options in business

8/20/2019 Options in Business

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Understanding Options



www.SimplerOptions.com 2




Introduction ............................................................................................................................... 4

Option Contracts ....................................................................................................................... 4

Call Options ................................................................................................................................. 5

Put Options ................................................................................................................................. 6

Using Leverage ........................................................................................................................... 7

Pricing An Option...................................................................................................................... 8

Learning the Basics ............................................................................................................... 10

Understanding the Bid/Ask Spread ................................................................................ 13

Changing Sides ........................................................................................................................ 15

Buying Vs. Selling ................................................................................................................... 15

Managing Positions at Expiration .................................................................................. 177

American Vs. European ....................................................................................................... 17 Cash Vs. Share Settlement ................................................................................................. 177

Avoiding Major Pitfalls ...................................................................................................... 211

Choosing Your Position ..................................................................................................... 211

Understanding Implied Volatility .................................................................................... 23

Giving Up Your Edge on Entries ........................................................................................ 27

Fibonacci Ratios ................................................................................................................... 288

Closing Statements ................................................................................................................ 29




Introduction

For many newcomers to the stock market, the possibility of making money bytrading from the convenience of a laptop is intriguing, dangerous, and exciting.When the markets are closed, take the time to learn the facts presented in this

collaboration.

This collaboration specifically tells newcomers to the business how to use andunderstand option contracts. For those just entering the field, moving into the worldof options can be somewhat daunting.

For those coming from a stock background, the most simplistic form ofunderstanding these methods would be “buy low and sell high.” In theory, this ideabreaks it down so even the newest members can understand, but that doesn’t meanit is always so simple.

With options, however, there are many working parts which make the machine, as awhole, more difficult to understand, and even harder to master.

That said, trading still invites newcomers to compete along-side lifelongprofessionals, unlike sports, where, for example, one could not sign up for theMasters after learning a basic golf swing, nor could an individual compete as aprofessional racecar driver after simply learning how to operate a manualtransmission.

If you feel like you’ve just set foot inside the Endeavour spaceship, where hundredsof lights, buttons, and screens blink and beep in your direction, a sense ofoverwhelming tension can creep up, causing a clear disadvantage in the market.

We overcome this disadvantage with a clear understanding of the market we’reparticipating in, with a foundational knowledge of how each part works. Thisfoundation begins by understanding what an option contract is, how it works, andhow you can implement it into your specific trading techniques.

For those who already feel overwhelmed, remember to take each working part onestep at a time, breaking them down into pieces one-by-one, much like learning adance, step-by-step, slowly mastering the entire process.

Option Contracts

An option contract, also known as “an option,” is defined as “a promise that meetsthe requirements for the formation of a contract.” Essentially, this is a bindingcontract between two parties.




An option simply means that the buyer has certain rights. The buyer is the optionee,or beneficiary, of the contract. This individual has rights, but not necessary anobligation, to long (or short) a stock from a predetermined price. There is a dateuntil which this contract is good for called an expiration date.

There are two types of options contracts – calls and puts.

Call Options

Call options give the buyer a guarantee that the person who sold the option, will sellthose shares at a predetermined price. That predetermined price is also known asthe “strike price.” As a bullish bet, it is likely to go up in value. “Bullish” means thatan investor believes a stock price will increase over time; similarly, investorswho purchase calls are bullish on the underlying stock. Conversely, “bearish” indicates that an investor believes that the stock will decrease in value.

A call option is a bet that the stock is going to increase in value. For instance, ifone predicted that Apple’s stock was on the verge of rising, that person wouldbuy a call option. The higher Apple’s stock climbs, the more the call optionappreciates.

The risk with options is that the option could expire worthless. If Apple’s stockwere hovering at $500 and one bought a $510 call, it would expire worthlessand the premium paid would be lost by that unfortunate investor. What thatseller managed to do is called “writing an option.” If a stock were going to golower, one could sell those options to a third party who believes it will go

higher. That is called “writing premium,” or “collecting premium.”

Writing call options is among the riskiest of trade strategies. A particularlyunfortunate scenario was illustrated when one individual sold hundreds of a$50 call option for approximately one dollar; when the stock price was $48.The call ended up expiring worthless, but that person had initially thought hewould make $25,000 on the trade. The next day he received the news that thestock was up over $50 a share, as it was being bought out. The money he hadinvested was unable to be recovered. That is the risk associated with writingcall options.

