A Blueprint To Profitable Options Trading

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1 You re In The Right Place If A Blueprint To Profitable Options Trading A Beginner s Guide To Success 1. You know you SHOULD be using options in your investing but you re not sure what to do. 2. You re frustrated, confused or intimidated by all the terms used with options. 3. You re looking to start or improve on your options trading to really ramp up your gains in the market. 1

2 You ll Learn 1. How to filter out all the noise and know what the important terms are when it comes to options. 2. How to know when to place option trades & how to find the right stocks. 3. How to increase your probability of success. 2

3 Why most option traders FAIL 1. So many terms to understand! 2. Buy at the wrong time & on the wrong stocks 3. Treat it like the lottery The FIX 1. Filter out the noise know what terms are important 2. Match option trade with market direction & stock direction 3. Pick the option with a high probability of success 1. Filter Out The Noise Useful Information 3

4 Options Terminology Options Terminology Buying A Call Option Calls vs Puts Rights vs Obligations Call Options: Call Options: Provide the right to buy units of 100 shares of stock at a certain price by a certain date. Increase in value when the price of the underlying stock rises. 4

5 Buying A Put Option Options Terminology Put Options: Provide the right to sell units of 100 shares of stock at a certain price by a certain date. 10 Skyworks May Contracts equals 1000 shares 2. Name of the underlying stock Buying a Stock Long SWKS is trading at $80 Put Options: Increase in value when the price of the underlying stock falls. 3. Expiration date (Duration) 4. Strike Price of the option 5. Type of option 6. Option Premium, per share of options. How much would it cost to buy 100 shares? $8,000 5

6 Buying a Stock Long Scenario #1 Buying a Stock Long Scenario #2 Buy Stocks Long Example Initial Cost of 100 $80/share Cash if Sold SWKS drops in price to $70 SWKS rises in price to $90 $60 $70 How much are those 100 shares worth now? $7,000 Do you have to sell or can you hold your shares? How much are those 100 shares worth now? $9,000 Do you have to sell or can you hold your shares? $80 $90 $100 6

7 Buy Stocks Long Example Buy Stocks Long Example Buy Stocks Long Example Initial Cost of 100 $80/share Cash if Sold Initial Cost of 100 $80/share Cash if Sold Initial Cost of 100 $80/share Cash if Sold $60 ($8,000) $70 ($8,000) $80 ($8,000) $90 ($8,000) $100 ($8,000) $60 ($8,000) $70 ($8,000) $80 ($8,000) $8,000 $0 $90 ($8,000) $100 ($8,000) $60 ($8,000) $70 ($8,000) $7,000 ($1,000) $80 ($8,000) $8,000 $0 $90 ($8,000) $100 ($8,000) 7

8 Buy Stocks Long Example Buy Stocks Long Example Buy Stocks Long Example Initial Cost of 100 $80/share Cash if Sold Initial Cost of 100 $80/share Cash if Sold Initial Cost of 100 $80/share Cash if Sold $60 ($8,000) $6,000 ($2,000) $70 ($8,000) $7,000 ($1,000) $80 ($8,000) $8,000 $0 $90 ($8,000) $100 ($8,000) $60 ($8,000) $6,000 ($2,000) $70 ($8,000) $7,000 ($1,000) $80 ($8,000) $8,000 $0 $90 ($8,000) $9,000 $1,000 $100 ($8,000) $60 ($8,000) $6,000 ($2,000) $70 ($8,000) $7,000 ($1,000) $80 ($8,000) $8,000 $0 $90 ($8,000) $9,000 $1,000 $100 ($8,000) $10,000 $2,000 What is maximum profit? Unlimited What is maximum risk? $8,000 8

9 Long Stock Buying a Call A Call provides the right, but not the obligation to buy 100 shares of a stock at a certain price by a certain date. Buying a Call You are bullish on SWKS. It is trading at $80 You want to buy the right to buy SWKS at $80/share. 9

10 Buying a Call Scenario #1 SWKS drops in price to $70 Will you want to exercise your RIGHT to BUY SWKS at $80 if it is trading at $70? Buying a Call Scenario #2 SWKS rises in price to $90 Will you want to exercise your RIGHT to BUY SWKS at $80 if it is trading at $90? $60 $70 $80 $90 $100 Buying a Call Example Initial Cost of 1 SWKS 80 Call option Option Value 10

11 Buying a Call Example Buying a Call Example Buying a Call Example Initial Cost of 1 SWKS 80 Call option Option Value Initial Cost of 1 SWKS 80 Call option Option Value Initial Cost of 1 SWKS 80 Call option Option Value $60 ($700) $60 ($700) $60 ($700) $70 ($700) $80 ($700) $90 ($700) $100 ($700) $70 ($700) $80 ($700) $0 ($700) $90 ($700) $100 ($700) $70 ($700) $0 ($700) $80 ($700) $0 ($700) $90 ($700) $100 ($700) 11

12 Buying a Call Example Initial Cost of 1 SWKS 80 Call option Option Value $60 ($700) $0 ($700) $70 ($700) $0 ($700) $80 ($700) $0 ($700) $90 ($700) $100 ($700) Buying a Call Example Initial Cost of 1 SWKS 80 Call option Option Value $60 ($700) $0 ($700) $70 ($700) $0 ($700) $80 ($700) $0 ($700) $90 ($700) $1,000 $300 $100 ($700) Buying a Call Example Initial Cost of 1 SWKS 80 Call option Option Value $60 ($700) $0 ($700) $70 ($700) $0 ($700) $80 ($700) $0 ($700) $90 ($700) $1,000 $300 $100 ($700) $2,000 $1,300 What is maximum profit? Unlimited What is maximum risk? $700 12

13 Long Call SWKS trade Initial Cost Feb 5 th Value March 17 th Net Profit March 17 th % Gain SWKS trade Initial Cost Feb 5 th Value March 17 th Net Profit March 17 th % Gain 100 shares ($8,140) $9,731 $1,591 19% 100 shares ($8,140) $9,731 $1,591 19% 1 contract ($715) $1,845 $1, % 13

14 2. The Match Game SWKS trade Initial Cost Feb 5 th Value March 17 th Net Profit March 17 th % Gain 100 shares ($8,140) $9,731 $1,591 19% 1 contract ($715) $1,845 $1, % Market Going Up + Stock Going Up + Bullish Option Trade = MATCH!! 5 contracts ($3,575) $9,225 $5, % 10 contracts ($7,150) $18,450 $11, % 14

15 Your Checklist Buyers have Rights Sellers have Obligations Match Market Direction with Stock Direction Buy Calls on Stocks Moving Up & Likely to Move Higher Select Strike Prices At or Below the Stock s Price Choose An Expiration Date At Least 2-3 Months Away Start With 1 Contract Until You Feel Comfortable 15

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