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Table of Content

1. Introduction………………………………………………….…………..……..3

2. Options Basics…………………………………………………………….4-12

1. Stocks vs Options…………………………………………………..….4

2. Option Types………………………………………………………..…...5

3. Underlying Assets..……...…..…..….……..…………..………..….….6

4. Strike Prices………………………………………………………….….7

5. Expiration Dates………………………………………………....……..8

6. American vs European Options…………………………….…..……9

7. Buying vs Selling Options…………………………...………..….….10

8. Trading Options……………….…………………………..………..…11

9. Standard Contract Sizes.……………………………..……………..12

10. Option Chains………………………………………………..….…….13

3. Trade Examples…………………………………………………….……14-15

4. Trading Mindset……………………………………………………….…16-18

5. Solutions………………………….……..……..……………..…………..19-34

6. Conclusion……………………………………………………………………35

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1. Introduction

Thanks for taking the time to go through this assignment handbook. Most people are too lazy and undedicated to do this and frankly, that is also why most people fail to become consistently profitable traders. But as you are reading this, you don’t seem to be one of those wannabe traders.Hopefully, you are dedicated enough to take full advantage of this guide.Ideally, you should have watched my entire options trading foundation masterclass before going through these assignments. The only prior knowledge that is required for this assignment handbook is the knowledge gained from the masterclass.

It is very important that you go through all the assignments carefully. Don’t skip ahead. Some questions may seem easy or repetitive and others may seem complicated. The goal of this assignment handbook is not that you have everything 100% correct. The goal is that you think and reflect about different options trading concepts and thereby ‘stabilize’ your options trading foundation.

Listening to or watching someone explain how things work is one thing. But actually thinking about these concepts yourself is totally different. Going through short assignments and answering questions is one of the best ways to learn. So once again, don’t worry if you don’t answer everything correctly. Just take your time and try your best.

Depending on your personal preferences, you could also print this out.

Enjoy!

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2.01 Options Basics: Stocks vs Options

A) Name at least two advantages of options over stocks.

B) Name at least one advantage of stocks over options.

C) Which of the following phrases describe options and which stocks?

1. Limited Time2. Capital Intensive 3. Non-Directional4. Leverage5. High Probability

Solutions on Page: 20

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2.02 Options Basics: Option Types

A) What types of options exist?

B) Finish the sentence: Call options give you…

C) Finish the sentence: Put options give you…

D) State the difference between Call and Put options.


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2.03 Options Basics: Underlying Assets

A) What is an underlying Asset?

B) Which of the following assets could be an underlying asset?

1. Stocks2. ETF’s3. Commodities4. Indexes

C) Does the price of the underlying asset affect an option’s price?


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2.04 Options Basics: Strike Prices

A) What is the strike price?

B) What does ITM, ATM and OTM stand for?

C) When is a Call option ITM, ATM or OTM?

D) When is a Put option ITM, ATM or OTM?


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2.05 Options Basics: Expiration Dates

A) How long can an option position maximally be held?

B) Which of the following is not a real option expiration cycle?

1. Quarterly2. Monthly3. Daily4. Weekly

C) Can you hold an option for years?

D) Can you hold an option after its expiration date?


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2.06 Options Basics: American vs

European Options

A) Name the difference between an American-style and a European-style option.

B) Generally speaking, which of these two options is more common?

C) Can you close a European-style option position before its expiration date?


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2.07 Options Basics: Buying vs Selling

Options

A) Outline at least two differences between buying and selling options.

B) What does short and long stand for (in regards to trading)?

C) Compare the directional assumption of a Put option buyer and a Put option seller.

D) Finish the sentence: A seller of a Call option has the…


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2.08 Options Basics: Trading Options

A) Can you close an option position without exercising an option?

B) How can you close a short Call position?

C) Add the corresponding closing transaction to each of the following positions?

1. Short Put2. Long Stock3. Long Call4. Short Stock

D) How should a Call option buyer decide if he should sell his option or exercise it?


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2.09 Options Basics: Standard Contract

Sizes

A) What is the standard contract size of an option contract?

B) Finish the sentence: One standard option contract controls…

C) An option’s price is quoted as $0,80. How much do you have to pay to buy two option contracts of this option?

D) If you would exercise three standard Call options, how many shares of the underlying asset could you buy at the strike price?


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2.10 Options Basics: Option Chains

A) What is an option chain?

