Options: How About Wealth & Income? I Really Don t Care Which Way the Market Goes!

Transcription

1 Options: How About Wealth & Income? I Really Don t Care Which Way the Market Goes!

2 Disclaimer U.S. GOVERNMENT REQUIRED DISCLAIMER COMMODITY FUTURES TRADING COMMISSION FUTURES AND OPTIONS TRADING HAS LARGE POTENTIAL REW ARDS, BUT ALS O LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE W ILLING TO ACCEPT THEM IN ORDER TO INVEST IN THE FUTURES AND OPTIONS MARKETS. DON T TRADE W ITH MONEY YOU CAN T AFFORD TO LOSE. THIS IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES OR OPTIONS. NO REPRESENTATION I S BEING MADE THAT ANY ACCOUNT W ILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED IN THIS TRAINING. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS H AVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESU LTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN E XECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF AN Y, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PRO GRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED W ITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT W ILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOW N. ALL MATERIALS PRESENTED ARE FOR TRAINING PURPOSES ONLY. TRADERS SHOULD PAPER TRADE ANY NEW METHOD PRIOR TO RISK OF PERSONAL CAPITAL.

3 What are Your Investment and Trading GOALS? - It depends! - Make Money Novice Idea - Security - Excitement! My No. 1 Goal is: Capital Preservation, Extra Income and then Growth

4 How to Trade Weekly Options for Wealth & Income Premise: The advent of Covered calls ushered in a new way of looking at buying and holding a long stock position Great Idea: 1. I own a stock (my collateral) 2. Sell an OTM Call Option against this position every month 3. Gain an extra 0.5% - 2.5% per month on your collateral 4. Still collect the dividend on your collateral stock

5 How to Trade Weekly Options for Wealth & Income Premise: The advent of Covered calls ushered in a new way of looking at buying and holding a long stock position Great Idea--Sounds great but!! What are the challenges? 1. The stock doesn t sit still Goes up Fear of your collateral being taken away Goes down Fear of loosing your collateral 2. Not all stocks are good CC candidates No OI Too Much of a Trend Too Little of a Trend If done well, CC s can provide a great source of Income, but is there another way?

6 How to Trade Weekly Options for Wealth & Income 1. The Concept: Hold a Collateral Long Position and then sell weekly premium against the position What makes the best collateral position? 1. Long Stocks or ETF s? 2. Zero Collateral Position? 3. LEAPS? (Long-Term Equity Anticipation Securities)

7 How to Trade Weekly Options for Wealth & Income Pro s & Con s Zero Collateral: Sell weekly naked weekly positions Naked Puts With no stops Risk is very high! For short Calls Risk is unlimited Can t short calls in an IRA Ties up Margin/Capital Long Stocks or ETF s: Capital Intensive No Expiration Capital Intensive Delta = 1 Hedging?

8 How to Trade Weekly Options for Wealth & Income Pro s & Con s Long LEAPS Lower cost Delta Volatility Expire Volatility Example: SPY (Must control 100 shares to sell against) 100 Shares at = $20, in non-margined Capital Tied Up 1 Contract of Jan C = $15.75 Ties up $

9 How to Trade Weekly Options for Wealth & Income 1. Long Call &/or Put LEAPS in an Index ETF or Liquid Stock - What about buying on both sides? A Long Straddle and then turn it into a Synthetic Long and Short Position 2. Sell Weekly Index ETF s/stock Calls and/or Puts against the long LEAPS But Which Weekly Options? What Day? Fire & Forget Approach - Use Weekly Option Chain to determine which options will do 2 things - First Pay For the Long Positions during the life of the LEAPS x 2 - Use Intraday, Daily and Weekly Charts to determine which Weekly to sell - Preferably sell on Thursday or Friday Unless the Technicals are not in your favor - Sell with the technical in your favor! But Is this Strategy Worth Your Effort?

