5 Secrets To Trading Options Just Like A Professional Trader

Jay Soloff

Options Portfolio Manager

Editor – Options Profit Engine, 30 Day Dividends

To Get A Copy Of This Presentation

Text

Jay To

213-516-9803 In less than a minute you should receive a response with a link to the

presentation that you can read later, download, and save. Also, if I see any interesting trades I want to share with you, I’ll send them out. 4-6 text

messages per month, Msg. & Data rates apply.

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

Options Trading Online Resources

• Marketchameleon.com (analytics, screener)

• Cmlviz.com (backtesting)

• Cboe.com (videos, education)

• Optionseducation.org (education)

• Finviz.com (screener, charts)

• Vixcentral.com (volatility)

What Does This Show?

How Market Returns Really Look

1975-2011 time period (looks about the same if you go back further or extend to today)

So What Does It Mean? https://sixfigureinvesting.com/2016/03/modeling-stock-market-returns-with-laplace-distribution-instead-of-normal/

- Why is the market like this? - Why do many market risk models still use

the normal distribution? - What can we do to take actual market risk

into account? - This is where options trading comes in

Options Trading Secret #1

• Prioritize Risk Management • Follow the risk management advice you’re about to receive in this

presentation regardless of your risk tolerance level

• Utilize standard risk management practices (trading plan, entry/exit points, positions sizing, etc.)

• Risk management doesn’t have to be one size fits all – you can alter your plan based on the type of trades you’re using or the market environment

• At least consider using a portfolio hedge at all times, but particular if the macro environment is uncertain

Options Trading Secret #2

• 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 • I’m a volatility trader (usually a seller) that likes self-hedged trades (like iron condors)

• I get into trouble when I start to lean towards heavily directional trades

• 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

To Get A Copy Of This Presentation

Text

Jay To

213-516-9803

Options Trading Secret #3

• Use covered calls as often as possible • In most years, you are better off with covered calls versus only long stocks

(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 every 100 shares 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 Results (5% OTM/45 Delta)

5 years back 30 day holding period Held to expiration

Options Trading Secret #4

• Use long vertical spreads for directional trading • For any short or medium-term directional trade, using vertical spreads is

almost always a good idea

• My rule of thumb is any option that costs more than about $0.75 should be countered with a short option to reduce costs

• 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 simply buying and selling a call or put in the same expiration, but using different strikes. Long (debit) verticals are when you are buying the closer to the money options and selling the farther out ones

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 #5

• Use short vertical spreads for credit trades

• A short vertical spread is when you sell the closer to the money option and buy the farther out one to cap risk – the exact opposite of the long vertical trade. This a credit trade where you collect premium. • However, rather than directional in nature, short verticals can be used to sell

volatility

• Does have some directional bias, but far higher probability than debit verticals

• Eventually, as you get comfortable with selling vertical spreads, you can start using iron condors (which is simply selling a put vertical spread and call vertical spread at the same time) • I mix short iron condors and short vertical spreads in my trading service, with the

occasional long trade

Short Vertical Spread Example

• IWM at $165 on July 5th • Sold 19,250 July 20th 163 puts for $1.42

• Bought 19,250 July 20th 155 puts for $0.31

• Total premium collected $1.11 • Breakeven point is $161.89

• Max profit is premium collected or $1.11 ($2.1 million) • Occurs if IWM is above $163 on July 20th expiration

• Max loss is $8 (gap between spreads) – credit received ($1.11) = $6.89 • Max loss is $13.2 million

• IWM would have to drop 6% in two weeks

• Don’t forget that just sitting still will do the trick (which is basically what happened)

• The long strike is key as it reduces risk and margin requirement

Short (Credit) Vertical Spreads

• Pros • Can be a good way to trade volatility with a slight directional bias

• Works in a sideways/neutral market

• Depending on how far out of the money you go, can be very high probability

• Cons • Requires a margin account (usually a minimum of $2,000)

• Max loss is much greater than max gain (trade off due to high probability)

Short Vertical Spread Results (30 delta)

30 days to expiration Held to expiration 3 years back Remember, some directional bias is needed

Bonus Trading Tips!

• Six tips to improve your success rate: • Trade liquid options – bid/ask spreads are narrow

• Look at the tape – big trades (block trades) generally come form savvy sources

• Option Sentiment (calls versus puts) can be a useful directional indicator • Check out Marketchameleon.com

• Timing a direction is always tough but sentiment can help you determine when a change may be coming

• Don’t trade “teenies”

• Selling options for credit is high probability, but understand your risks • Remember, trade your edge!

• Always understand the underlying product you are trading options on

Summary

• Proper risk management makes all the difference in options trading

• 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

• Short vertical spreads are a good way to collect a credit

• Remember the six tips for options trading success

Q&A

To Get a Copy of This Presentation

1. Text the word Jay to 213-516-9803.

2. You’ll get a response with the presentation link.

3. I’ll also send a couple of updates on options trades I’m watching.