When one purchases a call option, it offers the right to buy a given asset at afixed price, also known as the strike price. If a call option is purchased at $5and the underlying asset increases in value, the call will increase in value aswell. At any time before the specified expiration date, the option writer(namely, the individual who created the option purchased) has a legalobligation to sell the asset at the strike price. Call options that have a strikeprice below the current market price of the underlying asset are said to be “in




the money.” If Apple were at $500, a $450 call option would be considered tobe in the money, while a $550 call option would be out of the money. Thoseacronyms are common: ITM, OTM, and ATM, or “at the money.” Put options(discussed below) are the inverse of this.

It is also critical to remember that an option price consists of both theintrinsic value and the time value. The former is the amount that the option isin the money. For example, if Apple’s price was at $500 and there was a $490call, $10 of that option price is intrinsic. Extrinsic (time) value has severalvariables that create that dollar value.

Buying a call option is the least amount of risk that one could take. Selling anaked call option, on the other hand, is the riskiest endeavor. The downside isessentially unlimited. However, this should not indicate that buying will offera constant stream of income; if one purchases the wrong stock option, nomoney shall be made. For instance, if a stock trades at $520 and there are

options available at a strike price of $570, this would indicate a tidy profit ifthe stock were to rise in price. However, the stock could trade sideways, whichwould leave the trader with nothing as the option expires worthless.

As an example, if Apple’s March $515 call option was priced $23.10. Theoption buyer had the right to purchase 100 shares of Apple stock at a strikeprice of $515 per share any time prior to the expiration date. If Apple was at$520 and one bought the $515 call option, and the price might rose to $550.Then an instant profit could be made because the stock is actually trading at$550.

However, there is still the option of buying the stock at the price of $515.Some experts discourage the purchasing (assigning) of stock, which isuncommon but not unheard of. Generally the option is either bought or sold.

Put Options

Put options are the opposite of call options, and again, one can buy or sell a putoption in the same manner as a call option. If Apple’s stock were going to godown, one would buy a put option because as that stock descends, the putoption will increase in value. These options give you the right to sell shares at a

given strike price.

Selling naked put options is a popular income strategy. For instance, if stockskeep rising, like days when Apple continues to rally, one would sell naked putoptions. If the stock keeps rallying and the put options expire worthless, thepremium received could be kept as income. This is a more conservative optionthan selling naked call options because a stock can only fall to zero, and the




difference between the option strike and zero would be the maximum loss.One can also mitigate the risk by utilizing credit spreads. (more on thistechnique later)

As mentioned earlier with an option being in or out of the money, with put

options, the inverse holds true: if put options have a strike price above thecurrent market value of the underlying asset, those would be considered to bein the money. If the strike price were below the current market value, thosewould be out of the money.

The purchase of put contracts gives the buyer a bearish outlook on the market;meaning that they hope the value will actually go down. Therefore, we buy putswhen we expect a market to drop and buy calls when we expect it to rise.

While it seems that we could merely buy stocks rather than options, there is onereason why options are so important: leverage.

Leverage means that a small amount of work can move a large force. Imagine usinga pulley system to lift a heavy object, or using a crow bar to open a jammed door.Leverage can help small individuals move large objects. The leverage of options canhelp build a powerful portfolio.

Using Leverage

Leverage can actually allow traders with small accounts to grow exponentially while

also allowing traders with large accounts to free up excess capital. It is imperativeto maintain several different accounts with which to work. Some traders keepmultiple accounts, each engineered for different work: short-term, long-term,day trading futures, swing trading options (swing means holding for morethan 1 day), among others.

Consider the example of RAX. Currently, RAX is trading for $31.76 in the market. Atypical order of RAX may be 100 shares, for a total of $3,176.00.

$31.76 x 100 = $3,176.00

A delta 1.00 call option (delta meaning the rate of change for an options price,relative to a one-unit change in the price of an underlying asset) will give youthe exact same price movement as the 100 shares of stock, but it will only cost thebuyer $800, rather than a price over three grand. Generally, one should aim for adelta value of 70 or higher. Gamma, additionally, is the rate of change of thedelta. (more on this later)




In both of these examples, the buyer will receive $100 for every $1 that RAXincreases. If both of these scenarios give the same movement, why not trade optionto save on capital?

