Options Trading Cheat-Sheet - Strategies for Maximum Gains
Expert Tips for Option Traders: Optimal conditions for Short Puts and Short Calls ✓ Insights on the Underlying Stock ✓ Strategic Legs and timely Exits.
Hint: you can find Option Ideas in our Free Option Scanner| Buyer (long) |
Call Option | can (the right) to buy pay premium for the right |
Buy when you expect stock going up Option Price (Premium) increases as the share price rises Bullish Strategy |
| Put Option | can (the right) to sell pay premium for the right |
Buy when you expect stock going down Option Price (Premium) increases as the share price falls Bearish Strategy |
|
| Seller (short) |
Call Option | must (committed) to sell collect premium for the commitment |
Sell when you expect price will be below strike price Option Price decreases as the share price falls Bearish Strategy |
| Put Option | must (committed) to buy collect premium for the commitment |
Sell when you expect price will be above strike price Option Price decreases as the share price rises Bullish Strategy |
- Options prices move more than their underlying share prices, therefor:
- Options are leveraged by nature.
- You dont need to exercise a bought option, you make more money by just selling it.
- Buying Put Options is usually safer than shorting the underlying shares (same is for Call Options, just vice versa):
- You can only loose the option price, while shorting a share has theoretical no limits on loosing, if the share price rises and rises even more.
- This is especially true for short-term trades lasting only a few weeks.
- When shorting shares for several months or even years, you have to calculate the costs and maybe its better to short the underlying shares itselfs.
Todays Option Ideas
- Low Volatility (< 50%, smoother moves, easier to stomach)
- No earnings until expiration
- ValueRay Rating of 2.4 or higher
Recommended Conditions for Short Puts or Short Calls (collecting Premium)
Underlying
Low Volatility Stocks: Annualized Profit: ~2.5 - 4%
Medium Volatility Stocks: Annualized Profit ~6%
High Volatility Stocks: Annualized Profit: ~8%
- Market Cap > 2 Billion
- Price of underlying > 15 USD
- Average Options Volume per Day > 2,000
(you need enough market participants to trade with) - Quarterly (13 week) Implied Volatility Percentile > 40%
or Implied Volatility Ranking % > 30% - Premium of the 16 Delta SP should be > 15% monthly and > 35% weekly (as annualized profit)
Low Volatility Stocks: Annualized Profit: ~2.5 - 4%
Medium Volatility Stocks: Annualized Profit ~6%
High Volatility Stocks: Annualized Profit: ~8%
Leg
- Short Puts: Expiration day 4 weeks (regular monthly)
- Short Calls: Expiration day 12 weeks (regular quarterly)
- DTE 7d: annualized profit 7-13% (δ ~0.09, 1.5 Std.Dev OTM)
- DTE 14d: annualized profit 5-8% (δ ~0.07, 1.8 Std.Dev OTM)
- DTE 30d: annualized profit 4-7% (δ ~0.05, 2 Std.Dev OTM)
- Time Value left < 2% (Annualized Profit lower than Inflation) or
- 85% of profit reached
- When current Premium reaches 2.5x of the Premium you collected
Strategy: Selling Cash Secured Puts
Lets say you want to buy 100 shares of Company ABC, because they are part of your long term Dividend Plan for your retirement.
Instead of buying them with a regular order you may:
Sell one Put-Option (1 Option Contract equals to 100 shares in US)
Example: the price for 1 share is currently 10$ and you are willing to pay 11$ per share (even if the price is lower). You then sell the Put Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):
"This contract guarantees that whose owner can (but doesnt must) sell 100 shares of this stock to me for 11$ each stock."
Sell one Put-Option (1 Option Contract equals to 100 shares in US)
Example: the price for 1 share is currently 10$ and you are willing to pay 11$ per share (even if the price is lower). You then sell the Put Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):
"This contract guarantees that whose owner can (but doesnt must) sell 100 shares of this stock to me for 11$ each stock."
- Who guarantees? You, because you are the seller
- The fixed price of 11$ is called "strike price"
- The option is valid until a defined "expiration day"
- The buyer has to pay a premium of x% to the seller for the guarantee (the premium, similar to an insurance fee)
- The seller (you) collects the premium the moment the option is sold
- The sellers broker reserves 100 * 11$ for the case you have to buy the shares (cash secured put)
Outcome Scenarios
- If the price went sideways, the option will expire and the buyer will not "exercise" the option (you keep the premium and dont buy the shares).
