at the agreed on price. Seller is obligated to sell stock/ETF at the agree on Price

Short: Expect Stock Price to go downRights & Obligation: Buyer has the right to buy the stock/ETF at the agreed on price. Seller is obligated to sell stock/ETF at the agree on Price

The Catch: All Options are made up of both Intrinsic and Extrinsic Value—If an option has high Extrinsic Value due to High Implied Volatility I want to be a seller and not a buyer because even if the price of the stock goes up, the value of my option can go down!


Option Basics

Put OptionsLong: Expect Stock Price to go down

Rights & Obligation: Buyer has the right to sell the stock/ETF at the agreed

on price. Seller is obligated to buy stock/ETF at the agree on Price

Short: Expect Stock Price to go upRights & Obligation: Buyer has the right to sell the stock/ETF at the agreed on

price. Seller is obligated to buy stock/ETF at the agreed on Price


Intrinsic + Extrinsic = Option Price

Intrinsic: Price of the stock/ETF less the Strike Price

Extrinsic: Primarily Time Value impacted by Implied Volatility & Time Decay

If a stock’s price is currently at $75

Intrinsic Value of a $70 strike price would equal (75-70) = $5.00

If the $70 option is selling for $7.50 the Extrinsic Value would be:

Extrinsic Value = Price of the option – Intrinsic Value (7.50 – 5) = $2.50

If the stock stays at $75 until expiration you loose $2.50 on this trade.


Fatal Mistakes1. Trying to trade options before having a strong System Foundation

Not buying enough time

Selling too much time and too little volatility (can be an emotional roller coaster)

Buying too far Out of the Money (too much Extrinsic Value)

Buying too much Volatility (earnings are especially risky to buy premium)

Not knowing that option market can open up to 10-20 minutes after the regular market—Risky for Market orders

Not knowing that volatility is inflated at the beginning of the day

Chasing the Bid/Ask—Place your order at the Mark and it gets filled or doesn’t


How Do I Chose?

1. How long do I want to hold the option?

2. How much do I want the price to change with a move in the underlying? Choose proper Delta.

3. How much Bid/Ask Spread am I willing to risk?

4. Do I buy or sell premium?

5. How much Volatility

6. How Much Open Interest?

7. When are Earnings?


How Do I Chose?1. How long do I want to hold the option? Buying 2-6 Weeks

2. How much do I want the price to change with a move in the underlying? Choose proper Delta. Minimum of 0.50

3. How much Bid/Ask Spread am I willing to risk? .10-.50 cents unless I know the Option Chain Personality

4. Do I buy or sell premium? Depends on volatility

5. How much Volatility? Find the Chain with the lowest to buy & Highest to sell

6. How Much Open Interest? 50 – 250 Contracts Open unless I know the Option Chain

7. When are Earnings? Volatility tends to increase approaching earnings

8. Use ATTS Rules for Entry & Exit, estimate value of option


Example

Choose a Stock?


Key Points

-Trading Options Introduces Variables to the Trading Equation

-These variables can significantly increase risk

-Directional Options & Covered Call trades are the most basic

-Complex option trades add more variables (spreads & exotics)


Option Basics



DISCLAIMERU.S. GOVERNMENT REQUIRED DISCLAIMER – COMMODITY FUTURES TRADING COMMISSION FUTURES

AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALSO LARGE POTENTIAL RISK. YOU

MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDE R TO INVEST IN THE

FUTURES AND OPTIONS MARKETS.

DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN

OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT

WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED IN THIS

TRAINING. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOL OGY IS NOT

NECESSARILY INDICATIVE OF FUTURE RESULTS.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN


REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN E XECUTED, THE

RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN


GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF



ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY . TRADER S SHOULD PAPER TRADE

ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

Option Basics



New Vocabulary



Resources


Books:












Implied Volatility:










Option Basics








How Do I Chose?









Example

Choose a Stock?


Key Points






Bonus Slides

Options Basic


Option Basics



DISCLAIMER

U.S. GOVERNMENT REQUIRED DISCLAIMER – COMMODITY FUTURES TRADING COMMISSION

FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REWARDS, BUT ALS O LARGE

POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN

ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS.

DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION

NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION I S BEING MADE

THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO

THOSE DISCUSSED IN THIS TRAINING. THE PAST PERFORMANCE OF ANY TR ADING SYSTEM

OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS H AVE CERTAIN



RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF AN Y, OF CERTAIN


GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT

OF



ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY . TRADER S SHOULD

PAPER TRADE ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

Option Basics



New Vocabulary



Resources


Books:












Implied Volatility:










Option Basics








How Do I Chose?









Example

Choose a Stock?


Key Points






5 Objective Profit Exits

- Profit Exits can be planned based on

several objective parameters.

- Profit Exit parameters can be used in

combination

5 Objective Profit Exits

- Set Percentage, Fib Extensions, Symmetry

Extensions, Keltner or Moving Average

Extensions

Set Percentage: 5%, 10%, 15%, 20% from

Entry


10 %

Option Income Trades - ACTIVE TREND TRADING.COM™ · TSLA at 305 with expectation it will fall or...

Documents

Transcript of Option Income Trades - ACTIVE TREND TRADING.COM™ · TSLA at 305 with expectation it will fall or...