OPTIONS TRAIINING

QUICK OVERVIEW OF UNDERSTANDING OPTIONS 

What is an option contract?

• A legal contract and derivatives which allows the buyer to either buy or sell an underlying asset for a predetermined price at or before an agreed date.
• Underlying asset = stocks   →   could be TSLA for Tesla’s stock
• Works just like the exchange of stocks so there’s no actual interaction between the two parties. 
• As mentioned, the contract gives the buyer the OPTION to buy, but he/she is not obligated to do so. This means that he/she can simply buy the contract with the expectation for it to go up in value, and then before the expiration date, simply sell it again ; hence trade options. 

PLEASE REVIEW THE 3 SHORT VIDEOS BELOW!

• https://www.investopedia.com/terms/o/option.asp

LESSONS ON TAKING OUR SIGNALS

OVERVIEW OF Calls / Puts

There are two types of option contracts ; calls & puts.

Both can be bought and sold by whoever desires to do so. The alerts sent here will only be for buying options.

Buyers are also known as bearers

Sellers are also known as writers (‘writing’ the contract)

Calls allow the buyer to buy 100 shares of the underlying asset (stock) per contract at a predetermined price (strike price)

Apple’s share price is currently $135. Mike buys 10 option contracts for 3.25 ($325 per contract) for AAPL (Apple) which has the strike price $150 and the expiry date 10/19.

The price is written as 3.25 since the contract represents 100 shares. So simply multiply the price, 3.25, with 100 → equals $325 → 10 contracts makes it $3250

He has paid $325 x 10 = $3250

Since 1 contract represents 100 shares, Mike now controls 1000 shares of Apple stock. He has the option, but not the obligation, to buy 1000 shares of Apple stock for $150 per share before October 19th.

If he were to control 1000 shares by simply buying shares, that would require $135 x 10 x 100 = $135,000.

I.e.

• ( $135 per share x 10 contracts x 100 shares per contract )

• Instead he bought options and now controls 1000 shares, essentially worth $135,000, but this only required $3250 of capital.
• ( he could have even done it for $325 if he had just bought 1 contract )
• If this seem complex, read through it a couple of times

• Puts allow the buyer to sell 100 shares of the underlying asset (stock) per contract at a predetermined price (strike price)

Expiration Date

• The date which the contract expires
• Options is a bet that a certain stock will be above or below a certain price (strike price) before a certain date ; which is just like if you buy the stock instead of options. What differs between just buying equity/shares and buying options is that your option contracts have a limited time for the bet to work out, hence more risky ; however also with higher returns.
• As mentioned, buying calls or puts gives the buyer the right to either buy or sell at a predetermined price. Once the expiration date is passed, the buyer does no longer have that right and must therefore have decided what to do with the option contract before the expiration date. Post the expiration date, the contract will be invalid and worthless and since here in the group we will trade the contracts, no matter what the contract has to be sold BEFORE the end of the trading day for the expiration date - if this is not done, the contract will be worthless and you will have lost the whole value of the trade.
• There are 2 options as to what to do with the contract before the expiry date:
  • We will NEVER exercise any trades we post
• Close the trade by simply selling the contract
• Exercise the contract  which means to buy 100 shares for the predetermined price

Strike price

• the predetermined price which the buyer has the option to either buy or sell the underlying asset at.

Premium

• the price paid for the option contract
• I.e in the example above it is 3.25 → $325
• the premium always needs to be multiplied with 100 to get the value you need to pay
• it’s 100 because each contract represents 100 shares of the underlying asset

A way of thinking of options is that it’s insurance for your stocks. That’s what they were created for in the beginning.

I.e John holds 200 shares of TSLA and bought them for $400 a share. TSLA is now selling for $800 a share but he is scared the stock will go down in value. He buys puts to make sure he can sell his shares at a predetermined price. He buys the put contract with the strike price $750 and is now insured that he can sell his shares for $750 whenever he wants to. He pays the premium to the writer/seller of the contract so if the price goes below $750 it could make sense for John to sell them and the writer/seller would then be obligated to buy all 100 shares per contract for $750.