10 How to Trade Weekly Options for Wealth & Income But Is this Strategy Worth Your Effort? Yes because of Weekly Options Weekly vs Monthly Options OTM Call Option - SPY Monthly SPY Nov 205C = $2.24 (1.1% of SPY) How Many Week s until Nov 20 th? Six - SPY Weekly SPY Oct 205C = $0.55 (0.273% of SPY) - If an OTM Call every week is 0.55 then over the next 6 weeks this equates to $3.3 - This is a difference of $1.06 in potential premium, 47% more premium - This got my attention

11 How to Trade Weekly Options for Wealth & Income Plusses 1. Weekly trades that generates cash in a challenging market 2. Develops Patience & Persistence 3. Develops Technical Skills 4. Target Return is 100% over the life of the long option (the LEAPS) Cover Collateral Position plus 100% 5. Less Capital required than buying the Stock/ETF and writing covered calls Greater Leverage Challenges 1. The underlying option (LEAPS) may expire worthless! Index ETF s Better? Change in Mind Set Required This is not your Daddy s Covered Calls 2. Trade goes against you during the week 3. Short option assigned (Over 4 years I ve had three options exercised) 4. Timing (Target Shoot)

12 How to Trade Weekly Options For Wealth & Income Generation IWM Example Average Cash per Week = $40.92 About 5.5% per Week. Approximately $168 per Month Note that the underlying is almost worthless, but I can sell weekly s 15 more times! Scalable this is just 1 Contract

13 How to Trade Weekly Options For Wealth & Income Generation SPY Example Average Cash per Week = $ About 2.9% per Week. Approximately $506 per Month Scalable this is just 2 Contracts

14 How to Trade Weekly Options For Wealth & Income Generation TSLA Example Average Cash per Week = $ About 2.9% per Week. Approximately $ per Month Scalable this is just 2 Contracts ** TSLA example of a wild ride! Lowered Exposure!

15 How to Set Up the Shorts Hi Dennis, I have been trading using Strategy 3. As of today I have a gain of 26.6% on the leaps and 23.6% on the weekly calls and puts for a combined profit of 50.2%. Before I go further I must say THANK YOU Dennis. Don F. Sept 2015

16 How to Setup the Trade 1. Choose a very liquid Stock or ETF that has both LEAPS & Weekly Options Index ETF s are a good starting vehicle because there are no EARNINGS!!! 2. Buy an ATM or Slightly OTM LEAPS or long term option out 6 months or longer Variation: Buy a significantly OTM LEAP, but requires more margin 3. Find a weekly Option that is either OTM, ATM or ITM OTM if a stock/etf is Trending in favor of the long LEAPS ATM & ITM if stock/etf is Trending or Range bound with a bias against the long LEAPS 4. Place the Order When filled immediately place a GTC order to buy back at The buy back can be adjusted if an ATM or ITM position will more than cover the desired weekly premium

17 SPY Example Closed Friday 10-9 at Buy an ATM Jan C (Collateral Position) Current Quote: x Place order to buy at a limit of Determine how much premium needed per week to pay for position by Expiration on Jan 20 th 2017 How Many Weeks are there until expiration: Go to the Option Tables 469 Calendar Days until expiration 469/7 = 67 Weeks Cost of LEAPs/Number of Weeks Until Expiration 15.65/67 = $0.24/week will pay for the underlying (I round up to cover brokerage fees) To Double Multiply by 2 = $0.48 per week 3. Determine if Objective is doable & reasonable with Weekly Options available

18 SPY Example Closed Friday 10-9 at Another View 1. Buy an ATM Jan C (Collateral Position-Debit) Current Quote: x Place order to buy at a limit of Collect a Credit each week of How Long? 67 Weeks 0.48 x 67 = $32.16 total Credit This Trade: Debit = Credit = Net = What is the ROI? ( ) / = 105.5% What is Compounded Growth Rate? 67 weeks = 74.87%

19 SPY Example Closed Friday 10-9 at Determine if Objective is doable with Weekly Options available The ATM Oct SPY 201C = 1.61 The OTM Oct SPY 203.5C = 0.48 Criteria Met!!! Note the Low Volatility! with expected move for week +/ But is it time to sell the weekly and establish the Spread? Your Choice, but.

20 SPY Example Closed Friday 10-9 at But is it time to sell the weekly and establish the Spread? Your Choice, but. SPY 1 Hour Intraday 8/25 10/09/ Th Fr Th Fr Th Fr Th Fr Th Fr Th Fr Th Fr

21 How to Trade Weekly Options For Wealth & Income Generation Things to consider: 1. Must control potential loss one blow up week will eat up multiple profitable weeks 75% Win/Loss Good Starting Point is Premium need plus 50% as a stop 2. This approach works best when TSI is close to Would like to trade on Thursday or Friday but.sometimes the signals are not there 4. These setups can also be used for directional option trades 5. Stocks/ETF should be very liquid with great Weekly Options 6. Weekly options are different than monthly options and require a slightly different mindset (This isn t the old monthly covered call strategy!) 7. Do I have to Meet my Goal Weekly?