B) Name at least three things that are typically displayed on an option chain.

C) What is the purpose of an option chain?


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3. Trade ExamplesHere is a list of example option trades. Try to explain what exactly each trade means.

Here is an example:

H) XYZ 5 long Call 50 Jul

XYZ = underlying asset; 5 = # of contracts; long = buy; Call = option type; 50 = strike price; Jul = expiration cycle

This position gives you the right to buy 500 shares of XYZ at $50. The right to do this expires together with the option in July.

A) ABC 1 long Put 105 Aug

B) QRS 10 short Put 15 Jun

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C) EFG 3 short Call 435 Feb

D) ABC 6 short Put 75 Nov

E) XYZ 1 long Call 101 Jan


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4. Trading Mindset

In the following segment, I am going to ask you a few questions regarding your approach to trading and trading education. There isn’t necessarily a 100% right or wrong answer for each question. However, the answers to the following questions may reveal if you are mentally ready to become a successful trader or if you still need to work on your mindset. Try to answer these questions as honest as possible. If you aren’t honest and just write down what you think might be the correct answer, you are doing yourself a disservice.

A) How hard do you think it is to become a profitable trader?

B) How long do you think will it maximally take before you have become a consistently profitable trader?

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C) Are you willing to sacrifice some things (e.g. money, time…) to become a successful trader?

D) How long are you willing to work before you give up?

E) How long will it take you to reach one million Dollars in trading profits?

F) How important or unimportant is trading education in your eyes?

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G) Rank the following factors from most important to least important for your trading success.

• Having money to trade with• A special chart pattern

• The right education/preparation

• Trading experience

• Trade alerts

• Your mindset

Evaluation on Page: 31-34

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5. Solutions

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2.01 A) Possible advantages of options over stocks:

• Versatility

• Non-directional

• High Probability

• Leverage (Not capital intensive)

B) Possible advantages of stocks over options:

• Generally, more liquid (more people trade stocks than options)

• Unlimited time (stocks don’t expire and therefore, can theoretically be held forever)

C) Phrases that describe options:

• 1. Limited Time

• 3. Non-Directional

• 4. Leverage• 5. High Probability

Phrases that describe stocks:

• 2. Capital Intensive

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2.02A) What types of options exist?

• Call Options

• Put Options

B) Finish the sentence: Call options give you…

• The right to buy the underlying asset (at the strike price)

C) Finish the sentence: Put options give you…

• The right to sell the underlying asset (at the strike price)

D) State the difference between Call and Put options.

• Call options give you the right to buy, whereas Put options give you the right to sell

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2.03A) What is an underlying Asset?

• The underlying asset is the asset that the option’s price is based on. For instance, if you trade options on ABC, ABC will be the underlying asset

B) Which of the following assets could be an underlying asset?

1. Stocks2. ETF’s3. Commodities4. Indexes• All of the above.

C) Does the price of the underlying asset affect an option’s price?

• Yes! The option’s price is based on the underlying asset.

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2.04A) What is the strike price?

• The price that a Call option buyer can buy shares of the underlying asset at.

• The price that a Put option buyer can sell shares of the underlying asset at.

B) What does ITM, ATM and OTM stand for?

• ITM: In The Money• ATM: At The Money

• OTM: Out of The Money

C) When is a Call option ITM, ATM or OTM?

• A Call option is ITM when its strike price is below the underlying asset’s price.

• A Call option is ATM when its strike price is at the underlying asset’s price.

• A Call option is OTM when its strike price is above the underlying asset’s price.

D) When is a Put option ITM, ATM or OTM?

• A Put option is ITM when its strike price is above the underlying asset’s price.

• A Put option is ATM when its strike price is at the underlying asset’s price.

• A Put option is OTM when its strike price is below the underlying asset’s price.

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2.05A) How long can an option position maximally be held?

• Until its expiration date.

B) Which of the following is not a real option expiration cycle?

1. Quarterly2. Monthly3. Daily4. Weekly

• Quarterly, Monthly and Weekly expiration cycles exist.

C) Can you hold an option for years?

• If the expiration date is in years, then yes.

D) Can you hold an option after its expiration date?

• No.

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2.06 A) Name the difference between an American-style and a European-

style option.

• European-style options can only be exercised on the expiration date.

• American-style options can be exercised up until the expiration date.

B) Generally speaking, which of these two options is more common?

• American-style options are usually more common than European-style options.

