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