stock options

Learn How to Trade Options

Learn leading strategies used by professional trader every day.  

Learn to Trade Options
Bullish Option | Straddles

Learning how to trade options can one of the most lucrative investments you can make in terms of your time and money.  Most people, however, are intimidated by even the thought of trading options.  But it doesn’t have to be intimidating.  Read through our site to learn everything from the basics of options trading to more advanced techniques.  It is important that you learn the basics of the following:

  • Understanding Calls and Puts serves as the foundation for everything else
  • The basics of buying and selling call options
  • The basics of buying and selling put options
  • Choosing the strike price based on the stock price and time
  • Predict directional stock movements based on fundamental and technical analysis
  • Adjusting option trades that move against you
  • When to take profits
  • Advanced option strategies
Introduction Part 1
Option Basics

Why Trade Option

Calls and Puts

Buying or Selling Premium

Strike Price

Option Calendar

Time Decay

Implied Volatility

Introduction Part 2
Terminology

Intrinsic Value

Extrinsic Value

In The Money

Out of the Money

At the Money

Moneyness

Option Premium

Buying and Selling
Call Options

Buying – Bull Long Calls

Selling – Bear Short Calls

Buying and Selling
Put Options

Buying – Bear Long Puts

Selling – Bull Short Puts

Debit vs Credit Spreads

Call Debit Spreads

Call Credit Spreads

Put Debit Spreads

Put Credit Spreads

Combining Spreads

Combining Options

Long and Short Strangles

Long and Short Butterflies

Stock Replacement

Investment Strategies

Speculative Strategies

Income Strategies

Hedging Strategies

Adjusting Option Trades Gone Bad

Long Call Adjustments

Long Put Adjustments

Debit Spread Adjustments

Credit Spread Adjustments

Technical Indicators

TTM Squeeze

Fibonacci Retracements

Moving Averages

 

When to Take Profits

Long Calls

Long Puts

Debit Spreads

Credit Spreads

Why Trade Option

Calls and Puts

Buying or Selling Premium

Strike Price

Option Calendar

Time Decay

Implied Volatility

Investment Strategies

Speculative Strategies

Income Strategies

Hedging Strategies

Adjusting Option Trades Gone Bad

Long Call Adjustments

Long Put Adjustments

Debit Spread Adjustments

Credit Spread Adjustments

Technical Indicators

TTM Squeeze

Fibonacci Retracements

Moving Averages

 

When to Take Profits

Long Calls

Long Puts

Debit Spreads

Credit Spreads

Learn to Trade Options
Bullish Option | Straddles

Learning how to trade options can one of the most lucrative investments you can make in terms of your time and money.  Most people, however, are intimidated by even the thought of trading options.  But it doesn’t have to be intimidating.  Read through our site to learn everything from the basics of options trading to more advanced techniques.  It is important that you learn the basics of the following:

  • The basics of buying and selling call options
  • The basics of buying and selling put options
  • Choosing the strike price based on the stock price and time
  • Predict directional stock movements based on fundamental and technical analysis
  • Adjusting option trades that move against you
  • When to take profits
  • Advanced option strategies

Option Basics

The Power of Options

  • The basics of buying and selling call options
  • The basics of buying and selling put options
  • Choosing the strike price based on the stock price and time
  • Predict directional stock movements based on fundamental and technical analysis
  • Adjusting option trades that move against you
  • When to take profits
  • Advanced option strategies

Why trade options?

The stock market is the most powerful tool in history to build personal wealth.  It allows individuals to own parts of huge multi-billion dollar companies by buying “shares” of any listed company.  If the value of the company increases, an investor will share in the the increased value of the company by the same percentage that the companies value had increased.  And if you can find companies of excellent value, your wealth will increase in proportion to the companies that you invest in.  

Having said that, buying and selling stocks is not the only way that you can capitalize on investing in the stock market.  Buying and selling options provides a second level of more sophisticated tools which can help investors and “traders” to capitalize on not only the value of the underlying stocks, but be able to capitalize on the upward and downward trends over time.  

Many investors or traders avoid even the notion of learning options because of fears that strategies are too complex are dangerous.  To some extent this is true.  But to some extent, it is true that simply investing in anything can be complex and dangerous.  The trick is education.  Add Option Maniacs, we want to show and teach you that options trading doesn’t have to be complex or dangerous.  We want to teach you that options should simply another tool in your toolbox that you can use according to your risk tolerance to make money in the stock market

The Building Blocks for Learning Options

Definitions:

  • Call options
  • Put options
  • Buying an option
  • Selling an option
  • Long options
  • Short options
  • Premiums
  • Debits
  • Credits 
  • Defined risk trades

Concepts

  • A call is a bet that a stock or derivative will move up ( buy a call to bet that the stock will move up )
  • A put is a bet that a stock or derivative will move down ( buy a put to bet that the stock will move down )
  • Buying an option buys you the ability to bet that you will profit if your option moves in the same direction as your call ( up ) or put ( down )
  • A long call is an alternative phrase that describes buying a call ( or put )
  • A short call is an alternative phrase that describes selling a call ( or put )
  • A premium is the price you will have to pay in order to buy a call or a put
  • A debit is the term used to describe that you are paying a premium for buying a call or a put
  • A credit is the term used to describe that you are receiving a premium for selling a call or a put
  • A defined risk trade is a trade in which you can’t lose any more than you pay into it.  
  • Buying call or put options are defined risk trades because you can’t lose any more than what you pay into them
  • Buying a call or put debit spread are defined risk trades because you can’t lose any more than what you pay into them

Calls vs Puts

The fundamental building blocks of options are calls and puts.  A call is a bet that a stock or derivative will move up ( buy a call to bet that the stock will move up ).  A put is a bet that a stock or derivative will move down ( buy a put to bet that the stock will move down ).  All the strategies that are used in options trading are based upon simply buying or selling calls and puts or creating combinations of calls and puts.  A trader will buy a call if she thinks that a stock will move up; she will pay a premium ( debit ) for the privilege.  A trader will buy a put if she thinks that a stock will move down; she will pay a premium ( debit ) for the privilege.  If you can buy an option, it follows that you can also sell an option.  

One of the things that makes options trading confusing for a lot of beginners is the fact that the nomenclature is very confusing.  For example, buying a call is also called a long call or going long.  Selling a call is also called a short call or selling short or short a stock.  As you will see later, credit and debit spreads are also call vertical spreads. These terms are all interchangeable and often even used in the same sentence.

  • buying a call = a long call = going long
  • Selling a call = a short call = selling short = short a stock
  • Vertical spreads = credit and debit spreads

Buying vs Selling

Let me preface by saying that buying an option is the most common form of speculative options trade.  Buying an options contract is simple and versatile.  Buying an option implies that you are paying a premium to make the trade.  Buying a call option implies that you are paying a premium for the ability to bet that an option will go up in value.  Buying call or put options are defined risk trades because the amount that you can lose in the trade is limited or defined by the amount that you paid to get into the trade.  The profit potential, however, is not defined; in fact, the profit potential is unlimited up to the the expiration date of the trade.  

Selling an option implies that you are receiving a premium ( a credit ) to make the trade.  You can think of it as taking the other side of trade from a call buyer.  Selling a call option implies that you are receiving a credit for the ability to bet that an option will go down in value.  Selling an option is an undefined risk trade.  

The opposite is true for put options.  Because put options are bets that an option will decrease in value, buying a put option will require you to pay a premium ( debit ) for the ability for the ability to bet than an option will go down in value.  

Selling a put option implies that you are receiving a credit for the ability to bet that an option will go up in value.

 

2 Options to Trade a Stock Going Up

 

There are therefore 2 ways that you can make a bet that a stock will go up; you can either buy a call or you can sell a put.  There are therefore 2 ways that you can make a bet that a stock will go down; you can either buy a put or you can sell a call.

 

Combining Options

All more complicated strategies in options trading are based on combining these 4 “options”.  We will review most of them in later chapters.  For now, you should simply familiarize yourself with some of the names and principles behind them.  The most important principle to know is that all of the strategies are based on combining the ability to buy and sell calls and puts.  