- If the price went above the strike price of 11$, the option will not be "exercised" by the buyer (you keep the premium and dont buy the shares).
- If the price is under the strike price of 11$, you have to buy the shares for 11$ each (minus the collected premium).
Strategy: Selling Covered Calls
Lets say you want to sell 100 shares of Company ABC when they reach or are over a certain price. Instead of placing a limit order you also may collecting additional premium on top:
Sell one Call-Option (1 Option Contract equals to 100 shares in US)
Example: the price for 1 share is currently 10$ and you are willing to sell for 11$ per share (even if the price is higher). You then sell the Call Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):
"This contract guarantees that whose owner can (but doesnt must) buy 100 shares of this stock from me for 11$ each stock."
Sell one Call-Option (1 Option Contract equals to 100 shares in US)
Example: the price for 1 share is currently 10$ and you are willing to sell for 11$ per share (even if the price is higher). You then sell the Call Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):
"This contract guarantees that whose owner can (but doesnt must) buy 100 shares of this stock from me for 11$ each stock."
- Who guarantees? You, because you are the seller
- The fixed price of 11$ is called "strike price"
- The option is valid until a defined "expiration day"
- The buyer has to pay a premium of x% to the seller for the guarantee (the premium, similar to an insurance fee)
- The seller (you) collects the premium the moment the option is sold
- The sellers broker reserves 100 shares for the case you have to sell the shares (covered call)
Outcome Scenarios
- If the price went sideways, the option will expire and the buyer will not "exercise" the option (you keep the premium).
- If the price went above the strike price of 11$, the option will be "exercised" and you have to sell the shares at 11$ each (plus the collected premium).
How much is the Premium?
- The market defines the Premium, not the broker.
- The higher the VIX (S&P Volatility Index), the higher the Premium (broad market reaction).
- Events or the expectation of events drive Option Prices higher (Quarterly Earnings, good or bad news).
- The more the Expiration Date is in the future, the more expensive the Option (time/extrinsic value is higher, hence the share price has more time to move).
- The Black-Scholes Model estimates a fair value.
Introduction to Options Trading
Options trading offers a world of potential for savvy investors. This form of trading allows you to speculate on the future price of a financial instrument, like stocks or commodities, with significant leverage. But why choose options? They offer flexibility, strategic alternatives and potentially high returns.
Options trading offers a world of potential for savvy investors. This form of trading allows you to speculate on the future price of a financial instrument, like stocks or commodities, with significant leverage. But why choose options? They offer flexibility, strategic alternatives and potentially high returns.
Basic Terminologies in Options Trading
Before diving into strategies, it's crucial to understand the "Options-Language". Call options give you the right to buy, while put options give you the right to sell. The strike price is the agreed-upon price for trading the asset, and the expiry date is when the option contract ends. The premium is the price you pay for the option.
Before diving into strategies, it's crucial to understand the "Options-Language". Call options give you the right to buy, while put options give you the right to sell. The strike price is the agreed-upon price for trading the asset, and the expiry date is when the option contract ends. The premium is the price you pay for the option.
Top Strategies for Options Trading
For maximizing gains, let's start with some top strategies. The Covered Call strategy involves holding a long position in an asset and selling call options on that same asset. It’s ideal for earning extra income on your stock holdings. The Protective Put strategy is like an insurance policy, allowing you to minimize potential losses.
For maximizing gains, let's start with some top strategies. The Covered Call strategy involves holding a long position in an asset and selling call options on that same asset. It’s ideal for earning extra income on your stock holdings. The Protective Put strategy is like an insurance policy, allowing you to minimize potential losses.
Advanced Strategies for Experienced Traders
If you're more experienced, consider the Iron Condor - a complex strategy that profits from low volatility in the market. The Straddle and Strangle strategies are similar, focusing on price changes in either direction.
If you're more experienced, consider the Iron Condor - a complex strategy that profits from low volatility in the market. The Straddle and Strangle strategies are similar, focusing on price changes in either direction.
Risk Management in Options Trading
Risk management is critical. It's about balancing potential rewards with acceptable risks. Use stop-loss orders and diversify your portfolio to manage risk effectively. You will never know, which news happen tomorrow.
Risk management is critical. It's about balancing potential rewards with acceptable risks. Use stop-loss orders and diversify your portfolio to manage risk effectively. You will never know, which news happen tomorrow.
