How To Trade Stock Options (Ultimate Beginners Guide)

[MJ DeMarco]

Another great resource for the absolute beginner is Step Up to Options...

https://www.dough.com/stock-options-explained

I will expand on this at a later date/post (And @IceCreamKid as well) but options are truly the one financial investment that fits a Fastlane modality. At some point on your financial journey, you should learn the right way to trade them. And yes, there is a right way, and a wrong way.

 

[IceCreamKid]

Another great resource for the absolute beginner is Step Up to Options...

https://www.dough.com/stock-options-explained

I will expand on this at a later date/post (And @IceCreamKid as well) but options are truly the one financial investment that fits a Fastlane modality. At some point on your financial journey, you should learn the right way to trade them. And yes, there is a right way, and a wrong way.

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.

 

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[MJ DeMarco]

MJ, would be really great to read your post on this

I promise I will be making a huge post on it in the near future. Just gathering some more trench experience and waiting for the year to end.

Also, the post will NOT be outside for public consumption-- it will be made on the INSIDE. I got a good suspicion that @IceCreamKid will be a legendary contributor to it as well. Stay tuned!

 

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[IceCreamKid]

I am a little skeptical about their trading strategies and risk management techniques. I am looking for other learning sources, your recommendation would be greatly appreciated.

I can tell you from experience that reading another book will not give you the feeling of confidence which you seek. It will just lead you down the rabbit hole of analysis paralysis.

For me, the biggest confidence booster has been:
1. trading in real-time
2. using the ThinkBack feature in ThinkorSwim to allow me to manually backtest my strategies.

I invite you to test the strategies that you learned from TastyTrade using the ThinkBack feature. I think you'll be pleasantly surprised at how effective their strategies are. A consistent 20-40% profit per year is very realistic utilizing their strategies.

Also make sure to test your strategy in a variety of market types. It's important to learn when to use the proper cashflow strategy.

• Clear trending markets=directional trading(delta trading)
• Choppy markets=time decay trading(theta trading)
• Volatile markets=volatility trading(vega trading)

Historically, the market goes sideways the majority of the time so ideally you will be selling theta and profiting from time decay. Stay away from covered calls. Not enough control in those and when things get ugly, they get UGLY.

Sign up for a free account at https://www.dough.com/#traders and observe their trades in real-time. You'll learn a lot about how to adjust trades to profitability in the event that the market moves against you.

 

[MJ DeMarco]

people didnt seem to positive ab out trading stocks.

Stocks are like playing war.

Options are like playing poker.

At the very instant you buy a stock, your chances of being profitable is a coin flip -- 50/50. This statistical probability holds NO MATTER what the technical charts say, or the fundamentals.

If you buy 10 stocks, your odds of being profitable on every one of them is .5 to the 10th power or .097% -- and this is how the world invests for their retirement.

When using the market, the Fastlane preference is options due to time decay, which is essentially is finance world's version of the commandment of time.

 

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[jpmartin]

If you're interested in stock option trading, here's a good beginners guide to get you started. Covers the basics, plus four simple strategies to get started

 

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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.

 

[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.

 

[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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[jpmartin]

there is a right way, and a wrong way.

Without an ounce of doubt!!! btw, that article also leads you to dough.com - excellent resource, that has another advantage of getting you approved for options trading with ThinkOrSwim / TD Ameritrade.

 

[AllenCrawley]

It's been 15 years since I actively traded stock options. I really enjoyed it. Looking forward to this as I'm sure it will be a great refresher and I bet I'll learn a ton as well.

 

[MJ DeMarco]

Any updates on your options post MJ?

Yes, I made an extensive thread on the INSIDE, which I plan to update for awhile. That thread also morphed 3 other threads on the inside. All contain contributions from myself and @IceCreamKid who alluded in several threads that he also trades options.

 

[MJ DeMarco]

Did I miss this?

I tagged you in the INSIDERS thread ... it's called "How to Print Money Like the Worlds' Billionaires."

 

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[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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[JimD]

great thread, following this now.

 

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[jpmartin]

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.

We're all ears!

 

[jpmartin]

@jpmartin,

Bookmarked! Thanks for the link! Very interesting reading. Brings back memories of watching the options traders in the meat complex at the Merc in Chicago.

Chicago is where it all began...!

 

[jpmartin]

I am looking for other learning sources, your recommendation would be greatly appreciated.

Try going through the link given...

 

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[Captain Jack]

Any updates on your options post MJ?

There are MANY MANY updates on this. Purchase an INSIDERS subscription for further details.

Seriously. There are multiple very active threads that will tell you everything you need to know to successfully trade options.

 

[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.

 

[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.

 

[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.)

 

[jpmartin]

options are truly the one financial investment that fits a Fastlane modality.

MJ, would be really great to read your post on this, particularly how it ties with the CENTS = Control, Entry, Need, Time, Scale framework. (sorry, had to twist that around).

 

[Daniel A]

I'm seriously looking forward to this! 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...

Ditto on my bolded text above. ^

 

[exclusives88]

I also look forward to this.

I traded options in 2013 and 2014. 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! I'd like to learn as how I was investing was the WRONG way!

 

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[Chitown]

If you're interested in stock option trading, here's a good beginners guide to get you started.

@jpmartin,

Bookmarked! Thanks for the link! Very interesting reading. Brings back memories of watching the options traders in the meat complex at the Merc in Chicago.

 

[Kevind88]

There are MANY MANY updates on this. Purchase an INSIDERS subscription for further details.

Seriously. There are multiple very active threads that will tell you everything you need to know to successfully trade options.

Will do, thanks MJ!

 

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[Kevind88]

Yes, I made an extensive thread on the INSIDE, which I plan to update for awhile. That thread also morphed 3 other threads on the inside. All contain contributions from myself and @IceCreamKid who alluded in several threads that he also trades options.

Thanks MJ, will join Fastlane INSIDERS today

 

[jpmartin]

I will expand on this at a later date/post

Did I miss this?

 

[jpmartin]

Stocks are like playing war.

Options are like playing poker.

Love that example, gonna steal it next time!