 

Buying and selling calls and puts are the fundamental building blocks of all more complicated trading strategies. 

blah blah

More Complex Trading Strategies - Combining Calls and Puts

Definitions:

  • Vertical Spreads
  • Call Debit Spreads 
  • Call Credit Spreads
  • Put Debit Spreads
  • Put Credit Spreads

Concepts

  • Combining buying a call while selling a call ( call vertical spread )
  • Combining buying a put while selling a put ( put vertical spread )
  • Combining selling a call while selling a put ( straddle or strangle )
  • Combining selling a put while ( iron condor or iron butterfly )
  • There are more…. just keep combining

Vertical Spreads

Vertical spreads are a generic description of combining calls or combining puts.  A call debit spread combines buying a call at strike price lower than the 

 

 

is a defined risk spread where you buy a call at a lower strike price than

Concepts

Combining buying a call while selling a call ( call vertical spread )

Combining buying a put while selling a put ( put vertical spread )

Combining selling a call while selling a put ( straddle or strangle )

Combining selling a put while ( iron condor or iron butterfly )

There are more…. just keep combining

Buying options instead of trading stocks

Benefits of Options:

  • Options give you tools to “hedge” or protect the stock you own in case the stock moves down
  • Options provide “leverage” for less money than if you were to buy stock outright.
  • Options allow you to profit from stocks moving up, moving down, or not moving at all

Definitions:

  • A hedge is a strategy of minimizing financial losses
  • Leverage is … 

 

blah blah

You can do both.  Just because you are trading options doesn’t mean that you can’t trade stocks; you can do both.  Both have their benefits within your investment portfolio.  The ability to trade both stocks and options give a trader more “options” when it comes to trying to make money in the stock market.  

Most investors understand the basics of buying stocks in the stock market.  What most people don’t understand, is that most stock investors only know how to make money if their stocks move up.  They have no concepts of what to do, short of selling the stock, if they feel that their stock might go down instead.  They do not understand if you sell a stock, you will have to pay taxes between 15 and 30 percent on the stock depending on how long you held the stock.  Options give the stock investor “tools” to hedge their other investments so that they don’t have to sell the stocks.  

 

 

 

 

 

 

 

 

 

 

Learning options trading doesn’t have to be much more sophisticated than learning how to buy or sell a stock;  whether you realize it or not, you are using many of the same principles when you are simply buying or selling a stock.

 

 

 

1.  Research the fundamentals of the underlying company.  

2.  Decide on the the strike price ( the purchase price ) based on market forces and technical analysis; do you think think the price is going up or down and how fast.  In the case of buying stocks, the strike price is equal to the stock price.  If you think that Apple is going to go up and the current price is 150, then you will buy the stock at a strike price of 150.  As I will demonstrate later, the more sophisticated trader will use technical indicators to potentially help even the stock buyer to wait and choose a better strike price.

The following pages are designed to teach you the foundations of learning how to buy and sell options.  In many ways, it is like learning a new language.  But after learning the basics of the language, a light bulb will usually go off where you say,  I get it.  At the end of the day, you want to be able to say to yourself:

Components of an Options Contract

Components of an Options Contract

  • Strike Price
  • Expiration Date
  • Are you buying or selling?
  • Are you buying or selling a call or a put? ( are you making a bet that the stock will move up or move down )

Definitions:

  • Strike Price
  • Expiration Date and Calendar
  • Premium Pricing
  • Intrinsic Value
  • Extrinsic Value
  • Time Value
  • Implied Volatility

As we saw in the previous section, options give a trader the tools to capitalize on the ability to bet that a stock will move up, down, or sideways and with leverage.  But just like any commodity, the trader will want to buy the option at “fair value”.  In other words, she will not want to overpay for the option.  That begs the questions?  How are options priced?  And how do write an option contract with fair pricing in mind.  Let’s start with what are are the components of an options contract before progressing to the real question of how to buy your option contract at a fair premium value.  

How to write an options contract:

Before making any kind of bet, you will want to have an educated guess about the directional movement of the stock.  Do you think the stock is going to go up, down, or sideways.  Secondly, you will also want to make another educated guess about how fast that the stock will move up, down, or sideways.  An analogy from sports betting might help.  If you were betting on a football game, you would want to have some edge in knowing whether your team is going to win or lose and by how much?  You might place a bet that says that the Washington Redskins are going to beat the Dallas Cowboys by a 20 point margin ( or a 20 point spread ).  If that is how you felt, you would never buy the bet that calls for the Washington Redskins to lose against the Dallas Cowboys.  In options trading, you need to have a concept of directional trading, optimizing your odds, and timeframe.

The strike price:

The strike price is the price goal of your options contract.  Looking at the football analogy again, you were betting that the Redskins were going to win lose by a 20 point spread.  You weren’t simply betting that the Redskins were going to lose; you were betting that they were going to lose by 20 points.  Anything short of that, you lose the bet.  In options trading, the spread is equivalent to the strike price.  You are making a bet that your stock will reach a certain “strike” price; and if it does not reach the strike price, even if you have the right direction, you will lose the bet.  

The expiration date:

The expiration date is the time period of the options contract.  Looking again at the football analogy, you are making a bet that the Redskins were going to win by the 20 point spread by the end of the game.  But what if you took an alternative bet.  You can certainly find a bet that says that the Redskins will be ahead of the Cowboys by a 10 point spread by half-time.  In options trading, there is a time limitation to the options contract.  In order for you to profit, you your stock will have to reach the strike price by the option expiration date.

Are you buying or selling?  A call or a put?

Buying a call is a bet that a stock is going to move up.  You will pay a premium ( debit ).  Selling a call is a bet that a stock is going to move down.  You will receive a premium ( credit ).  Buying a put is a bet that a stock is going to move down.  You will pay a premium ( debit ).  Selling a call is a bet that a stock is going to move down.  You will receive a premium ( credit ).  

There are therefore 2 ways that you can bet that a stock will move up.  You can either buy a call ( and pay a debit ) or sell a put ( and receive a credit ). There are also 2 ways that you can bet that a stock will move down.  You can either buy a put ( and pay a debit ) or sell a call ( and receive a credit ).  Don’t be intimidated.  These 4 options are simply tools that you can combine if you want into more complicated strategies.  These will be explained in a more dedicated chapter.  For now, suffice it to say that for all intents and purposes, buying for a debit and selling for a credit basically are the same thing.  This is because, if you think about it, the market isn’t really going to give you money for nothing.  In order for you to receive a credit, you will be putting up collateral ( a debit in disguise ) that the broker will hold against you.  The vast majority of my trades are straight directional purchases of long calls and long puts.

 

blah blah

Gaining and Edge - Buy Low Sell High

Technical Indicators

  • Exponential Moving Averages
  • Historial Support and Resistance Levels
  • Fibonacci Retracement Levels
  • Parabolic SARs
  • MACD
  • TTM Squeeze
  • VIX
  • Candlesticks

Definitions:

  • Technical Indicators
  • Fundamentals

Whether you are trading stocks or trading baseball cards, you will want to educate and identify the best price available to make your bet.  As the old saying goes, you will want to buy low and sell high.  Option traders have many and often too many tools to help them determine the best time to place their trades.  These tools include exponential moving averages, historical support and resistance levels, fibonacci retracement levels, parabolic SARs, MACDs, TTM Squeezes, and volatility indicators.  Some traders will use a few of these tools.  Others will use all of them and more.  Personally, I use all the tools on the list most of the time.  This section is meant to be a brief introduction to some of the technical indicators that I use.  For a deeper dive, please refer to the chapter on technical indicators.

Exponential Moving Averages

Traders will use the moving averages to:

  • identify the trend or directional movement of a stock
  • to help identify support and resistance levels

The moving average (MA) as well as the exponential moving average ( EMA ) are a widely used indicator in technical analysis.  They represent the average of the the stock prices over a certain time period.  The period of time can anything from minutes, to days, to weeks. Some commonly used moving averages are the 10 day, 50 day, 100 day, and even 1000 day moving averages.   The prices over the period of time ( 10 days for example ) are added together and then divided by the number of prices in the set.  Because they average out the stock prices, they serve to filter out the “noise” from random short-term fluctuations in the stock prices.  

Simple moving averages will take the arithmetic mean of a given set of stock prices over the past number of days.  The simple 10 day moving average will take the mean of the stock prices over the last 10 days.  Exponential moving averages ( EMAs ) will give more weight to more recent days over the the same period of time.  It is thought to be more responsive to more recent information. 

