How To Trade Stock Options (Ultimate Beginners Guide)

[Boo Blizzi]

Oh... now you guys are talking my language!
I made alot of money trading IC's and bear/bull credit spreads.
I used to watch Dan Sheridan videos and had an optionsexpress account back in the days before TOS.
Matter of fact, I remember Tom Sosnoff speaking at a seminar in NY, then pitching seats to his live trading room.
I violated my trading plan following some dude on Elitetrader who was killing it back in 2013 and took a bad beat on the SPX.
I didnt keep enough cash in reserve to roll the position out the next month when the market blew past my call strikes so I have been sitting on the sideline and licking my wounds. Perhaps you guys can pull me out of retirement, especially if we are talking about trading for income.

 

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[V8Bill]

Perhaps you guys can pull me out of retirement, especially if we are talking about trading for income.

That's what they did for me. Time might have matured your nerves and decision making process during your hiatus. You might be a better trader now.

 

[MJ DeMarco]

I violated my trading plan following some dude on Elitetrader who was killing it back in 2013 and took a bad beat on the SPX.

How many calls where you short? So you used your entire buying power on one position?

I made alot of money trading IC's and bear/bull credit spreads.

I've turned selling naked into a business. The details are on the inside as well as a few other option threads.

 

[Boo Blizzi]

How many calls where you short? So you used your entire buying power on one position?

Yes MJ, I pulled a bonehead novice move and put it all on the line and didnt keep any cash to roll out. It wasnt all on one trade though, I had 3 positions open, 2 IC's and a butterfly. My bread and butter stocks at that time were Valero, Sandisk, and Frontier oil, but like I said, I was following a guy on Elitetrader and he was saying you could never make any real money unless you traded the indexes because they have the liquidity to move in and out of large positions.

I made money 3 or 4 months in a row trading the SPY and NDX, then decided to jump to the big leagues with 20 contracts on the SPX. (I legged into the bear calls when the market pulled backed to squeeze more profit out them). I didn't consider what the margin requirements would be on the 10 point strikes when I was looking at the options chain, I just jumped into the trade because according to the Elitetrader, the RSI, Bollinger bands, and VI were saying the index would stay within a certain range.

I cant remember for sure, but I think I had 1000 spread between the puts and calls, with the index trading somewhere closer to the puts. Then news came out that unemployment wasnt as bad as they thought it was going to be or maybe housing was recovering...but whatever it was... the market went wild and shot clear past my calls. I was sick, but I made money on the other IC and couldnt figure out what the hell was going on with the butterfly so I just left it alone.

 

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[MJ DeMarco]

20 contracts on the SPX

Holy shit, a max loss on 20 Naked SPX puts is about $4.1 million.

 

[Boo Blizzi]

Holy shit, a max loss on 20 Naked SPX puts is about $4.1 million.

Yeah my exposure wasnt that severe. I had the calls to cover my a$$ plus the credit I received.
With those naked positions, I hope they are waaaaaay out of the money and they are on stocks you want to own anyway.
Im sure some of these new tech stocks have enough VI to provide juicy premiums on deep puts so you can sell theta.

 

[Boo Blizzi]

Not to mention, I think he was saying that he was short the calls, not puts...so, max loss is (theoretically) infinite...

I was short and long both puts and calls. Its called an iron condor.

 

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[IceCreamKid]

I used to trade wide ICs, but it always felt like a Martingale scheme to me -- basically, it's hard to lose, but when you do, you can lose a whole lot. Especially indexes over the past ten years with high IV and some crazy market events...I just don't have the stomach for it...

That said, I'm far from an expert so I almost certainly wasn't trading optimally...

My experience mirrored yours up until I discovered the concept of IV Rank. IV Rank was the gamechanger that filtered out the less than optimal trades.

Off topic, but I loved your book man. I ended up not executing on the info when I bought it years ago, but regardless I learned a lot about how to make a house look good without spending a ton of cash.

 

[IceCreamKid]

I'll have to do some research on IV Rank... I've been thinking that I'd like to get back into doing some trading again...

There are some INSIDERS threads where MJ and I reveal a lot of our metrics, including IV Rank.

The TastyTrade methods have essentially turned the investing process into a game in which if you follow all of the listed metrics, winning is virtually guaranteed. Sorta like being a casino or an insurance company. The thing that I like most about it is that you no longer have to be a master of predicting direction. You can end up making money even when you are massively wrong about direction. Unfortunately, it still requires an investment of time/mental energy/emotional energy/capital in order to get a full understanding of all the moving parts.