Usually when something is too good to be true, it is. In this particular scenario, it’s

important to discuss the other moving parts that make the machine operate.

Leverage does not come without a cost. Traders who overleverage themselves maynot truly understand the risk involved. Imagine giving a fulcrum to children, or evenadults who haven’t been trained in operate the device, and then asking them tomove a large object; risk is involved.

Pricing An Option

In terms of our machine’s “moving parts,” this really only refers to how an option ispriced. The most common method is the Black-Scholes Option Pricing Formula,which has been the premier method of valuating options since Fischer Blackand Myron Scholes published their theorem regarding the subject in 1973:




To be fair, the formula above is a little overbearing and most traders will neveractually have to use it. It’s included, however, for those who would like tounderstand the fundamentals of trading.

Specifically, this formula emphasizes the point that your options price is a moving

target. Exercise comes back to being the buyer vs the seller. If you’re long the optionyou can exercise [buy the stock] at any time. For beginners, the following variablesshould be noted from the formula above:

1. Stock Price2. Strike Price3. Time Until Expiration4. Volatility

Of the four variables listed above, volatility is perhaps the most critical.

Implied volatility (IV) is one of the most important concepts for options traders tounderstand for two reasons: First, it shows how volatile the market might be in thefuture. Second, implied volatility can help you calculate probability. There arevarious indexes to watch on a daily basis: NASDAQ 100 options (thecontinental benchmark for securities and technology stocks), ETFs (exchange-traded funds), SPDRs (as said before, an abbreviated version of Standard &Poors depositary receipt), and others. There are even reverse-ETFs, in whichan exchange-traded fund, which is made by utilizing various derivatives, leadsto a profit from a decline in the value of an underlying benchmark. These areideal for traders who feel comfortable doing shorter-term work.

Some individuals believe that market internals, or hourly updates from withinthe market itself, provide valuable information. While they do offerinformation and help situate a trader before buying or selling, the data is notthe benchmark from which someone should measure. If the trading is to bedone on SPDRs, then market internals will be valuable. Other times, marketinternals will indicate an overall downward trend while individual stocks arerising.

With that in mind, IV can be measured as a deviation or variance between severalreturns within a security or market index. Essentially, the higher the volatility, themore risk involved.




Learning the Basics

The image below can come off as a little daunting to newcomers, but remember totake each piece one at a time, and you will soon learn the entire puzzle.

From left to right, each of the four working parts is presented above. Time UntilExpiration is on the left, in red. On the upper right, Stock Price is listed with StrikePrice and Implied Volatility sit underneath.

This specific example comes from ThinkOrSwim.com, so not all programs will bedesigned, or presented in this exact way.

1. Stock Price2. Strike Price3. Time Until Expiration4. Volatility

In this example, the Time Until Expiration is presented in red, with exception to thethird option. When red (in this example), these are generally weekly options.

The strike price points to different numbers. These strike prices relate directly tothe underline stock price. With options, it’s important to understand what the stocksmay be worth upon option expiration, to know if these stocks or bearish or bullish.




It’s important to think of where the stock is trading. In many cases, 90 percent oflower priced options will not lead to success and will expire worthless. Instead,take time to study those options that sit within the money.

In addition, think about options from their intrinsic standpoint.

Implied volatility is the next step to study. Take a look at the numbers presentedhere, listed in black font on blue background near the Implied Volatility bubble.

In this example, the numbers are relativity the same until April 14. When you seesomething like this (a jump from 15 to 25), this usually signals an earnings periodfor the company.

Market makers (traders on the other side of your position) price the option to covertheir risks. Essentially, rather than take the chance of losing any money, the pricesimply rises during earnings periods to make sure the stock doesn’t take any large

jumps or falls.

Now, take a look at the four black rectangles.

Apple is bullish, but it’s also important to know when/how the stock might move.For example, if you expect the stock to move within 48 hours, you can examine howthe stock has moved in the past. If the numbers will not add up in 48 hours, considergiving yourself seven days for the stock to move, knowing you will only pay anadditional two dollars overall.