Choose a moving average for your trading timeframe:

  • If you are a day trader, you might prefer a short period moving average such as a 1, 2, or 10 minute moving average
  • If you are a long term investor, you might prefer a long period moving average such as a 50 day or 200 day moving average.
  • A rising moving average reinforces an assumption that your stock is in an up-trend
  • A falling moving average reinforces an assumption that your stock is in a down-trend
  • A bullish cross-over represents the situation where a shorter period MA crosses and moves above a longer trending MA
  • A bearish cross-over represents the situation where a shorter period MA crosses and moves below a longer trending MA

Historical Support and Resistance Levels

  • Visually useful to show traders when a stock is potentially going to change directions
  • Visually useful to show traders the directional movement of a stock

Technical traders are traders who rely on charts and indicators in making a large part of their trading decisions.  In large part, this is because of their belief in a few truisms at least in how they relate to the stock market.  The main one is that history tends to repeat itself.  Stocks tend to fall to a historical “support” level that a trader can see and target before going back up.  The corollary is that stocks tend to rise to a historical “resistance” level that a trader can see and target before going back down ( or stalling ).  The second truism is that the more traders who believe the first truism to be true, the stronger the support and resistance levels become.  In essence, the belief that historial support and resistance levels exist becomes a self-fulfilling actuality.  

Finding strong support and resistance levels is my most important indicator of how a stock will react.  While the overall general direction of the stock is determined by factors such as company earnings, political and economic climate, or the current market sentiment, the smaller moves within the larger moves can be determined by identifying support and resistance levels.

This is because other traders, besides yourself, also try to find support and resistance levels to aid them in their trading.  To some extent, this behavior becomes self-fulfilling; if enough traders believe that a stock will rise and fall against specific support and resistance levels, these levels become reinforced by the market behavior to “be” points of support and resistance.  

Support levels are stock prices to which a falling stock price is supported.  The falling stock tends to either sit at this level for a while or reverse course and start going up.  The support level can be overcome, and the stock can continue to fall if there is enough momentum and sentiment to force the stock lower. In the image, 211.8 a support level, albeit a week one, represented by the green fibonacci line.  The next lower support level was 203.  This support level also was violated.  Note that this stock- Apple, hit a high of 224.2 when the coronavirus hit the stock market, allowing all support levels to be violated.  In this image also, you can see the orange line; this represents a historical support level that I drew myself a few weeks before this clipped image.  

Resistance levels are stock prices to which a rising stock price is resisted.  The rising stock tends to either sit at this level for a while before rising further or reverse course and start going down.  The resistance level can be overcome and the stock can continue to rise if enough momentum and sentiment to force the stock higher.   In the image, the upper resistance level is 222, represented by the green fibonacci line.  Notice how the candlesticks seem to just want to stop there  

Example:

If I see that my stock zzz is falling and I either 1) want to know at what price I want to buy the stock, I might look at what level it fell to historically and buy at or around the same level.  If my stock zzz is now 100, and it recently fell to 80, I might take the chance and wait for it to fall to 80 before I bought it.  Alternatively, if it falls below 80 and I haven’t bought it, I might wait until it hits the next point of support.

If I see that my stock zzz is rising and I either 1) want to know at what price I want to sell the stock, I might look at what level it rose to historically and sell at or around the same level.  If my stock zzz is now 80 and it recently rose to 100, I might wait to sell it at 100.  Alternatively, if it rose past 100 and I haven’t bought it, I might pull the trigger at point because it had enough momentum to rise above its level of resistance.

Fibonacci Retracement Levels

  • Visually useful to show traders when a stock is potentially going to change directions
  • Visually useful to show traders the directional movement of a stock

One way of finding support and resistance is identifying historical support and resistance levels as described in the previous section.  A trader, will however, find that their stock will often violate those levels only to fall or rise to the next level.  This is particularly true in volatile stocks.  Identifying support and resistance levels is not an exact science.  

Fibonacci retracements are another way of identifying support and resistance levels.  If the stock of interest is at a new high and begins to fall, a retracement can be drawn to help you find “potential” support levels to which the stock might stop and/or reverse higher.  The opposite is also true.  If the stock of interest is at a new low and begins to rise, a retracement can be drawn to help you find “potential” resistance levels to which the stock might stock and/or reverse lower.  Lining these lines up with historical lines can be even more meaningful.

A detailed description is beyond the scope of this section and will be described later.  For now, you should know that some software, including Think or Swim by TD Ameritrade has tools that help you draw out the retracement ladder.  In their tool, you simply draw a line from the highest historical point of the stock to the lowest historical point of the stock.  This can be in the most recent timeframe or over a more extended timeframe.  The tool will then draw out several retracement levels including ones for  23.6%, 38.2%, 61.8% and 78.6% retracement levels. While not officially a Fibonacci ratio, 50% is also used.  Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. If the price rises $10, and then drops $2.36, it has retraced 23.6%, which is a Fibonacci number. Fibonacci numbers are found throughout nature, and therefore many traders believe that these numbers also have relevance in the financial markets.  Remember, Fibonacci levels can be self-reinforcing.  If enough traders use these levels ( and there are ), then the levels become stronger and more 

Parabolic SARs

  • Visually useful to show traders when a stock is potentially going to change directions
  • Visually useful to show traders the directional movement of a stock
  • Visually useful to show traders potential entry and exit points. 
  • False signals are more common in a stock that is moving sideways in a choppy market

The parabolic SAR indicator appears on a chart as a series of dots that generally follows the trend line of a stock.  A dot is shown on the stock chart below the price when it is trending upward; the dot is seen above the price when it is trending downward.  Rising dots can easily be visualized as a rising and maybe increasingly bullish signal.  Falling dots can be easily visualized as a falling and maybe increasingly bullish signal. 

The most useful part of the parabolic SAR, however, is the point of transition from rising dots to falling dots.  If the dots flip from below the stock to above the stock, this indicates a transition from a bull signal to a bear signal.  The opposite is also true.  if the dots flip from above the stock to below the stock, this indicates a transition from a bear signal to a bull signal.

The parabolic SAR, like all indicators, are most useful when used in concert with other indicators.  They are excellent visual cues about the direction of a stock as well as the potential change in direction of the stock particularly when the momentum of the stock is strong.  They will have more false signals if the stock is moving sideways in a choppy market.  Parabolic SAR signals have should be given much more weight if the bull signal is seen in concert with a stock that is trading above its long-term moving average or if a bear signal is seen in concert with a stock that is trading below its long-term moving average.  

 

More Indicators Later-  Getting Bogged Down

RSIs

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Volume

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

Candlesticks

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

Keltner Channels

The Keltner Channel price range indicator that combines the exponential moving average of a stock as well as the average true range of the stock.  These inputs are combined to visually provide an indicator with three lines.  The upper line is the upper trading range, the lower line

the lower trading range, and the middle line represents the exponential moving average of the stock.  The stock should theoretically stay inside the confines of the channel.  One can consider selling buying the stock if the stock goes outside the normal upper range of the stock; or sell the stock if the stock goes below the normal range of the stock.

 

Bollinger Bands

Bollinger Bands also use moving averages to form a channel around the stock price.  The upper and lower bands approximates a 2 standard deviation move from the average price of the stock.  In periods of low volatility, the bands will narrow because there is not a stock movement to be expected.  In fact, in periods of lower volatility, the boundaries of the bollinger bands will sit inside the boundaries of the Keltner Channel.  As volatility increases. The boundaries of the bollinger bands should expand.  This effect can be seen in my favorite indicator called the TTM Squeeze.  The TTM Squeeze indicator measures the relationship between the Bollinger Band study and the Keltner Funnel study.  In periods of increased volatility, the TTM squeeze indicator will fire ( described later ); indicating a greater than 2 standard deviation move…. Time to buy… or sell. 

TTM Squeeze

My favorite indicator that helps me determine both the momentum and direction of stock movement is the TTM squeeze.  In the image, you will see that TTM squeeze indicator at the bottom. The Squeeze indicator measures the relationship between two studies: Bollinger Bands and Keltner’s Channels. 

 

When the volatility increases, so does the distance between the bands, conversely, when the volatility declines, the distance also decreases.

 

The Squeeze indicator finds sections of the Bollinger Bands® study which fall inside the Keltner’s Channels. When the market finishes a move, the indicator turns off, which corresponds to bands having pushed well outside the range of Keltner’s Channels.

 

To produce Buy/Sell signals, the Squeeze indicator is plotted along with Momentum Oscillator. The Momentum Oscillator histogram is smoothed up with linear regression and other techniques. When the indicator is on (green) and the Momentum Oscillator is colored cyan, it is considered a Buy signal (this signal is supposed to be correct until two blue bars in a row). When the indicator is on and the Momentum Oscillator is red, it is considered a Sell signal (this signal is supposed to be correct until two yellow bars in a row). When the indicator is off (red), no trade is recommended.