I'm in the process of creating a "Black Book" compiling all of my metrics. I'll send it to you when I'm done.

 

[JimD]

great thread, following this now.

 

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[imtheserbian]

great thread, following this now.

great thread, following this now.

Heya Jim, couldn't contact you via messages but I left a message on your profile page FYI.

 

[IWC Man]

There are some INSIDERS threads where MJ and I reveal a lot of our metrics, including IV Rank.

The TastyTrade methods have essentially turned the investing process into a game in which if you follow all of the listed metrics, winning is virtually guaranteed. Sorta like being a casino or an insurance company. The thing that I like most about it is that you no longer have to be a master of predicting direction. You can end up making money even when you are massively wrong about direction. Unfortunately, it still requires an investment of time/mental energy/emotional energy/capital in order to get a full understanding of all the moving parts.

I'm in the process of creating a "Black Book" compiling all of my metrics. I'll send it to you when I'm done.

Hi ICK,

Any updates on the black book? I am just starting out. Best, IWCMan

 

[mosdef]

how many % are you guys getting on avarage? Higher than 10% each month?

 

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[mosdef]

Guys, im looking into starting to trading on a little scale. Just to test all the options. Since i don't live in the US (or a citizen of the us) It seems pretty complicated to start an Ameritrade account for dough. Can i use some Swedish or European brokerage account instead and still use dough?

Also if i fund the account 3000:- will they charge me when im trying to pull out the money?

Probably going to buy INSIDERS also Just wanna se that everything works before buying

 

[MJ DeMarco]

Any updates on the black book? I am just starting out. Best, IWCMan

Read my INSIDERS thread, it's about as black book as you can get.

how many % are you guys getting on avarage? Higher than 10% each month?

I've had a few 10% months, but mostly 3-8% per month on risk capital. Thus far this year I'm up about 40% on risk capital. (And January 2016 was a pretty bad month for me, so let's just say, the year started really poorly.)

 

[mosdef]

Read my INSIDERS thread, it's about as black book as you can get.



I've had a few 10% months, but mostly 3-8% per month on risk capital. Thus far this year I'm up about 40% on risk capital. (And January 2016 was a pretty bad month for me, so let's just say, the year started really poorly.)

thanks for the answer

 

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[Big Z]

Thank you for the kind words, and I've certainly appreciated all your posts here on this forum...great stuff!

I'll have to do some research on IV Rank... I've been thinking that I'd like to get back into doing some trading again...

The basics of IV rank is that when the IV Rank is high the premium is fatter so it makes sense to do credit spreads because there is more premium there. Doing the credit spreads when IV Rank is low wouldn't be worth it.

 

[Big Z]

Here is an example, leading up to earnings there is a lot of uncertainty in a stocks price because it can really move up or down. This increases the IV and the premiums get inflated. After earnings , literally minutes after you get the IV crush where all the premium gets sucked out. So people play this , but you have to know what strikes to use because you can get hammered if your too close. If you know what to look for you can see the probabilities of certain strikes going in the money. I traded Iron Condors for a few years so I know a little about this stuff. It's not my preferred strategy but It can be lucrative with better than average returns , but you need to get the right knowledge to do it. Just my humble opinion.

 

[MJ DeMarco]

This increases the IV and the premiums get inflated. After earnings , literally minutes after you get the IV crush where all the premium gets sucked out.

I traded this way in my early days but stopped as my trade logs indicated all my losses were coming from these earnings play. IOW, the IV collapse didn't justify the risk. Now I pretty much avoid all earning plays and instead deal with low IV, but a low IV that doesn't move much.

If you open positions after earnings through the next earnings cycle, your IV is low, but it also doesn't move much. In a sense, it becomes an non-factor unless that is, the IRS raids your corporate office (CAT), ha ha.

 

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[Big Z]

I traded this way in my early days but stopped as my trade logs indicated all my losses were coming from these earnings play. IOW, the IV collapse didn't justify the risk. Now I pretty much avoid all earning plays and instead deal with low IV, but a low IV that doesn't move much.

If you open positions after earnings through the next earnings cycle, your IV is low, but it also doesn't move much. In a sense, it becomes an non-factor unless that is, the IRS raids your corporate office (CAT), ha ha.