C) Can you close a European-style option position before its expiration

date?

• Yes. Even though you can’t exercise the option before expiration, you can close the position with a closing transaction.

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2.07A) Outline at least two differences between buying and selling options.

• Option buyers have a right and option sellers have an obligation.

• The directional assumption of an option seller is the opposite of a buyer of the same option.

B) What does short and long stand for (in regards to trading)?

• Short: Sell to open a position• Long: Buy to open a position

C) Compare the directional assumption of a Put option buyer and a Put

option seller.

• The Put option buyer has a bearish directional assumption, whereas the Put option seller has a bullish directional assumption.

D) Finish the sentence: A seller of a Call option has the…

• Obligation to sell the underlying asset at the strike price if the buyer of that option exercises his right.

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2.08A) Can you close an option position without exercising an option?

• Yes, option positions can be bought and sold just like stock positions. So instead of exercising a long option position, you could also just sell it.

B) How can you close a short Call position?

• By buying the Call option back.

C) Add the corresponding closing transaction to each the following

positions?

1. Short Put - To close a short Put position, you have to buy back the Put option.

2. Long Stock - To close a long Stock position, you would have to sell the stock.

3. Long Call - To close a long Call position, you would have to sell the Call option.

4. Short Stock - To close a short Stock position, you would have to buy the stock.

D) How should a Call option buyer decide if he should sell his option or

exercise it?

• Probably the most important factor to consider here is if the Call option buyer is interested in the underlying asset. If he does not want to own the underlying asset, he probably should not exercise the option.

• Another factor would be the total profit. Depending on the option’s price, it may be more profitable to sell the Call option instead of exercising it.

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2.09A) What is the standard contract size of an option contract?

• 100 shares of the underlying asset.

B) Finish the sentence: One Standard option contract controls…

• 100 shares of the underlying asset.

C) An option’s price is quoted as $0,80. How much do you have to pay to

buy two option contracts of this option?

• To find the price that you have to pay for one standard option contract, you have to multiply the quoted price by 100 (100 x $0,8 = $80). To find the price for two contracts, you have to multiply this figure by two (2 x $80 = $160). So you have to pay $160 to buy two option contracts of that option.

D) If you would exercise three Call options, how many shares of the

underlying asset could you buy at the strike price?

• Each Call option controls 100 shares of the underlying asset. So if you exercise three Call options, you will be able to buy 300 shares of the underlying asset at the strike price.

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2.10 A) What is an option chain?

• A table displaying the most important options trading information.

B) Name at least three things that are typically displayed on an option

chain.

• Underlying Asset

• Strike Prices

• Expiration Date

• Type of Option (Call or Put)

• Option’s Price• …

C) What is the purpose of an option chain?

• To show options traders which options exist and how expensive they are. Option chains are a very efficient way of filtering a lot of information.

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3.A) ABC 1 long Put 105 Aug This position gives you the right to sell 100 shares of ABC at $105. This right expires in August.

B) QRS 10 short Put 15 Jun

This position gives you the obligation to buy 1000 shares of QRS at $15 if the buyer of those options chooses to exercise his right to sell his shares. This obligation expires in June.

C) EFG 3 short Call 435 Feb This position gives you the obligation to sell 300 shares of EFG at $435 if the buyer of those options chooses to exercise his right to buy his shares. This obligation expires in February.

D) ABC 6 short Put 75 NovThis position gives you the obligation to buy 600 shares of ABC at $75 if the buyer of those options chooses to exercise his right to sell his shares. This obligation expires in November.

E) XYZ 1 long Call 101 Jan This position gives you the right to buy 100 shares of XYZ at $101. The expiration date is in January.

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4. Before we get into the evaluation of your current mindset for trading, I just want to tell you to take everything with a grain of salt. These are just a few questions and like I said earlier, there are no right or wrong answers. I am just going to give you my thoughts on what I think is the best mindset for beginning and learning traders. If your answers don’t align with mine, that does not mean that you never will be a profitable trader or anything similar. It just means that I think, you potentially should try to adjust your approach/mindset. But like I said, don’t take this too seriously.

A) How hard do you think it is to become a profitable trader?

If you answered this question with ‘easy’ or something along those lines, you should probably reconsider your answer. Becoming a profitable trader is everything else than easy.