 

Blue Bars

 

The light blue bars indicate an increase in momentum in the upward direction.  Increasing height of the bars indicate that the momentum is progressively increasing

The light blue bars indicate a decrease in momentum.  I strongly consider getting out of a trade when the momentum indicator moves from light blue to dark blue.

A change in the indicator from light blue to dark blue indicates decrease in momentum.  This translates into the possible change in the directional movement of the stock from up to down.

 

Red and Yellow Bars

 

The red bars indicate an increase in momentum in the downward direction of a stock.  Increasing height of the bars indicate that the downward momentum is increasing.

The yellow bars indicate an decrease in momentum in the downward direction of a stock.  I think about getting into a stock when the indicator moves from red to yellow.  Decreasing the height of the yellow bar indicates a slowing of the negative direction.

A change in the indicator from red to yellow indicates a decrease in negative momentum.  This translates into the possible change in the directional movement of the stock from down to up.

 

Red dots

 

Red dots indicate a condition where an indicator called the Kessner Funnel lies within the boundaries of another indicator called the Bollinger Bands.  ( detailed description later ).  The condition indicates that the stock is neutral and battling between the desire to move up or down.  

One of the strongest indicators is when the red dots transition to green in addition to the appearance of a light blue bar.  This condition is powerful because it indicates that the stock, which had pent up energy ( indicated by the red dots ) makes a transition to the upwards or downwards direction.  

Light blue means it is going to move powerfully upwards.  

Red means that it is going to move powerfully downwards.

 

 

 

 

Interim Summary

You now have the tools or “options” to trade stocks that you think will go up, down, or sideways.  You also have the “technical” tools to read a stock chart to make an educated guess as to how a stock of interest might move.  If you think a stock will move up, you might consider buying a call option or call debit spread.  If you think a stock will move down, you might consider buying a put or a put debit spread.  If you think a stock will move sideways, then you might consider combining these options to create butterfly, condor, or stangle spreads.

 

The Building Blocks for Learning Options

In many ways, options trading is similar to buying and selling stocks.  You still need to know something about the fundamentals of the underlying company.  You still need to have a technical understanding about how the stock is acting;  is it going up or down and how fast. And you will still have to make an educated guess at a proper strike price based on the a similar understanding of the the technical movements of the stock.  

The building blocks of learning options trading:

1.  Buying a call is betting that a stock will go up.  You will pay a “debit” to make this trade.

2.  Buying a put is betting that a stock will go down.  You will pay a “debit” to make this trade.

3.  Selling a call is betting that a stock will go down.  You will receive a “credit” to make this trade.

4.  Selling a put is betting that a stock will go up.  You will receive a “credit” to make this trade.

5.  The premium is the cost of a stock options contract.  You can pay a “debit” or receive a “credit” for the options contract

6.  Understanding premium pricing is crucial if you are to make money trading options

9.  Option contracts require you to identify a strike price as well as a contract expiration date;  The stock will have to reach your strike price before expiration before you make money*

10.  Strike prices at or around the stock price are referred to as ATM – at the money

11.  Strike prices above the stock price are referred to as OTM – out of the money

12.  Strike prices below the stock price are referred to as ITM – in the money

13. Moneyness is the term used to describe where the strike price is in relation to the stock price: OTM – out of the money, ATM – at the money, or ITM – in the money

13.  It is understandable that long dated options ( contracts expiring a long time from now ) give you more time to be right and should cost more

14.  It is understandable that more volatile stocks that could easily move in the wrong direction than your bet should cost more

15.  It is understandable that strike prices that are far away from the stock and give you more leeway to be right should cost more.

16.  Time, volatility, and relative distance from the strike price ( delta ) are therefore extrinsic value components to any premium price.

17.  In other words, premiums are composed of an intrinsic value component and an extrinsic value component.

18.  The intrinsic value of a stock or option is the true value or worth of the stock

19.  The extrinsic value of a stock option includes the addition of “time value” and “volatility value” and “delta”

20.  It follows that premium is composed of intrinsic value + time value + volatility value + delta

21.  In general buy calls ITM 0.6 delta

22.  In general buy puts ITM 0.5 delta

23.  Roll a long call if it moves in your favor in order to collect gamma – if you can capture 80% of the width of change in premium.

24.  Exit losing trades at 30% depending on market and technical conditions – retain capital to bet on a more favorable trade

  • Get the direction right
  • Understand support and resistance levels
  • The value of your options depend on price, time, and volatility. 
  • Buying call options is betting that a stock will go up
  • Buy put options is betting that a stock will go down
  • Selling options is simply the opposite of buying
  • Ignore all more advanced “morphing” strategies until later
  • Understanding delta and gamma are the keys to winning
  • Volatility in a stock will increase its value.

Option Basics

Key principles to know before you get started

  • Understanding technical indicators
  • Understand how to buy, sell, and combine calls and puts
  • Understand how time, volatility, price, and delta affect the price of options

Understanding options can be intimidating.  It is not always easy to know where to start.  I know I didn’t.  The ability to become a successful trader depends largely on how well you learn these principles and how you can apply them consistently.

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

Options prices are influenced by time, volatility, and price.  Together, these elements make up the price of the option.  In any market, understanding what your commodity is worth is essential to making money.  It should make sense that  buying an option that gives you more time time to be successful should be worth more money than shorter dated options; it also should make sense that more volatile stocks that move up and down more severely and randomly should be worth more than more stable stocks; and finally, it should make sense that buying a contract with a strike price well below the market price should be worth more.

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

Options prices are influenced by time, volatility, and price.  Together, these elements make up the price of the option.  In any market, understanding what your commodity is worth is essential to making money.  It should make sense that  buying an option that gives you more time time to be successful should be worth more money than shorter dated options; it also should make sense that more volatile stocks that move up and down more severely and randomly should be worth more than more stable stocks; and finally, it should make sense that buying a contract with a strike price well below the market price should be worth more.

Don't Trade Blind

Technical Indicators

  • Support and Resistance Levels
  • Momentum Indicators

Finding strong support and resistance levels is my most important indicator of how a stock will react.  While the overall general direction of the stock is determined by factors such as company earnings, political and economic climate, or the current market sentiment, the smaller moves within the larger moves can be determined by identifying support and resistance levels.  This is because other traders, besides yourself, also try to find support and resistance levels to aid them in their trading.  To some extent, this behavior becomes self-fulfilling; if enough traders believe that a stock will rise and fall against specific support and resistance levels, these levels become reinforced by the market behavior to “be” points of support and resistance.  

Support levels are stock prices to which a falling stock price is supported.  The falling stock tends to either sit at this level for a while or reverse course and start going up.  The support level can be overcome, and the stock can continue to fall if there is enough momentum and sentiment to force the stock lower. In the image, 211.8 a support level, albeit a week one, represented by the green fibonacci line.  The next lower support level was 203.  This support level also was violated.  Note that this stock- Apple, hit a high of 224.2 when the coronavirus hit the stock market, allowing all support levels to be violated.  In this image also, you can see the orange line; this represents a historical support level that I drew myself a few weeks before this clipped image.  

Resistance levels are stock prices to which a rising stock price is resisted.  The rising stock tends to either sit at this level for a while before rising further or reverse course and start going down.  The resistance level can be overcome and the stock can continue to rise if enough momentum and sentiment to force the stock higher.   In the image, the upper resistance level is 222, represented by the green fibonacci line.  Notice how the candlesticks seem to just want to stop there

 

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

Options prices are influenced by time, volatility, and price.  Together, these elements make up the price of the option.  In any market, understanding what your commodity is worth is essential to making money.  It should make sense that  buying an option that gives you more time time to be successful should be worth more money than shorter dated options; it also should make sense that more volatile stocks that move up and down more severely and randomly should be worth more than more stable stocks; and finally, it should make sense that buying a contract with a strike price well below the market price should be worth more.

Support and resistance levels are simply guidelines that can be used to guide a trader when deciding high a stock might fall or rise, or where the stock might reverse its short-term trend.  One of the best and most specific ways to determine these levels is simply to look back  in time and look levels to which a stock fell hard and stopped, or where a stock moved sideways for a period of time.  Most software will have line drawing tools that can draw this line across an entire graph.  Use this line as a guide, but this line is even more powerful if it coincides with a fibonacci retracement level

Determining a fibonacci retracement level is a technical analysis tool that allows traders to find levels of support or resistance. If the stock of interest is at a new high and begins to fall, a retracement can be drawn to help you find “potential” support levels to which the stock might stop and/or reverse higher.  The opposite is also true.  If the stock of interest is at a new low and begins to rise, a retracement can be drawn to help you find “potential” resistance levels to which the stock might stock and/or reverse lower.  Lining these lines up with historical lines can be even more meaningful.