Why would the writer do that then?

Well if the price stays above $750, the writer/seller will simply just collect and get to keep the premium that John paid. So writers/sellers are usually those with a lot of money on hand that by selling option contracts earn extra income by doing so. It could be beneficial to do so on stocks you want to buy anyway, however keep in mind 1 contract represent 100 shares ; so 1 contract with the strike price of $750, to sell that you would have to make sure that you have $75,000 to buy those 100 shares if the buyer wants to exercise the contract.

The above in this section however is not anything we will do on any alerts sent here in the group. We will ONLY trade the contracts, hence buy and then sell it again before expiry date.

Alert Format and Terminology

The format will be as followed : BTO [Stock] [Expiry Date] [Strike Price] [Call/Put, C/P] [@Entry Price] 

Example : BTO AAPL 150C 4/30  @1.80

In this example we will buy options contracts for the stock AAPL (Apple). 

• BTO = Buy to Open (this will ALWAYS be the case for the options signals) 

• Stock = AAPL (Apple)

• Strike Price = 150, meaning we expect the price will move towards this price.

• Call/Put, C/P = Call/C, meaning we expect the price to go up from its current price since we BTO

• Expiry Date = 4/30, meaning this contract will expire at that date. We will never exercise it.

• @Entry Price = @1.80 meaning the contract will cost $180 since the Entry Price x 100 = Actual cost to enter the trade. This example requires just $180 to enter. 
• do not chase a trade ; meaning if the trade has already gone up in value or hit SL, do not enter

Additional terminology for the alerts :

CL = cut losses → close the trade

Swing = plan is to hold for longer than a single trading day

SL = Stop Loss

DT = Daytrade

Trim = if multiple contracts have been bought, start selling some of them

TP = take profit (SELL)      /        STC= sell to close

We recommend a HARD 15-20% SL depending on the risk you are willing to take. 

• I.e for below :      BTO AAPL 4/30 150C @1.80

This means the SL should be @1.44 - 1.53 which would make your risk $27-36 for this trade.

We recommend entering the trades with 15-25% of your account size at the utmost.

The most ideal scenario would be to have an account balance big enough that you only use 10% at most.

15-25% should only be used if you have a relatively small account and you do understand the risks of trading with a small account and entering a trade with that much of your balance.

Let's say you have $1000 and you follow the trade from above.

15-25% of $1000 = $150-250 and the trade cost $180 to enter if you buy 1 contract. 

You could then simply get 1 contract which would be $180 = 18% of your account balance.

If this trade unfortunately hit our SL then you would just lose $27-36 which would be at most 3.6% of your account size.

If you have a very small account though (<$1000) then this rule does not really apply. This also means that if you do decide to trade with a smaller balance and thereby try to leverage your money by using options, it will also be more risky. On the other hand if you hit a couple of good trades with a small account, the power of options could quickly put you in a more ideal situation where it would be easier to manage risk.

Position sizing

The ideal situation for a trade, especially a swing but also daytrades, is that you still have buying power to average down if the trade doesn’t move in our favor from the first entry.

Daytrade / Swing = 10% of your account balance

Small position = 2.5% of your acc balance

Risky / Yolo / Lotto = 1% to 2.5% of your acc

• Example :      
• You have $10,000 to trade with
• BTO AAPL 150 C 4/30 @ 1.00       →     $100 per contract
• Daytrade / Swing   =   10 contracts for a total of $1,000
• Small position =   2-3 contracts for a total of $200-300
• Risky / Yolo / Lotto = 1-3 contracts for a total of $100-300
• As mentioned having capital to average down is ideal
• I.e
• It’s a Daytrade so we want 10 contracts
• We might not be able to nail the entry to the penny, so we buy 3-7 contracts first and see how it moves ; then we can always average the entry.
• Make sure to use broker that have low fees for this (which most do, but just make sure)