22 How to Trade Weekly Options For Wealth & Income Generation Do I have to Meet my Goal Weekly? A better question may be if I don t make my goal this week do I have to make twice as much next week? No, but why? The amount of premium needed each week is determined by how many weeks are remaining until the Collateral position expires. Starting Point: Collateral = $10K in 4 contracts Weeks to Expiration 75 Needed per week = $10K/75 = $ per week x 2 = How much premium per shares controlled = $266.66/400 = 0.67 I go on vacation for 5 weeks with no trading Weeks to Expiration 70 Recalculated per week = $10K/70 = $ per week x 2 = How much premium per shares controlled = $285.72/400 = 0.72

23 How to Trade Weekly Options For Wealth & Income Generation Things to consider: What if Underlying goes against you? 2. Underlying goes hard in a positive direction for the long. Hit 100% early 3. Stops on Weekly s Starting Point: 1.5 x Weekly Requirement, this way you will never give up more that a week and a half worth of effort 4. Must be ready to get back in But is there another way that approaches Market Neutrality?

24 How to Trade Weekly Options For Wealth & Income Generation But is there another way that approaches Market Neutrality? Can I be both long and short the market? Do I want to be both long and short the market? 1. Buy a LEAPs Straddle or Strangle & Sell Weekly Options against both sides Straddles and Strangles have their own Pros & Cons Use the previous exercise to establish a weekly Pay-Off amount Use the Intraday Chart to Time Entries Drawback: More to manage! 2. Straddles or Strangles provide the opportunity to have a Synthetic Long or Synthetic Short Increases Probability of reaching 100% return objective Reduces Directional Risk

25 How to Trade Weekly Options For Wealth & Income Generation What if price go big in either direction? SPY Straddle Example: C and 200P = = B.E. at Expiration = SPY at either $ or SPY Moves 10% in either direction in one month (+/ ) At our collateral positon would be worth = = At our collateral position would be worth = = With this position it would require $1.00 in premium each week to reach 200% return on my collateral. In 4 weeks over all cost basis would be reduced by $4

26 How to Trade Weekly Options For Wealth & Income Generation Questions?

27 Clarify, Simplify & Multiply This has been the Motto of Active Trend Trading from the beginning! We continuously work to Clarify & Simplify through refinements to the system to make it objective and easy to both learn and use. The purpose of all presentations is to provide our fellow Active Trend Trader Members a jump start to accelerate progress up the Learning Curve. We welcome suggestions on how to improve the learning process! Trade Wisely & Profitably, Dennis W. Wilborn Founder & Lead Technical Analyst

28 The Active Trend Trading System Our Motto: Clarify, Simplify & Multiply Three Point Strategies based on ATTS Stocks & Index ETFs Basic Options Wealth Building & Income Generation Active Trend Trading System

29 Basic Option Index Copyright Active Trend Trading

30 Fatal Mistakes 1. Trying to trade options before having a strong System Foundation Develop a clear & simple option strategy Buying too far Out of the Money (too much Extrinsic Value) Not buying enough time Selling too much time and too little volatility (can be an emotional roller coaster) Buying too much Volatility (earnings are especially risky to buy premium) Not knowing that option market can open up to minutes after the regular market Risky for Market orders Not knowing that volatility is inflated at the beginning of the day Chasing the Bid/Ask Place your order at the Mark and it gets filled or doesn t Copyright Active Trend Trading

31 Options: The Good, The Bad & The Ugly The Good o Leverage o Fast Gains o Index ETF best trading entity to learn how to options The Bad o More Variables to manage (Greeks, Volatility and more) o Increased Management Time o Fast Loses The Ugly o 100% Loss of a known amount & More o Complex Strategies (High Probability of losing money) Copyright Active Trend Trading

32 Option Basics What are Options? o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Why do people trade options? Perceived benefit of Leverage & Variable Strategies New Vocabulary More Variables than just trading stocks (can work for or against the trader) Copyright Active Trend Trading

33 Resources Chicago Board of Options Exchange Think or Swim Training Books: The Option Advisor, Author: Bernie Schaeffer Options as a Strategic Investment, Author: Lawrence G. McMillan The Option Course, Author: George A. Fontanills Copyright Active Trend Trading