Analyzing Market Trends for Options Trading
Successful options trading often hinges on the ability to analyze market trends. Technical analysis involves studying past market data, whereas fundamental analysis looks at economic factors. The trend is "usually" your friend.
Successful options trading often hinges on the ability to analyze market trends. Technical analysis involves studying past market data, whereas fundamental analysis looks at economic factors. The trend is "usually" your friend.
Common Mistakes to Avoid in Options Trading
Watch out for common pitfalls like overtrading, ignoring market trends and not doing enough research. When in doubt, don`t trade.
Watch out for common pitfalls like overtrading, ignoring market trends and not doing enough research. When in doubt, don`t trade.
The Psychological Aspect of Trading
Trading isn't just about strategies; it's also about mental fortitude. Keep emotions in check and make decisions based on logic, not fear or greed.
Trading isn't just about strategies; it's also about mental fortitude. Keep emotions in check and make decisions based on logic, not fear or greed.
Options Trading Strategies for Maximum Success
To fully leverage the potential of options trading, it's essential to understand and implement a variety of strategies. This not only broadens your trading repertoire but also enhances your ability to adapt to different market conditions. Here are some of the top strategies to consider:• Iron Butterflies for Market Stability
An Iron Butterfly strategy is particularly effective in stable markets. By selling an at-the-money call and put, and simultaneously buying an out-of-the-money call and put, traders can capitalize on minimal market movement.
• Straddle for High Volatility
In times of high market volatility, a Straddle strategy can be highly beneficial. By holding both a call and a put option at the same strike price, traders can profit from significant moves in either direction.
• Strangle for High Volatility
A Strangle strategy is similar to a Straddle, but with different strike prices. This strategy involves buying an out-of-the-money call and put, allowing traders to profit from significant moves in either direction.
• Iron Condor for Range-Bound Markets
The Iron Condor is a premium strategy for range-bound markets. This involves selling an out-of-the-money call and put, while also buying a further out-of-the-money call and put, creating a range within which the market can safely operate.
• Vertical Spreads for Directional Trades
For those with a strong market direction bias, Vertical Spreads offer a great way to trade. This involves buying and selling options of the same type (calls or puts) but with different strike prices, allowing for profit if the market moves in the anticipated direction.
• Calendar Spreads for Time Decay
Calendar Spreads take advantage of time decay and differing expiration dates. By selling a short-term option and buying a long-term option of the same strike price, traders can profit as the near-term option loses value faster than the long-term option.
• Protective Collars for Risk Management
A Protective Collar strategy is a risk management tool. It involves holding the underlying asset, buying a put option to limit downside risk, and selling a call option to offset the put's cost. This strategy is ideal for protecting existing gains.
• Butterfly Spread for Low Volatility
A Butterfly Spread is a premium strategy for low volatility markets. It involves buying an in-the-money call and put, while also selling two out-of-the-money calls and puts, creating a range within which the market can safely operate.
Tipps & Tricks
- When the Implied Volatility is higher than the Stock Volatility, the Option is considered as overpriced: Sell Options for Premium
Due to insurance demand this is quite often the case, therefor I recommend to check if IV is more than 15% higher then Stock Vola.
Best Call Strategy to hit Take Profit (Theta Backtested)
- DTE < 7 days: Long Calls only when DTE (Days to Expiration) is small, Theta effect becomes predominant.
- DTE 7 - 60 days: Bull Call Spread buy 1 Call, sell 1 higher Call
- DTE > 60 days: Ratio Call Spread buy 1 Call ITM, sell 2 higher Calls OTM
FAQs
What is the best strategy for a beginner in options trading?
Start with basic strategies like a) Covered Calls with high quality Stocks or b) Bull Put Spreads on Stocks with an ending correction and are going back up.
How important is risk management in options trading?
Extremely important ! It can make the difference between making consistent 1.5%-3% per month or going broke in 5 weeks.
Can options trading be a full-time career?
Yes, but building up the right knowledge is not done with a couple YouTube Videos or a Masterclass Video Course. Find an envoriment, where everyone is a trader and learn as relentless as one can do.
How do market trends affect options trading?
The trend is your friend ! Nothing more to add here.
What are common mistakes in options trading?
Overtrading, ignoring market trends, and inadequate research are the most common mistakes.