5 Secrets To Trading Options Just Like A Professional Trader Jay Soloff Options Portfolio Manager Editor – Options Profit Engine
5 Secrets To Trading Options Just Like A Professional Trader
Jay Soloff
Options Portfolio Manager
Editor – Options Profit Engine
About Me
• 20 years of experience trading options
• 8 years of online research & options services
• CBOE floor trader and market maker – provided liquidity on the largest options exchange in the world for stocks like Amazon
• Hedge fund analyst, options portfolio
• MBA, MSIM, Arizona State University
• BA Economics, University of Illinois
Lessons From February 5th
Feb 5th:
Short volatility ETPs got crushed but institutions didn’t lose money. So who did?
Options Trading Secret #1
• TRADE YOUR EDGE • There are many different ways to successfully trade options
• Options strategies can vary in success based on your personality and trading style
• If you find something that works for you, it can’t be the “wrong” strategy
• That doesn’t mean you should ignore basic risk management and trade management best practices
Options Trading Secret #2
• Use covered calls as often as possible • In most years, you are better off with covered calls (plenty of data to support
this, not to mention – just look at block trades)
• Covered calls are very easy and take very little time to implement
• Perfect complement to dividend collection
• A covered call is when you write a call versus 100 shares (at least) of a stock you own to help amplify the yield • Example: An actual Apple (AAPL) covered call trade on May 7th
• Purchased 100,000 shares of AAPL at $186
• Sold 1,000 May 18th 192.5 calls for $0.84 (collecting $84,000)
Covered Calls
• Payoff scenarios • Scenario 1: Apple is at $186 on May 18th
o Stock gains = $0 o Option gains = $84,000 (10 days) o Return = 0.5% (84,000/18,600,000), monthly = 1.5%, yearly = 18%
• Scenario 2: Apple is at $192.5 or higher on May 18th o Stock gains = $650,000 ($6.5 move x 100,000 shares) o Option gains = $84,000 o Return = 4% (734,000/18,600,000), monthly = 12%, yearly = 144%
• Scenario 3: Apple is at $185.16 on May 18th o Stock loss = $84,000 ($0.86 move x 100,000 shares) o Option gains = $84,000 o Return = 0% o Any lower price would result in a loss
Covered Calls
• Pros • Works in almost any environment
• Easy to do
• Consistent income generation (even more so than dividends)
• Cons • Can cap earnings in a high growth environment (note that you aren’t losing
money)
• Takes a fair amount of capital (not a con if you already own the shares)
Covered Calls (5% OTM)
Options Trading Secret #3
• Use vertical spreads for directional trading • For any short or medium-term directional trade, using vertical spreads is
almost always a good idea
• Any option that costs more than about $0.50 should be countered with a short option to reduce costs (in most cases)
• For long-term options (LEAPS), using naked options is okay because it’s more like a stock purchase (basically trading dividends for leverage)
• A vertical spread is when use buy and sell a call or put in the same expiration, but using different strikes
Vertical Spreads: AAPL Example
• Apple stock at $185.50 on May 8th • Bought 1,000 September 195 calls for $5.52
• Sold 1,000 September 200 calls for $3.93
• Total cost is $1.59 • Breakeven point is $196.59
• Max profit is $5 (gap between strikes) - $1.59 cost = $3.41 • That’s $341,000 or 214% gains
• Max loss is $159,000
• Conversely if you bought the 195 calls for $5.52 • Breakeven is $200.52
• Max loss is $552,000
Vertical Spreads
• Pros • Reduced risk (due to lower premium costs)
• Higher returns (lower costs means bigger percentage gains)
• Cons • Can cap gains
Vertical Spreads – Facebook (FB)
Naked Calls
Call Vertical Spreads
Vertical Spreads – Tesla (TSLA)
Naked Puts
Put Vertical Spreads
Options Trading Secret #4
• Use straddles or strangles if you think a stock is going to move but don’t have a directional opinion • This happens a lot more than you realize
• Doesn’t have to just be an earnings scenario
• Can be very good for index/ETF trading as well
• Straddle versus strangle depends on the cost of the options
• A straddle consists of buying a call and put at the same strike in the same expiration
• A strangle consists of buying a call and put at different strikes in the same expiration
Straddle/Strangle Examples
• Groupon (GRPN)
• May 11th
• Visa (V) Strangle
• June 2019
Straddle/Strangle
• Pros • Don’t have to pick a direction
• Can show big returns
• Cons • Can be expensive
• Lower probability (due to cost)
Strangle (5% OTM)
Gains: 100% capped Losses: 35% capped
Option Trading Secret #5
• Six tips to improve your success rate: • Trade liquid options – bid/ask spreads are narrow
• Look at the tape – big trades generally come form savvy sources
• Don’t trade “teenies”
• Selling options for credit is high probability, but understand your risks • I’ll discuss this a lot more tomorrow at 1:15!
• Never trade binary options
• Always understand the underlying product you are trading options on
Summary
• Trade your edge • There are many ways to make money trading options, but always try to focus
on what you do best
• Use covered calls whenever possible
• Use vertical spreads for directional trades
• Straddles and strangles are the best bet for trading movement
• Remember the six tips for options trading success
Thank You! Let’s take some questions now.
For more information, go to
www.OptionsProfitEngine.com