34 Vocabulary Option Basics Contract: Typically controls 100 shares (Mini s Control 10 shares) Obligation: Typically the responsibility of the seller Rights: Typically the benefit to the buyer Premium: Price of the Option Greeks: Variables used in the Black Scholes Option Model Implied Volatility: Established based on various inputs including Market Volatility Expiration Month: Month the Option will expire typically on the Friday after the 3 rd Thursday (Settles on Saturday for non-european Options) Strike Price: Contract Price of underlying stock/etf Open Interest: Contracts currently open Bid/Ask Spread: The price difference between the Bid & Ask Intrinsic Value: The positive price difference between Strike and Stock $ Extrinsic Value: Time Value (influenced by Vega & Gamma) Exercise: Put to me or Called away Copyright Active Trend Trading

35 Vocabulary (Cont) Option Basics Theoretical Value: Theoretical Price of an Option determined by an option calculator Time Decay: Amount price goes everyday (Theta) At the Money (ATM): Price of option strike that is closest to the price of the stock/etf In the Money (ITM): Price of option strike that has Intrinsic Value Out of the Money (OTM): Price of option strike outside the parameters of the trade Volatility Inflation: Volatility is growing due to VIX or other events like earnings Volatility Crunch: Volatility deflation due to falling VIX or event passes Leaps: Options that expire in January each year and are more that 6 months in the future Option Chains: List of option strike prices and months presented in a table Directional: Option trades placed in the direction of the trend Spreads: Credit or Debit two option trade with limited upside and fixed downside Condors: Exotic type option trade selling premium with a very low Delta Butterflies: Exotic type option trade made up of three separate options of the same type Copyright Active Trend Trading

36 What are Options? Option Basics o A Contract or Agreement between two parties o Each Option Contract comes with Rights and Obligations Types: Puts & Calls, American, European, Mini s, Standard & more Time: Weekly, Monthly, Leaps Variables: Greeks (Delta, Gamma, Theta, Vega, Rho) Model Options Calculators: Black Scholes, Binomial, Brownian & Others Copyright Active Trend Trading

37 Option Basics Variables: Greeks (Delta, Gamma, Theta, Vega, Rho) - Delta: How much price increases or decrease per dollar movement in the underlying. Also tells us how many equivalent shares of stock one contract actually approximates. 50 delta is approximately like 50 shares of the stock - Theta: How much value the options looses every day this is a complex equation and not straight line decay - Vega: Price variation due to Volatility - Gamma: How much Delta Changes per dollar increase or decrease in movement of the underlying stock/etf - Rho: Associated with interest rates Model Options Calculators: Black Scholes, Binomial, Brownian & Others Copyright Active Trend Trading

38 Option Basics Call Options: Rights & Obligations Long: Expect Stock Price to go up Rights & Obligation: Buyer has the right to buy the stock/etf at the agreed on price. Seller is obligated to sell stock/etf at the agree on Price Short: Expect Stock Price to go down or stay at or slightly above current levels Rights & Obligation: Buyer has the right to buy the stock/etf at the agreed on price. Seller is obligated to sell stock/etf at the agree on Price The Catch: All Options are made up of both Intrinsic and Extrinsic Value If an option has high Extrinsic Value due to High Implied Volatility I want to be a seller and not a buyer because even if the price of the stock goes up, the value of my option can go down! Copyright Active Trend Trading

39 Option Basics Put Options: Rights & Obligations Long: Expect Stock Price to go down Rights & Obligation: Buyer has the right to sell the stock/etf at the agreed on price. Seller is obligated to buy stock/etf at the agree on Price Short: Expect Stock Price to go up or stay at or slightly below current levels Rights & Obligation: Buyer has the right to sell the stock/etf at the agreed on price. Seller is obligated to buy stock/etf at the agreed on Price Copyright Active Trend Trading

40 Intrinsic + Extrinsic = Option Price Intrinsic: Price of the stock/etf less the Strike Price Extrinsic: Primarily Time Value impacted by Implied Volatility & Time Decay If a stock s price is currently at $75 Intrinsic Value of a $70 strike price would equal (75-70) = $5.00 If the $70 option is selling for $7.50 the Extrinsic Value would be: Extrinsic Value = Price of the option Intrinsic Value (7.50 5) = $2.50 If the stock stays at $75 until expiration you loose $2.50 on this trade. Copyright Active Trend Trading