Basic Options Part 4A. How to trade the Big A System Using Options

Transcription

1 Basic Options Part 4A How to trade the Big A System Using Options 1

2 First Things First You should not trade the Big A System using options unless you fully understand all of the basic fundamentals of The Big A ETF Trend Trading System first!!!! 2

3 Second You should not trade the Big A System using options unless you fully understand how to trade using options and the risks associated with options trading!!!! 3

4 Why use Options? Requires less money to participate in a trade Therefore I can participate in more trades I can participate if I have a smaller account 4

5 Option Basics Primary Risk of Options Primary Risk of Options a primary risk you encounter with all options is time risk because option contracts have a limited life (they expire) an option will lose value over time even if the ETF or stock price does not move Stocks and ETF s do not expire unless the company ceases to exist or the ETF is closed out by the managing firm 5

6 Type of Trader You need to determine what type of trader you are and select the appropriate risk level 1. Conservative use Risk / Reward parameter 2. Aggressive use profit targets only and let the options realize full profit ( or full loss) We advocate and will provide information on the conservative method only 6

7 What else? What do I really need to know to use options for the Big A Method ( Besides good knowledge of the Big A System and Option Basics 1. How to execute a conditional buy of a call or put option ( if you can not be at the computer to watch your trades) 2. How to execute an OCO order when buying a call or put 3. How to read an option chain ( Part of basic options material) 4. Knowing the difference between ITM, ATM and OTM options ( Part of Basic Options material) 5. Knowing the Delta of an option position ( Part of Basic Options material) 7

8 Types of trades Types of Trades using options 1. 5 BP Break Out Trades 2. PD Trades 3. Add On Trades use the exact same rules as 5 BP Break Out Trades 4. 5 BP Pull Back Trades use the exact same rules as 5 BP Break Out Rules 8

9 5 BP Break Out trades 9

10 5 BP Break Out Trades Types of 5 BP Break Out Trades 5 BP Break Out Buy 5 BP Break Out Sell 10

11 5 BP Break Out Buy 5 BP Break Out Buy 1. Which Month? 2. Which Strike? 3. How Many Contracts? 4. Determine Target Exit 5. Determine Stop Exit 11

12 5 BP Break Out Buy 5 BP Break Out Buy 1. Which Month? At least 45 days to expiration ( 60 or more preferred) if you are in August you would look at September / October or later expiration dates 12

13 5 BP Break Out Buy 5 BP Break Out Buy 2. Which Strike? - Buy the appropriate ITM Call Strike when the underlying price hits the Entry price in the Big A system a) At least 1-2 strikes ITM ( for strikes that are $1 apart) b) Delta between.65 and.75 13

14 5 BP Break Out Buy 5 BP Break Out Buy 3. How Many Contracts? - Buy the appropriate number of ITM call option contracts based on number of shares per the Big A system a) If Less than 100 shares buy 1 contract b) If more than 100 shares round to nearest 100 shares (per Big A system) and buy 1 contract per 100 shares 14

15 5 BP Break Out Buy 5 BP Break Out Buy 4. Target Exit ( which ever is hit first) a) Close option when underlying hits Big A target exit ( 10%, Modified 10%, Channel exit) or 15

16 5 BP Break Out Buy 5 BP Break Out Buy 5. Stop Exit ( which ever is hit first) a) Close the option position when the Big A system hits the stop for the underlying (or) b) Close when option value is 50% of purchase cost of option ( if cost to purchase was $2.50 then close when option price is $1.25). Set an alert to notify you (or) c) If conservative - Close when 1% of account value loss is hit ( if $10,000 account then close when option position has lost $100) - This will usually happen before a. and b. d) If Aggressive let it ride until expiration However you could lose 100% of your investment Remember - an option will lose value over time even if the 16 stock price does not move

17 5 BP Break Out Sell 5 BP Break Out Sell 1. Which Month? 2. Which Strike? 3. How Many Contracts? 4. Determine Target Exit 5. Determine Stop Exit 17

18 5 BP Break Out Sell 5 BP Break Out Sell 1. Which Month? At least 45 days to expiration ( 60 or more preferred) if you are in August you would look at September / October or later expiration dates 18

19 5 BP Break Out Sell 5 BP Break Out Sell 2. Which Strike? - Buy the appropriate ITM Put Strike when the underlying price hits the Entry price in the Big A system a) At least 1-2 strikes ITM ( for Options with $1 strikes) b) Delta between -.65 and

20 5 BP Break Out Sell 5 BP Break Out Sell 3. How Many Contracts? - Buy the appropriate number of ITM puts based on number of shares per the Big A system a) If Less than 100 shares buy 1 contract b) If more than 100 shares round to nearest 100 shares (per Big A system) and buy 1 contract per 100 shares 20