Yes I agree about the earnings plays being to volatile. From my understanding I believe low IV plays are done more with debit spreads than credit spreads. The market in general goes from a period of Low IV to High IV and then cycles again. During Low IV the options become cheap and debit spreads have a lower price. Do your low IV trades deal with credit spreads?

 

[MJ DeMarco]

Do your low IV trades deal with credit spreads?

No, I go naked, but on a limited # of underlyings. (I avoid biotechs, bonds and stick to boring stuff, like retail.)

 

[CareCPA]

Options are derivatives consisting of "puts" and "calls". A the owner of a call option is basically betting that the stock will be higher at a certain date in the future. Owners of put options are betting the stock will be lower. The strike price is the price in which a call option must be above or the put option must be below, at expiration in order for the option to have any value. For instance, if you own a call option that expires on August 25th 2014 with a strike price of $100 and price at the end of trading on August 25th is $105 the option will be $5 "in the money". A put option in this case would be worth nothing. If the price is instead $90 instead of $150 on August 25th, the put option will be $10 in the money and the call option will be worthless. Each option controls 100 shares so an option that expires $10 in the money will be worth $1,000.


Before expiration the the main factors affecting the value of an option are the strike price relative to the current stock price, time until expiration, and anticipated volatility of the stock price. For example, if the strike price of a call option of $100 and the current stock price is $101 the price of the option could be $2. The $2 premium accounts for $1 of intrinsic value (the amount the option is in the money) + the value of the time until expiration + the value from anticipated volatility. Now, say the price of the stock is currently $99 instead, in this case there will be $0 of intrinsic but there will still be value arising from the time until expiration and anticipated volatility because the stock price could be well above the strike price once the option expires.


The least an option can be worth is equal to its intrinsic value (otherwise arbitrage would be possible). The more time there is until the option expires the greater the option is worth. Similarly, the more anticipated volatility the more an option will be worth.


In addition to owning an option you can also sell them. When you own an option your risk is limited to the amount of the money you used to purchase the option, but when you sell an option your risk can be unlimited.


A lot of people would probably consider trading stock options more difficult than trading stocks, because with stocks you just need to be able to predict if the price will go up or down. Options introduce a time dynamic so not only do you need to know if it will go up or down, but you also need to know when the move will take place. Options lose time value as each day passes, so it isn't uncommon to correctly anticipate the price movement of a stock but still lose money trading the options.


I've only scratched the surface of options trading. Due to the nature of options there are many different strategies you can use. There is the potential to make exceptionally high returns with options, but it comes with significant risk.

Thank you for the literal word for word answer from Quora, as you and Alexlewter follow each other around liking each other's posts.
https://www.quora.com/How-does-stock-options-trading-work
It goes along with your answer on real estate auctions that is also word for word from Quora.
@MJ DeMarco @Andy Black , are these guys for real?

 

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[Koen_88]

Options are derivatives consisting of "puts" and "calls". A the owner of a call option is basically betting that the stock will be higher at a certain date in the future. Owners of put options are betting the stock will be lower. The strike price is the price in which a call option must be above or the put option must be below, at expiration in order for the option to have any value. For instance, if you own a call option that expires on August 25th 2014 with a strike price of $100 and price at the end of trading on August 25th is $105 the option will be $5 "in the money". A put option in this case would be worth nothing. If the price is instead $90 instead of $150 on August 25th, the put option will be $10 in the money and the call option will be worthless. Each option controls 100 shares so an option that expires $10 in the money will be worth $1,000.


Before expiration the the main factors affecting the value of an option are the strike price relative to the current stock price, time until expiration, and anticipated volatility of the stock price. For example, if the strike price of a call option of $100 and the current stock price is $101 the price of the option could be $2. The $2 premium accounts for $1 of intrinsic value (the amount the option is in the money) + the value of the time until expiration + the value from anticipated volatility. Now, say the price of the stock is currently $99 instead, in this case there will be $0 of intrinsic but there will still be value arising from the time until expiration and anticipated volatility because the stock price could be well above the strike price once the option expires.


The least an option can be worth is equal to its intrinsic value (otherwise arbitrage would be possible). The more time there is until the option expires the greater the option is worth. Similarly, the more anticipated volatility the more an option will be worth.


