5 Secrets To Trading Options Just Like A Professional Trader Jay - - PowerPoint PPT Presentation

5 Secrets To Trading Options Just Like A Professional Trader

Jay Soloff

Options Portfolio Manager Editor – Options Profit Engine

About Me

• 20 years of experience trading options
• 8 years of online research & options services
• CBOE floor trader and market maker – provided liquidity on the

largest options exchange in the world for stocks like Amazon

• Hedge fund analyst, options portfolio
• MBA, MSIM, Arizona State University
• BA Economics, University of Illinois

Lessons From February 5th

Feb 5th:

Short volatility ETPs got crushed but institutions didn’t lose money. So who did?

Options Trading Secret #1

• TRADE YOUR EDGE
• There are many different ways to successfully trade options
• Options strategies can vary in success based on your personality and trading

style

• If you find something that works for you, it can’t be the “wrong” strategy
• That doesn’t mean you should ignore basic risk management and trade

management best practices

Options Trading Secret #2

• Use covered calls as often as possible
• In most years, you are better off with covered calls (plenty of data to support

this, not to mention – just look at block trades)

• Covered calls are very easy and take very little time to implement
• Perfect complement to dividend collection
• A covered call is when you write a call versus 100 shares (at least) of a

stock you own to help amplify the yield

• Example: An actual Apple (AAPL) covered call trade on May 7th
• Purchased 100,000 shares of AAPL at $186
• Sold 1,000 May 18th 192.5 calls for $0.84 (collecting $84,000)

Covered Calls

• Payoff scenarios
• Scenario 1: Apple is at $186 on May 18th
• Stock gains = $0
• Option gains = $84,000 (10 days)
• Return = 0.5% (84,000/18,600,000), monthly = 1.5%, yearly = 18%
• Scenario 2: Apple is at $192.5 or higher on May 18th
• Stock gains = $650,000 ($6.5 move x 100,000 shares)
• Option gains = $84,000
• Return = 4% (734,000/18,600,000), monthly = 12%, yearly = 144%
• Scenario 3: Apple is at $185.16 on May 18th
• Stock loss = $84,000 ($0.86 move x 100,000 shares)
• Option gains = $84,000
• Return = 0%
• Any lower price would result in a loss

Covered Calls

• Pros
• Works in almost any environment
• Easy to do
• Consistent income generation (even more so than dividends)
• Cons
• Can cap earnings in a high growth environment (note that you aren’t losing

money)

• Takes a fair amount of capital (not a con if you already own the shares)

Covered Calls (5% OTM)

Options Trading Secret #3

• Use vertical spreads for directional trading
• For any short or medium-term directional trade, using vertical spreads is

almost always a good idea

• Any option that costs more than about $0.50 should be countered with a

short option to reduce costs (in most cases)

• For long-term options (LEAPS), using naked options is okay because it’s more

like a stock purchase (basically trading dividends for leverage)

• A vertical spread is when use buy and sell a call or put in the same

expiration, but using different strikes

Vertical Spreads: AAPL Example

• Apple stock at $185.50 on May 8th
• Bought 1,000 September 195 calls for $5.52
• Sold 1,000 September 200 calls for $3.93
• Total cost is $1.59
• Breakeven point is $196.59
• Max profit is $5 (gap between strikes) - $1.59 cost = $3.41
• That’s $341,000 or 214% gains
• Max loss is $159,000
• Conversely if you bought the 195 calls for $5.52
• Breakeven is $200.52
• Max loss is $552,000

Vertical Spreads

• Pros
• Reduced risk (due to lower premium costs)
• Higher returns (lower costs means bigger percentage gains)
• Cons
• Can cap gains

Vertical Spreads – Facebook (FB)

Naked Calls Call Vertical Spreads

Vertical Spreads – Tesla (TSLA)

Naked Puts Put Vertical Spreads

Options Trading Secret #4

• Use straddles or strangles if you think a stock is going to move but

don’t have a directional opinion

• This happens a lot more than you realize
• Doesn’t have to just be an earnings scenario
• Can be very good for index/ETF trading as well
• Straddle versus strangle depends on the cost of the options
• A straddle consists of buying a call and put at the same strike in the

same expiration

• A strangle consists of buying a call and put at different strikes in the

same expiration

Straddle/Strangle Examples

• Groupon (GRPN)
• May 11th
• Visa (V) Strangle
• June 2019

Straddle/Strangle

• Pros
• Don’t have to pick a direction
• Can show big returns
• Cons
• Can be expensive
• Lower probability (due to cost)

Strangle (5% OTM)

Gains: 100% capped Losses: 35% capped

Option Trading Secret #5

• Six tips to improve your success rate:
• Trade liquid options – bid/ask spreads are narrow
• Look at the tape – big trades generally come form savvy sources
• Don’t trade “teenies”
• Selling options for credit is high probability, but understand your risks
• I’ll discuss this a lot more tomorrow at 1:15!
• Never trade binary options
• Always understand the underlying product you are trading options on

Summary

• Trade your edge
• There are many ways to make money trading options, but always try to focus
• n what you do best
• Use covered calls whenever possible
• Use vertical spreads for directional trades
• Straddles and strangles are the best bet for trading movement
• Remember the six tips for options trading success

Thank You!

Let’s take some questions now.

For more information, go to

www.OptionsProfitEngine.com