 

A detailed description is beyond the scope of this section and will be described later.  For now, you should know that some software, including Think or Swim by TD Ameritrade has tools that help you draw out the retracement ladder.  In their tool, you simply draw a line from the highest historical point of the stock to the lowest historical point of the stock.  This can be in the most recent timeframe or over a more extended timeframe.  The tool will then draw out several retracement levels including ones for  23.6%, 38.2%, 61.8% and 78.6% retracement levels. While not officially a Fibonacci ratio, 50% is also used.  Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. If the price rises $10, and then drops $2.36, it has retraced 23.6%, which is a Fibonacci number. Fibonacci numbers are found throughout nature, and therefore many traders believe that these numbers also have relevance in the financial markets.  Remember, Fibonacci levels can be self-reinforcing.  If enough traders use these levels ( and there are ), then the levels become stronger and more relevant.

 

The parabolic SAR is another indicator that can help you determine the trend direction and potential reversal points suitable for entry and exit points.  The indicator appears on the chart as a series of dots above ( if the stock is trending up ) and below the asset price ( if it is trending lower ).  Where the indicator changes directions is theoretically a possible entry or exit point for buying or selling your stock.  As the price of a stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. The SAR starts to move a little faster as the trend develops, and the dots soon catch up to the price.  The indicator is most accurate for longer trending moves that are confirmed by other indicators like the moving average or the TTM squeeze indicators.  If the market is more neutral and is trading sideways, the indicator tends to give more false signals.  

The Keltner Channel price range indicator that combines the exponential moving average of a stock as well as the average true range of the stock.  These inputs are combined to visually provide an indicator with three lines.  The upper line is the upper trading range, the lower line

the lower trading range, and the middle line represents the exponential moving average of the stock.  The stock should theoretically stay inside the confines of the channel.  One can consider selling buying the stock if the stock goes outside the normal upper range of the stock; or sell the stock if the stock goes below the normal range of the stock.

 

Bollinger Bands also use moving averages to form a channel around the stock price.  The upper and lower bands approximates a 2 standard deviation move from the average price of the stock.  In periods of low volatility, the bands will narrow because there is not a stock movement to be expected.  In fact, in periods of lower volatility, the boundaries of the bollinger bands will sit inside the boundaries of the Keltner Channel.  As volatility increases. The boundaries of the bollinger bands should expand.  This effect can be seen in my favorite indicator called the TTM Squeeze.  The TTM Squeeze indicator measures the relationship between the Bollinger Band study and the Keltner Funnel study.  In periods of increased volatility, the TTM squeeze indicator will fire ( described later ); indicating a greater than 2 standard deviation move…. Time to buy… or sell. 

My favorite indicator that helps me determine both the momentum and direction of stock movement is the TTM squeeze.  In the image, you will see that TTM squeeze indicator at the bottom. The Squeeze indicator measures the relationship between two studies: Bollinger Bands and Keltner’s Channels. 

 

When the volatility increases, so does the distance between the bands, conversely, when the volatility declines, the distance also decreases.

 

The Squeeze indicator finds sections of the Bollinger Bands® study which fall inside the Keltner’s Channels. When the market finishes a move, the indicator turns off, which corresponds to bands having pushed well outside the range of Keltner’s Channels.

 

To produce Buy/Sell signals, the Squeeze indicator is plotted along with Momentum Oscillator. The Momentum Oscillator histogram is smoothed up with linear regression and other techniques. When the indicator is on (green) and the Momentum Oscillator is colored cyan, it is considered a Buy signal (this signal is supposed to be correct until two blue bars in a row). When the indicator is on and the Momentum Oscillator is red, it is considered a Sell signal (this signal is supposed to be correct until two yellow bars in a row). When the indicator is off (red), no trade is recommended.

 

 

Blue Bars

 

The light blue bars indicate an increase in momentum in the upward direction.  Increasing height of the bars indicate that the momentum is progressively increasing

The light blue bars indicate a decrease in momentum.  I strongly consider getting out of a trade when the momentum indicator moves from light blue to dark blue.

A change in the indicator from light blue to dark blue indicates decrease in momentum.  This translates into the possible change in the directional movement of the stock from up to down.

 

Red and Yellow Bars

 

The red bars indicate an increase in momentum in the downward direction of a stock.  Increasing height of the bars indicate that the downward momentum is increasing.

The yellow bars indicate an decrease in momentum in the downward direction of a stock.  I think about getting into a stock when the indicator moves from red to yellow.  Decreasing the height of the yellow bar indicates a slowing of the negative direction.

A change in the indicator from red to yellow indicates a decrease in negative momentum.  This translates into the possible change in the directional movement of the stock from down to up.

 

Red dots

 

Red dots indicate a condition where an indicator called the Kessner Funnel lies within the boundaries of another indicator called the Bollinger Bands.  ( detailed description later ).  The condition indicates that the stock is neutral and battling between the desire to move up or down.  

One of the strongest indicators is when the red dots transition to green in addition to the appearance of a light blue bar.  This condition is powerful because it indicates that the stock, which had pent up energy ( indicated by the red dots ) makes a transition to the upwards or downwards direction.  

Light blue means it is going to move powerfully upwards.  

Red means that it is going to move powerfully downwards.

 

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

Don't Trade Blind

Should you buy a stock or an option?

  • Support and Resistance Levels
  • Momentum Indicators

Finding strong support and resistance levels is my most important indicator of how a stock will react.  While the overall general direction of the stock is determined by factors such as company earnings, political and economic climate, or the current market sentiment, the smaller moves within the larger moves can be determined by identifying support and resistance levels.  This is because other traders, besides yourself, also try to find support and resistance levels to aid them in their trading.  To some extent, this behavior becomes self-fulfilling; if enough traders believe that a stock will rise and fall against specific support and resistance levels, these levels become reinforced by the market behavior to “be” points of support and resistance.  

Support levels are stock prices to which a falling stock price is supported.  The falling stock tends to either sit at this level for a while or reverse course and start going up.  The support level can be overcome, and the stock can continue to fall if there is enough momentum and sentiment to force the stock lower. In the image, 211.8 a support level, albeit a week one, represented by the green fibonacci line.  The next lower support level was 203.  This support level also was violated.  Note that this stock- Apple, hit a high of 224.2 when the coronavirus hit the stock market, allowing all support levels to be violated.  In this image also, you can see the orange line; this represents a historical support level that I drew myself a few weeks before this clipped image.  

Resistance levels are stock prices to which a rising stock price is resisted.  The rising stock tends to either sit at this level for a while before rising further or reverse course and start going down.  The resistance level can be overcome and the stock can continue to rise if enough momentum and sentiment to force the stock higher.   In the image, the upper resistance level is 222, represented by the green fibonacci line.  Notice how the candlesticks seem to just want to stop there

 

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

Options prices are influenced by time, volatility, and price.  Together, these elements make up the price of the option.  In any market, understanding what your commodity is worth is essential to making money.  It should make sense that  buying an option that gives you more time time to be successful should be worth more money than shorter dated options; it also should make sense that more volatile stocks that move up and down more severely and randomly should be worth more than more stable stocks; and finally, it should make sense that buying a contract with a strike price well below the market price should be worth more.

Support and resistance levels are simply guidelines that can be used to guide a trader when deciding high a stock might fall or rise, or where the stock might reverse its short-term trend.  One of the best and most specific ways to determine these levels is simply to look back  in time and look levels to which a stock fell hard and stopped, or where a stock moved sideways for a period of time.  Most software will have line drawing tools that can draw this line across an entire graph.  Use this line as a guide, but this line is even more powerful if it coincides with a fibonacci retracement level

Determining a fibonacci retracement level is a technical analysis tool that allows traders to find levels of support or resistance. If the stock of interest is at a new high and begins to fall, a retracement can be drawn to help you find “potential” support levels to which the stock might stop and/or reverse higher.  The opposite is also true.  If the stock of interest is at a new low and begins to rise, a retracement can be drawn to help you find “potential” resistance levels to which the stock might stock and/or reverse lower.  Lining these lines up with historical lines can be even more meaningful.