In addition to owning an option you can also sell them. When you own an option your risk is limited to the amount of the money you used to purchase the option, but when you sell an option your risk can be unlimited.


A lot of people would probably consider trading stock options more difficult than trading stocks, because with stocks you just need to be able to predict if the price will go up or down. Options introduce a time dynamic so not only do you need to know if it will go up or down, but you also need to know when the move will take place. Options lose time value as each day passes, so it isn't uncommon to correctly anticipate the price movement of a stock but still lose money trading the options.


I've only scratched the surface of options trading. Due to the nature of options there are many different strategies you can use. There is the potential to make exceptionally high returns with options, but it comes with significant risk.

How about CFD's Then what's the difference?

 

[Michael Raphael]

Very excited to be sharing some knowledge and experiences on this topic in the future. I've been dying to share some of this stuff with people who are actually interested.

I am dying to learn how to do this, I have a significant source of residual income (10k+) that I don't do any work for -literally have hours a day for free. Would love to learn how to do this. I would do whatever it takes to learn how to trade options. I am on level 1. Please would you be able to train me. I am going to read this thread and the links throughly but I am a visual and (direct) learner. Easy for me to learn via teaching, more difficult just to read and do.

I know sad, but I know my strengths and weaknesses.

 

[MJ DeMarco]

hank you for the literal word for word answer from Quora, as you and Alexlewter follow each other around liking each other's posts.

Good call, both @Daniel Newton and @Alexlewter share the same IPs and are essentially copy/pasting content from other sources, while they like each other's posts.

I'll give them 24 hours to explain before I ban them.

As for @Michael Raphael -- if you want to learn a particular strategy of options, I've posted a 20+ thread on the INSIDE (along with @IceCreamKid) detailing our strategy for option trading, which entirely revolves around selling. As a seller, time becomes your ally which resembles the Fastlane concept.

Of course, there are numerous strategies to trade options. If you want to play the buy side, then I don't recommend that thread.

 

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[IceCreamKid]

I am dying to learn how to do this, I have a significant source of residual income (10k+) that I don't do any work for -literally have hours a day for free. Would love to learn how to do this. I would do whatever it takes to learn how to trade options. I am on level 1. Please would you be able to train me. I am going to read this thread and the links throughly but I am a visual and (direct) learner. Easy for me to learn via teaching, more difficult just to read and do.

I know sad, but I know my strengths and weaknesses.

Sorry brother, but teaching this stuff 1-1 isn’t within my scope of focus right now. Teaching this stuff is really, really hard. Best to just listen to MJ’s posts as he seems to have a talent for explaining this in a way that’s easy to understand. Also, make sure to watch the Option Alpha vids.

One word of caution, this stuff ain’t easy money. It’s an emotional rollercoaster at times.

If you’re looking for easy passive income, I can connect you with my peeps who help me find deals on single family homes in cities ripe for growth. You still need to learn to identify what a deal is yourself though.

Lastly, be careful with writing stuff like, “I’m looking to be mentored” as it tends to attract all sorts of offers in your inbox from people who don’t have your best interest in mind. Do your homework on anyone you do biz with regardless of reputation, rep bank, etc.

 

[Michael Raphael]

As for @Michael Raphael -- if you want to learn a particular strategy of options, I've posted a 20+ thread on the INSIDE (along with @IceCreamKid) detailing our strategy for option trading, which entirely revolves around selling. As a seller, time becomes your ally which resembles the Fastlane concept.

I need to get INSIDERS again. Just debating as to whether I wait a few weeks or not (i.e. time where I can actually sit down and absorb). Also if I do can you convert my new thread to an INSIDERS thread so I can get more detailed so I can get more insight/assistance from INSIDERS people?

 

[MJ DeMarco]

Also if I do can you convert my new thread to an INSIDERS thread so I can get more detailed so I can get more insight/assistance from INSIDERS people?

Yes, at anytime an INSIDERS can request his post to go privately on the inside.

 

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[Elif]

The 3-day Rich Dad event I went to long ago was about stock options and regrettably my interest in that died off, but now it's been reignited! I was just signing up for dough.com, but it said the email was taken. I knew it seemed familiar because I'd already made an account. This is another reason to get INSIDERS once again...

 

[Elif]

I traded options in 2016 and 2017. I was super risky, trading calls/puts or straddles on earning days where premiums were crazy high due to its volatility. Let's say that I lost a lot of money!