B) How long do you think will it maximally take before you have become

a consistently profitable trader? It is very hard to predict how long it will take someone to become a consistently profitable trader. This time frame can vary a lot. It can take months to many years. But this question asked how long it will maximally take and not what the best case scenario will be. So in my opinion, you should have a long-term approach and therefore, ideally should have answered with ‘years’. You may very well become a profitable trader before that. However, in the worst case scenario, you won’t learn how to trade consistently profitable for years.

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C) Are you willing to sacrifice some things (e.g. money, time…) to

become a successful trader? If you aren’t willing to sacrifice time, money or anything else, it will be very hard to become a successful trader. Trading and even more important, learning how to trade takes time (and money).

D) How long are you willing to work before you give up?

The more work that you are willing to put in, the better. If you are only willing to give trading a shot for a few days or even weeks, you should try to work on that approach. Like I said before, trading and learning to trade takes time and dedication. If you aren’t fully dedicated and willing to work, it will be hard to become a successful trader.

E) How long will it take you to reach one million Dollars in trading

profits? One million Dollars in trading profits is a majestic thing to do. Once again, the time that it takes to achieve this varies widely. Some people achieve it in a year. Others work their entire life towards this and never reach this goal. I personally think that anyone who thinks he will achieve one million Dollars in trading profits in under a few years has the wrong approach. Trading is not a ‘get rich quick’ scheme. So don’t treat it like one. If you seriously expect to reach one million Dollars or more in trading profits within a few months, you have to adjust your expectations. Even reaching one million Dollars in trading profits after five years of trading is very fast and successful. I am not saying that it is impossible to reach the one million Dollar mark sooner. I am just saying that this is unlikely and you, therefore, shouldn’t expect it.

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Obviously, this also depends on your starting capital. If you start with 100 million Dollars, you could achieve profits in excess of one million Dollars much faster than someone with a smaller account.

F) How important or unimportant is trading education in your eyes?

In my eyes, trading education is one of the most important factors to becoming a successful trader. Just compare trading to other professions. Usually, you have to go through years of education and training before you start with a real job. Why should this be so different with trading?No one is born as a perfect trader. You have to go through training and learn how to do it. So don’t underestimate the importance of trading education!

G) Rank the following factors from most important to least important for

your trading success.

My Ranking:

1. The right education/preparation (I can’t emphasize the importance of the correct preparation and education enough)

2. Your mindset (If you don’t value your mindset, your mindset isn’t right yet. It is very important to have the right approach.)

3. Trading experience (Trading experience is another important factor and

it comes with time. However, this does not mean that you should just go and trade straight away. It is much more important to prepare yourself before you actually risk your hard earned money.)

4. Having money to trade with (Even though you need money to trade, I don’t think this is near as important as any of the just-mentioned factors. It is much more important to know what you are doing and to have a plan than it is to have money to trade. In the beginning, you shouldn’t be looking to trade anyway. Rather focus on the preparation.)

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5. A special chart pattern (A special chart pattern is a metaphor for some magic secret to trading success. A lot of people think there is one special secret chart pattern or something similar that they have to know to become a successful trader. You won’t become a successful trader because you paid some internet guru to reveal his ‘exclusive’ trading pattern. You will become successful because you worked your way to the top and actually prepared yourself.)

6. Trade alerts (Trade alerts are another near useless feature. You won’t become successful if you follow someone else’s trade alerts. That’s not how it works. Instead of trying to follow trade alerts, focus on learning how to trade on your own.

The focus in my ranking lies on the top three factors. In my opinion, the remaining three aren’t really important to a trader’s success.

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6. Conclusion

Thanks so much for taking the time and actually doing your homework. If you went through all assignments, you are already better off than the vast majority of other undedicated wannabe traders that aren’t willing to put in some work.I truly hope you learned a lot. Furthermore, I think this assignment handbook does help with stabilizing your options trading foundation. Always remember, these basics are what everything is based on. If you don’t fully understand the basics, you won’t understand the rest either. Don’t skip ahead without a complete understanding of the previous topic. Never forget, this is a marathon, not a sprint and slow and steady wins this race.

If you felt like you could have done better on some assignments, I just want to tell you that there is absolutely no harm in redoing some or all of the assignments.

If you have trouble understanding anything regarding this assignment handbook or anything else trading related, make sure to let me know. So if you have any questions, comments or feedback either let me know through comments on my site or send me a mail. My email address is:

[email protected]

Once again, thanks!

Cheers and good luck on your trading journey!Louis

Founder of TradeOptionsWithMe.com

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