 

A detailed description is beyond the scope of this section and will be described later.  For now, you should know that some software, including Think or Swim by TD Ameritrade has tools that help you draw out the retracement ladder.  In their tool, you simply draw a line from the highest historical point of the stock to the lowest historical point of the stock.  This can be in the most recent timeframe or over a more extended timeframe.  The tool will then draw out several retracement levels including ones for  23.6%, 38.2%, 61.8% and 78.6% retracement levels. While not officially a Fibonacci ratio, 50% is also used.  Each level is associated with a percentage. The percentage is how much of a prior move the price has retraced. If the price rises $10, and then drops $2.36, it has retraced 23.6%, which is a Fibonacci number. Fibonacci numbers are found throughout nature, and therefore many traders believe that these numbers also have relevance in the financial markets.  Remember, Fibonacci levels can be self-reinforcing.  If enough traders use these levels ( and there are ), then the levels become stronger and more relevant.

 

The parabolic SAR is another indicator that can help you determine the trend direction and potential reversal points suitable for entry and exit points.  The indicator appears on the chart as a series of dots above ( if the stock is trending up ) and below the asset price ( if it is trending lower ).  Where the indicator changes directions is theoretically a possible entry or exit point for buying or selling your stock.  As the price of a stock rises, the dots will rise as well, first slowly and then picking up speed and accelerating with the trend. The SAR starts to move a little faster as the trend develops, and the dots soon catch up to the price.  The indicator is most accurate for longer trending moves that are confirmed by other indicators like the moving average or the TTM squeeze indicators.  If the market is more neutral and is trading sideways, the indicator tends to give more false signals.  

The Keltner Channel price range indicator that combines the exponential moving average of a stock as well as the average true range of the stock.  These inputs are combined to visually provide an indicator with three lines.  The upper line is the upper trading range, the lower line

the lower trading range, and the middle line represents the exponential moving average of the stock.  The stock should theoretically stay inside the confines of the channel.  One can consider selling buying the stock if the stock goes outside the normal upper range of the stock; or sell the stock if the stock goes below the normal range of the stock.

 

Bollinger Bands also use moving averages to form a channel around the stock price.  The upper and lower bands approximates a 2 standard deviation move from the average price of the stock.  In periods of low volatility, the bands will narrow because there is not a stock movement to be expected.  In fact, in periods of lower volatility, the boundaries of the bollinger bands will sit inside the boundaries of the Keltner Channel.  As volatility increases. The boundaries of the bollinger bands should expand.  This effect can be seen in my favorite indicator called the TTM Squeeze.  The TTM Squeeze indicator measures the relationship between the Bollinger Band study and the Keltner Funnel study.  In periods of increased volatility, the TTM squeeze indicator will fire ( described later ); indicating a greater than 2 standard deviation move…. Time to buy… or sell. 

My favorite indicator that helps me determine both the momentum and direction of stock movement is the TTM squeeze.  In the image, you will see that TTM squeeze indicator at the bottom. The Squeeze indicator measures the relationship between two studies: Bollinger Bands and Keltner’s Channels. 

 

When the volatility increases, so does the distance between the bands, conversely, when the volatility declines, the distance also decreases.

 

The Squeeze indicator finds sections of the Bollinger Bands® study which fall inside the Keltner’s Channels. When the market finishes a move, the indicator turns off, which corresponds to bands having pushed well outside the range of Keltner’s Channels.

 

To produce Buy/Sell signals, the Squeeze indicator is plotted along with Momentum Oscillator. The Momentum Oscillator histogram is smoothed up with linear regression and other techniques. When the indicator is on (green) and the Momentum Oscillator is colored cyan, it is considered a Buy signal (this signal is supposed to be correct until two blue bars in a row). When the indicator is on and the Momentum Oscillator is red, it is considered a Sell signal (this signal is supposed to be correct until two yellow bars in a row). When the indicator is off (red), no trade is recommended.

 

 

Blue Bars

 

The light blue bars indicate an increase in momentum in the upward direction.  Increasing height of the bars indicate that the momentum is progressively increasing

The light blue bars indicate a decrease in momentum.  I strongly consider getting out of a trade when the momentum indicator moves from light blue to dark blue.

A change in the indicator from light blue to dark blue indicates decrease in momentum.  This translates into the possible change in the directional movement of the stock from up to down.

 

Red and Yellow Bars

 

The red bars indicate an increase in momentum in the downward direction of a stock.  Increasing height of the bars indicate that the downward momentum is increasing.

The yellow bars indicate an decrease in momentum in the downward direction of a stock.  I think about getting into a stock when the indicator moves from red to yellow.  Decreasing the height of the yellow bar indicates a slowing of the negative direction.

A change in the indicator from red to yellow indicates a decrease in negative momentum.  This translates into the possible change in the directional movement of the stock from down to up.

 

Red dots

 

Red dots indicate a condition where an indicator called the Kessner Funnel lies within the boundaries of another indicator called the Bollinger Bands.  ( detailed description later ).  The condition indicates that the stock is neutral and battling between the desire to move up or down.  

One of the strongest indicators is when the red dots transition to green in addition to the appearance of a light blue bar.  This condition is powerful because it indicates that the stock, which had pent up energy ( indicated by the red dots ) makes a transition to the upwards or downwards direction.  

Light blue means it is going to move powerfully upwards.  

Red means that it is going to move powerfully downwards.

 

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 
How is Options Trading Similar to Playing Craps?
Bullish Option | Straddles

Investing in the stock market is a type of gambling… legalized gambling.  Like any form of gambling, the odds of making money are less than 100 percent. If you were to go to Vegas or any gambling casino, you will see that most of the table games have games within games.  I think I will write more about the comparison in a later chapter [  link  ].   For now, simply know that in craps, you can bet on the place numbers along the sides for reasonable odds against you (but a lesser pay-out), or you can play the center numbers “hardways” or “hop” bets for terrible odds.  You will win a place number bet if you roll the number before you roll a 7; for hop bets, you will get one chance, one roll, to hit the number.  The probability of hitting the hardways bet or the hop bet is pretty small, but if you win, the payout can be huge.  Hitting the 2 or 12 hop for example will pay 33:1.  These are considered sucker bets by the casino.  These are the bets that the casino wants you to take.  

So what kind of options trader do you want to be?  Do you want to be the gambler that plays the odds to win more consistently by varying your bets on the more consistent winners, or your you the gambler who wants to hit the homerun against terrible odds?  

In options trading, the difference between placing an in the money bet vs placing an out of the money bet equivalent to betting a place line number vs betting a hardways or hop bet.  Place line bets are the equivalent to in the money bets in craps have significantly better odds but pays less.  Hardways or hop bets are equivalent to out of the money and deep out of the money bets in craps respectively.  They have progressively worse odds of winning, but if you win, the payouts can be huge.  

Improving your odds ( pick the right direction )

The odds are always against you when it comes to gambling. In options trading, you can improve your odds of success understanding that the odds of success depends entirely on one concept; you have to get the direction and timing of your stock movement correct.  You need to be able to correctly say that your stock will move up or down to your stock price by the day of expiration that I choose.  But simply getting the direction correct is 90 percent of the battle; this is because you don’t need to wait for the expiration to cash out.  In general, if you bought a call for an option with 30 days to expiration, you can close out of the contract for a small profit even minutes from buying the contract.  And depending on the size of your bet, the small profit could actually be a large one. 

Traders educate themselves to improve their odds of success; they do this by understanding the by learning the fundamentals of the companies in which they want to invest as well as becoming experts in interpreting technical indicators to help decide the directional movement of their potential stocks.  Option contracts, unlike stocks, will also require you to bet on a “strike price” and an “expiration date”; that is, the option trader will need to place a bet that their stock will reach a certain price by a certain date.  It is therefore, more imperative that the option trader gets the initial thesis correct in terms of directional movement and that the stock will move in that direction with reasonable conviction and time.

 
  • The basics of buying and selling call options
  • The basics of buying and selling put options
  • Choosing the strike price based on the stock price and time
  • Predict directional stock movements based on fundamental and technical analysis
  • Adjusting option trades that move against you
  • When to take profits
  • Advanced option strategies
The Official Definition of a Stock Option
Bullish Option | Straddles

A stock option is “a contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration).

A simpler definition would be that a stock option is “the right to buy or sell a specific stock at a certain price for a limited period of time.”

Another very important aspect of options contracts that are often left out of descriptive definitions of options contracts that option contracts have properties of dynamic value pricing. The value of the contract will actually go up and down depending on the price of the stock prior to the expiration date. You have no obligation to keep the option contract to the date of expiration. If the “value” of the option contract increases by 100% in the hour after writing the contract, you have every “right” to sell the contract back for the 100% profit immediately.