21 5 BP Break Out Sell 5 BP Break Out Sell 4. Target Exit ( which ever is hit first) a) Close option when underlying hits Big A target exit ( 10%, Modified 10%, Channel exit) or b) Use 10% target range value( $4 if $40 ETF) and add range value to price of option and exit when option target price is hit ( if original price of option was $2.50 then add $4 for exit of $6.50) 21

22 5 BP Break Out Sell 5 BP Break Out Sell 5. Stop Exit ( which ever is hit first) a) Close the option position when the Big A system hits the stop for the underlying (or) b) Close when option value is 50% of purchase cost of option ( if cost to purchase was $2.50 then close when option price is $1.25). Set an alert to notify you (or) c) If conservative - Close when 1% of account value loss is hit ( if $10,000 account then close when option position has lost $100) - This will usually happen before a. and b. d) If Aggressive let it ride until expiration However you could lose 100% of your investment Remember - an option will lose value over time even if the stock price does not move 22

23 PD Trades 23

24 PD Trades Types of PD Trades PD Buy PD Sell 24

25 PD Buy PD Buy 1. Which Month? 2. Which Strike? 3. How Many Contracts? 4. Determine Target Exit 5. Determine Stop Exit 25

26 PD Buy PD Buy 1. Which Month? a) If more than 15 days to current month expiration then use current month b) If less than 15 days to current month expiration then use next month We are usually only in PD trades a very short period of time so therefore we only use current and next month options- we are looking to make our money quickly 26

27 PD Buy PD Buy 2. Which Strike? - Buy the appropriate ATM/ ITM Call Strike when the underlying price hits the Entry price in the Big A system a) If the underlying price is a few cents from the closest strike price then use the close ATM strike b) If the underlying price is between strikes use the next highest OTM strike price 27

28 PD Buy PD Buy 3. How Many Contracts? - Buy the appropriate number of ITM Call contracts based on number of shares for a PD Trade per Big A system a) If Less than 100 shares buy 1 contract b) If more than 100 shares round to nearest 100 shares (per Big A system) and buy 1 contract per 100 shares 28

29 PD Buy PD Buy 4. Target Exit ( which ever is hit first) a) Close option when underlying hits Big A target exit ( 10%, Modified 10%, Channel exit) or b) Use 10% target range value( $4 if $40 ETF) and add range value to price of option and exit when option target price is hit ( if original price of option was $2.50 then add $4 for exit of $6.50) 29

30 PD Buy PD Buy 5. Stop Exit ( which ever is hit first) a) Close the option position when the Big A system hits the stop for the underlying (or) b) Close when option value is 50% of purchase cost of option ( if cost to purchase was $2.50 then close when option price is $1.25). Set an alert to notify you (or) c) If conservative - Close when 1% of account value loss is hit ( if $10,000 account then close when option position has lost $100) - This will usually happen before a. and b. d) If Aggressive let it ride until expiration However you could lose 100% of your investment Remember - an option will lose value over time even if the stock price does not move 30

31 PD Sell PD Sell 1. Which Month? 2. Which Strike? 3. How Many Contracts? 4. Determine Target Exit 5. Determine Stop Exit 31

32 PD Sell PD Sell 1. Which Month? a) If more than 15 days to current month expiration then use current month b) If less than 15 days to current month expiration then use next month We are usually only in PD trades a very short period of time so therefore we only use current and next month options- we are looking to make our money quickly 32

33 PD Sell PD Sell 2. Which Strike? - Buy the appropriate ATM/ ITM Put Strike when the underlying price hits the Entry price in the Big A system a) If the underlying price is a few cents from the closest strike price then use the close ATM strike b) If the underlying price is between strikes use the next lowest OTM strike price 33

34 PD Sell PD Sell 3. How Many Contracts? - Buy the appropriate number of ATM / OTM puts based on number of shares for a PD Sell Trade per Big A system a) If Less than 100 shares buy 1 contract b) If more than 100 shares round to nearest 100 shares (per Big A system) and buy 1 contract per 100 shares 34

35 PD Sell PD Sell 4. Target Exit ( which ever is hit first) a) Close option when underlying hits Big A target exit ( 10%, Modified 10%, Channel exit) or b) Use 10% target range value( i.e. $4 if $40 ETF) and add range value to price of option and exit when option target price is hit ( if original price of option was $2.50 then add $4 for exit of $6.50) 35

36 PD Sell PD Sell 5. Stop Exit ( which ever is hit first) a) Close the option position when the Big A system hits the stop for the underlying (or) b) Close when option value is 50% of purchase cost of option ( if cost to purchase was $2.50 then close when option price is $1.25). Set an alert to notify you (or) c) If conservative - Close when 1% of account value loss is hit ( if $10,000 account then close when option position has lost $100) - This will usually happen before a. and b. d) If Aggressive let it ride until expiration Remember - an option will lose value over time even if the stock price does not move 36

37 5 BP Pull Back Trades We use the exact same rules as a 5 BP Break Out Trade 37

38 Add On Trades We use the exact same rules as a 5 BP Break Out Trade 38