Breaking this down, you will need to understand the following concepts:

Like any data set, there may be hundreds of ways you can see and interpret the data. Many more variables will be presented later. For now, it is important to understand the following concepts.

Stock price
Strike price
Options premium
Probability of success
Expiration date


Find a stock or asset that you want to buy or sell
Buy a stock or asset only if you think it is going up – this should be self-evident
Sell a stock or asset only if you think it is going down – this also should be self evident
You are betting that the stock or asset will reach a certain price ( strike price ) by a specified time ( the expiration
You will pay a premium to enter the options contract
The premium will vary depending on the strike price, expiration date, and volatility ( described later )
You can close out the contract at any time – you don’t have to wait until the expiration date.
You have the “right” but not the “obligation” to ever buy the stock

Think of Options Like Getting a Raincheck
Bullish Option | Straddles

Consider this scenario. You go to a store because an item that you are interested in is on sale. The problem is that the item was so popular that has already sold out. Your choices are to leave without making the purchase and hoping that the store restocks its shelves or to ask the manager for a rain check. The raincheck works by guaranteeing you the sale-price of the item up to a certain date… but it will cost you a dollar. You have now entered into an options contract. The sales price is equivalent to the strike price while the dollar paid is equivalent to the premium price you had to pay to enter into this contract. You bought a contract that guarantees the sales price even if the price is higher when it returns to the store. And just like an options contract, you are not obligated to “exercise” the ability to buy the item at the sales price; if the price of the item goes down, you can simply opt out of the contract and purchase the item at the lower price.

Once you believe with some conviction that your stock will move up, you will want to be able to capitalize on that assumption by making a directional bet. You can bet on your stock by buying the stock or buying an “option” contract. Stocks allow individuals to own parts or percentages of companies. These parts are called shares. The stock market acts as a marketplace that allows an investor to buy “shares” of a company. It allows you to own one share or hundreds of shares of any company that is listed in the stock market. If the company becomes more valuable, you get to share in its success by the percentage of ownership that you have in the company. If the stock value of the company increases, the value of your share of the company will go up by the same percentage. Most investors who want to participate in the stock market will buy “stocks”. More sophisticated investors, however, might want to participate in the stock market by buying “options”.

Simply buying stocks can be significantly limiting. For example, let’s say that you own 10 shares of Apple stock. What you do if you had a strong feeling based on the market sentiment and the technical indicators described earlier that the stock was likely to go down. Most investors have been taught to buy and hold their stocks through thick and thin. I would argue that it would be completely demoralizing to watch a stock that you knew was going to go down, to actually begin going down without any recourse.

Options contracts give investors more sophisticated “options” to profit from the stock market whether it is going up, down, or sideways. The ability of having multiple “options” to control your view of the stock market is intimidating to most people… but it shouldn’t be. I would give you the argument that it is significantly more stressful thinking about what you should be doing with your stock investments if you think that your stock might move down. What tools do you have in a down-market? Yes, you can sell your stock; you might be subjected to pay taxes and you will not be able to profit. You can “short” the stock; I would argue that most investors don’t know how to do this either.

The practical answer, however, is that it is a vehicle through which you can trade the stock market with tools to profit if the stock goes up or down. Not only do options allow you to profit from the market in different market conditions, but your options allow you to buy the stock for only a fraction of the price; this is called leverage. Each option contract controls 100 shares of stock for a fraction of what they are worth. At the time I am writing this, an option contract for Apple that expires in 30 days will cost me an option premium of about 1100 dollars when the stock price is about 319 dollars. If I were to buy 100 shares of stock at 319 dollars, I would normally have to pay 31,900 dollars; instead, I am able to control 31,900 dollars worth of stock for only 1,00 dollars.

Benefits of options

Options allow an investor to profit from any kind of market; an investor can profit can profit from a stock moving up, down, or side-ways.


Options allow the market investor to buy stocks for fractions of their normal costs. At the time of this writing, you are able to buy 100 shares of Apple Stock for $1100 dollars when a single share of Apple Stock is worth 319 dollars… that is called leverage.


Options can also allow an investor to hedge their “stock” portfolio. If you think that there will be a temporary and potentially imminent downturn in your stock, you can instead of selling your stocks, buy a “put” option that bets that the market will go down.

Buying a Call Option
Bullish Option | Straddles

Option Basics— the building blocks

The power of understanding options is that they give investors a tool to profit from markets that go up, down, or sideways. Buying and selling calls and puts make up the foundation to all the option strategies. In fact, as you will learn, every option strategy is created by buying calls and puts in different combinations.

  • What does it mean to buy a call
  • What does it mean to sell a call
  • What does it mean to buy a put
  • What does it mean to sell a put

Calls are bets that a stock will move up. Puts are bets that a stock will move down.

  • Buying anything ( whether call or puts ) are bets that align with the first principle. If calls are bets that a stock will move up, buying a call is the mechanical strategy to bet that a stock will move up. If puts are bets that a stock will move down, buying a put is the mechanical strategy that a stock will move down. Buying an option will require you to pay a premium.
  • Selling anything ( whether calls or puts ) are bets that move opposite of the first principle. If calls are bets that a stock will move up, selling a call is a different mechanical strategy to bet that a stock will move down. If puts are bets that a stock will move down, selling a put is a different mechanical strategy that a stock will move down. Selling an option will allow you to collect a premium.

Betting a stock will move up

As you can see, there are two ways to bet that a stock will move up; you can buy a call or you can sell a put. Likewise, there are two ways to bet that a stock will move down; you can buy a put or you can sell a call. The reasons to choose which strategy will be discussed later. For now, simply memorize these four combinations with the knowledge that you will most commonly choose the easiest and most intuitive strategy to buying anything. You see an item that you want to invest in because you think it will appreciate, you will “buy” the item— you will “buy” the call. If you see an item that you think will go down, you will simply “buy the put”.

Buying a Call Option ( betting that a stock will move up )

If you want to buy a stock because you think that the stock is going to move up, you simply buy the stock at the existing stock price. If the stock price is 100 dollars, then you will buy the stock for 100 dollars. Buying an option is more complicated but it provides the tools to profit from the market going up, down, or even sideways.  Buying a call option requires you anticipate not only the directional movement of the stock, but you will have to anticipate a target price ( called the strike price ) and the time you think it will take to get there ( called the expiration date ). 

If the stock you are interested in is 100 dollars, you might think to yourself that the stock will reach 120 dollars in the next month. More on this later, but you might be considering buying a call option contract for a 115 dollar strike with a March expiration. It is very important to know that you will be profitable as long as you get the direction correct. While it is true that you are most profitable if your stock approaches your strike price by the March expiration, you don’t have to wait until expiration to cash in and close your trade. Read later about what happens if you get the direction wrong or don’t reach the strike price by expiration.

Initial Steps in purchasing a call option:

Anticipate the directional movement of the stock
Anticipate a strike ( target ) price that you think the stock might reach by a given date ( expiration date 

Buying a call is the most common option that I use.  In its simplest form, it is a bet that your stock is going to move up to your designated strike price by a given time.  Note that your stock doesn’t even need to reach your strike price by the allotted time; it simply needs to be moving in the right direction.  You will have to pay a premium to place the trade. 

Steps:

1. Look at technicals to indicate that a stock is going up.  It is best if the stock is near a support line moving up to a resistance line.

2.  Buy an option with a delta of about 60 for most options

3. Buy the option with about 3x the time you actually think it will take to reach your target price.

4. If your contract is up –  Sell ( close ) or roll the contract if you are approaching a resistance level

5.  If your contract is down – Sell ( close ) the contract to avoid more losses.  Use the proceeds to place a more favorable trade.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

Buying a put is a bearish trade to capitalize on a stock moving down.  In its simplest form, it is a bet that your stock is going to move down to your designated strike price by a given time.  Note that your stock doesn’t even need to reach your strike price by the allotted time; it simply needs to be moving in the right direction.  You will have to pay a premium to place the trade. 

Steps:

1. Look at technicals to indicate that a stock is going down.  It is best if the stock is near or at a resistance line moving down to a support line

2.  Buy an option with a delta of about 50 for most options

3. Buy the option with about 3x the time you actually think it will take to reach your target price.

4. If your contract is winning –  Sell ( close ) or roll the contract if you are approaching a support level

5.  If your contract is losing – Sell ( close ) the contract to avoid more losses.  Use the proceeds to place a more favorable trade.

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

One of the most important things to understand if you are going to be a successful trader is that timing is everything.  This is true whether you are simply buying or selling stock or if you are to trade options.  There is a saying in the market, “buy low, sell high”;  the implication is that you don’t simply want to buy a stock in a vacuum.  What if the stock price is on it’s way down.  This is where technical indicators come in.  Some indicators that I like include exponential moving averages, parabolic SARs, the TTM squeeze, MACD, fibonacci retracement lines, and historical support and resistance lines.

Calls and Puts are the most basic building blocks of all option trades and strategies.  Calls are bets that a stock will move up.  Puts are bets that a stock will move down.  Notably, the vast majority of my opening trades are to either BUY a call on a stock I think will go up or to BUY a put on a stock that I think will go down. 

The average stock chart will show the price of the stock over time as either a linear graph or a graph with candlesticks.  In the Apple graph, you can see the candlesticks as the red and green bars.  You will also notice that the bars have wicks that extend up or down.

 

Red candlesticks indicate that the stock price went down from the top of the red bar to the bottom

Green candlesticks indicate the the stock price with up from the bottom of the green bar to the top

Wicks indicate that the stock went up or down to the end of the wick but settled back at the price indicated by the edge of the bar.

 

Descending red bars indicate that the stock is going down over time.  Ascending green bars indicate that the stock is increasing over time.  Descending bars with a wick that extends down to a support line “might” indicate that the stock will stop decreasing and reverse course or stay neutral for a time.  Ascending bars with a wick that extends up to a resistance line “might” indicate that the stock will stock increase and reverse course or stay neutral for a time.

 

Option Basics

The Power of Options

The following pages are designed to teach you the foundations of learning how to buy and sell options.  In many ways, it is like learning a new language.  But after learning the basics of the language, a light bulb will usually go off where you say,  I get it.  At the end of the day, you want to be able to say to yourself:

The stock market is the most powerful tool in history to build personal wealth.  The stock market allows individuals to own parts of huge multi-billion dollar companies by buying “shares” of their company.  If the value of the company increases, an investor will benefit by increasing the value of the shares in proportion to the increase in value of the company.  Learning how to trade options gives you the tools to exponentially increase your potential exploit the earnings potential of the stock market.  

If you use option tools and principles correctly, you will be able to make more money in the stock market than you will ever be able to make at your job, multiple jobs, or side-gigs.  In fact, persons who understand and trade in the stock market is one of the primary reasons for the ever-increasing income gap in the United States as well as the rest of the world.  Options give investors more sophisticated “options” to profit from the stock market whether it is going up, down, or sideways.   Like any investment, you will need to do research on the growth potential of the companies that you will want to invest in.  

 

The short straddle is an options strategy that consists of selling call and put option on a stock with the same strike price and expiration date.

  • – Sell ATM Call
  • – Sell ATM Put

The sale of an at-the-money call is a bearish strategy; and selling a put is a bullish strategy.  Combining the two into a short straddle results in a directionally neutral position. 

However, as the stock price changes, the trade will become directional and can suffer significant losses.

 

When selling straddles, profits come from the passage of time or decreases in implied volatility, as long as the stock price remains within the breakeven points of the position. 

Selling straddles is very similar to selling strangles, with the only difference being that the short call and put share the same strike price.

 

Option Basics

The Language of Options

The following pages are designed to teach you the foundations of learning how to buy and sell options.  In many ways, it is like learning a new language.  But after learning the basics of the language, a light bulb will usually go off where you say,  I get it.  At the end of the day, you want to be able to say to yourself:

Why Trade Option

Calls and Puts

Buying or Selling Premium

Strike Price

Option Calendar

Time Decay

Implied Volatility

The short straddle is an options strategy that consists of selling call and put option on a stock with the same strike price and expiration date.

  • – Sell ATM Call
  • – Sell ATM Put

The sale of an at-the-money call is a bearish strategy; and selling a put is a bullish strategy.  Combining the two into a short straddle results in a directionally neutral position. 

However, as the stock price changes, the trade will become directional and can suffer significant losses.

 

When selling straddles, profits come from the passage of time or decreases in implied volatility, as long as the stock price remains within the breakeven points of the position. 

Selling straddles is very similar to selling strangles, with the only difference being that the short call and put share the same strike price.

 

Toggle Content
Toggle Content
Toggle Content
Toggle Content
Toggle Content

Option Basics

Key principles to know before you get started

Get the direction right

Understand support and resistance levels

The price and value of options depend on the “extrinsic factors” of time and volatility. 

Buying call options is betting that a stock will go up

Buy put options is betting that a stock will go down

Calls and puts can be sold instead to bet in the opposite direction

Ignore all more advanced strategies until later

Further out of the money options have more time value to get rid of before generating a real profit.

Volatility in a stock will increase its value.

But, we know this. The real question is how to adjust for this situation. As far as the puts go when trading the downside, everything should remain the same. Our 50 delta option is aided by the increase in implied volatility so there is no reason to make an adjustment. However, in the case of our calls and trading the upside, an adjustment needs to be made. As the stock goes up, the decrease in volatility decreases the amount of extrinsic value in our call. This decrease can be very tangible as the ATM option, which is 50 delta, has the highest volatility sensitivity (vega) of any strike in the said expiration cycle. Since the decrease in volatility could be very damaging to our call, a change has to be made. We need to move away from the ATM option.

 

If we move further out of the money, we will avoid the heaviest amount of volatility sensitivity (by moving away from the at the money option) but we also lessen our delta thereby lowering our mimicking power to the stock. However, if we moved a little further in the money to the 65 delta option, we would avoid the heavier extrinsic value loss AND we would ADD some delta or mimicking power (15 more deltas or about 30%) into the equation. This is why when we are engaged in short term directional trading or swing trading, it is best to use 50 delta puts for trading downside opportunities and 65 delta calls for trading upside opportunities.

 

Options contracts have expiration 

You only have so much time to get the trade right.

Sentiment and environment

Company characteristics

Support and resistance levels

Moving averages

Historical support and resistance

Fibonacci retracement tool

Harder at all time highs

Bigger bets if you are bullish and you are near support

Smaller bets if you are near resistance even if you are bullish

Bigger bets if you cross the line of resistance

Buy a call

Buy a call debit ( vertical ) spread

Sell a put

Sell a put credit spread

 

Buy a put

Buy a put debit spread

Sell a call

Sell a call credit spread

Toggle Content
Toggle Content

Buying a call is betting that a stock will move up.  You pay

Selling a out is also betting a stock will move up.  You collect premium but the broker will keep collateral.

Option Basics

Understanding how to read stock charts

Blurb

 

Understand how to read stock charts

  • Support and resistance levels
  • Trend lines
  • Candlestick patterns
  • Time frame of charts
  • MACD
  • TT Squeeze
  • RSI
  • Daily averages

 

 

Option Basics

Understanding the Core Language of Options Trading

When I first started to learn about options, I was intimidated and confused about the language of options for a very long time.  But similar to learning any language, it becomes easier and even second nature once you start using it more and more.  The core terms are listed here.  

Key Terminology:

In the money vs out of the money:

 

Understand the core language of options trading

  • In the money trades
  • Out of the money trades
  • At the money trades
  • Intrinsic value of an option
  • Extrinsic value of an option
  • Implied volatility
  • Time Value or Theta
  • Volatility Value or Vega
  • Rolling a trade
  • Contract expirations
  • Assignment
 

Option Basics

Understanding the Important Calculations Associated with Options

Blurb

 

Understand the important calculations associated with options

  • Maximum potential profit
  • Maximum potential risk
  • Probability of profit
  • Break even points

 

 

Option Basics

Understanding how to read stock charts

Blurb

 

Understand how to read stock charts

  • Support and resistance levels
  • Trend lines
  • Candlestick patterns
  • Time frame of charts
  • MACD
  • TT Squeeze
  • RSI
  • Daily averages

 

 

Option Basics

Advanced Concepts

Blurb

 

Advanced concepts

  • When to close a trade
  • Understanding out of the money vs in the money trades
  • Adjusting problem trades
  • Trading volatility
  • Understanding what is volatility crush
  • Trading a trend
  • Trading for safe monthly income
  • Trading for binary events such as corporate earnings
 

Option Basics

My Principle Option Strategies

Blurb

 

My principle option strategies:

 
  • Credit spreads
  • Debit spreads
  • Strangles
  • Straddles
  • Iron condors
  • Iron butterflies
  • Covered calls
  • Synthetic long calls
  • Synthetic long puts
  • Diagonal spreads

Trending Articles on Options

Trending Articles