In April 5, many of these numbers nearly double (presented in lower portion of

graph). This is a direct impact of the Implied Volatility. This is crucial and relatesback to the intrinsic value.

For example, take a look at the 540 call. Take a look at the beige colors on the leftside of the chart above (page 7). For this particular example, the beige strikes are inthe money and the white strikes are out of the money.

While the 540 call is in the money, it’s only worth $2.55, with the remainder of thevalue being the juiced up volatility along with the premium, making profit difficultto attain.

When an option expires in the money, it will be worth however far it is in themoney. Meaning, if these options expired on Friday, then they would only be worth$2.55. When purchasing directional calls, timing is everything.

Also, despite these numbers being presented in the form of decimal dollars, whenbuying, they actually represent hundreds of dollars. For example, if you were topurchase a 2.55 stock, this is actually $255.00 and not $2.55, in real dollars.




This all comes down to intrinsic value, versus extrinsic value—knowing what thatoption will be worth upon expiration.

Imagine buying the 540 call, and doing so for only $15. Now, where will that setyour break-even price? Paying 15 up front means that Apple will have to be sitting

at 555 on the expiration date just for the buyer to break even.

If the call was only $10, but sat at 550, then the stock would have to increase all theway to 560 just for the buyer to break even. For those not paying close attention, inthis scenario, it’s possible to take a large hit, losing money upon expiration.

Once again, if this seems overwhelming, take some time to digest the chart above,allowing for the information to sink in. These four variables will come back againand again.




This option is not nearly as liquid as the previous option.

Auto Zone traded 232,723 options that day, which is relatively thin. In this scenario,that will affect the numbers. Specifically, AZO doesn’t trade weekly’s (or weeklyoptions, for which premiums can be extremely high; when dealing in weeklyoptions, it is best to be a seller as opposed to a buyer), but they do trademonthly’s, meaning t here is not an option to sell a spread the following week.

Lower volume stocks do not have weekly’s. In this example, the Bid/Ask restsbetween 10.60 and 11.40. For newcomers, it’s best to focus on liquid markets, suchas the one illustrated in the first example.

In the example above, looking under volume on the chart, only 1 single option wastraded that day, on an interest of 88. That means that only 88 people have come intoto purchase a fresh interest in the stock.

The Bid/Ask spread specifically relates to what the market maker will ask for andwhat the buyer will pay. Much like an asking price at a car dealership, there is asticker price (MSRP is theo price), but there is some leniency until the two partiesreach an agreement. The agreed-upon price is the last price traded, or “last.”

Keep it simple: an option is only worth what a buyer is willing to pay.




Changing Sides

Once these ideas have become more understandable, buyers are more comfortablethinking of themselves as the market makers, or sellers. Imagine buying a car from adealership, and then becoming an independent dealer. As a seller, you want to find

the highest bidder in order to make the most money.

Buying an option versus selling one is also a key factor in how the Greeks will affectyour position. The main three to focus on are delta, theta, and vega (theta meaningthe measure of premium decay, and vega indicating the measure of how muchan options premium will increase or decrease given a change in volatility).

Buying Vs. Selling

Selling options can give you an edge in the market.

Take a look at the 535 calls in Apple (APPL).

In this scenario, we see a delta of .56, theta of -.22 and a Vega of .43.

Disregard the positive and negative values until you actually take a position. Thiscan be especially confusing when one number is negative and the other two positive.

If we come in as the buyer of the option, then we will be focusing on the bid and the“theo price.”

Once we enter our position, the Greeks will take a positive or negative stance.




In this example, we have one loan option that has fourteen days before expiration.The market price is 538 and the market change is -4. There are long deltas, whichrest at 57.37, meaning that as APPL rises, the market will rise at that value.

However, each day theta will fall -21.88, as theta moves exponentially rather than

linearly, which is different from delta and vega. This means that if APPL opens up at538 and doesn’t move a penny, the buyer will still lose 21 dollars due to leverage.

Therefore, our contract will react each day as we move forward in time, to eachdollar the underlying rallies and how much the contract will gain or lose for each 1percent change in the volatility of the underlying asset.

If the seller of the option focuses on ask and theo price, then the Greeks will taketheir corrective positive or negative stances upon the position.

In the above example, the stock was sold, reversing the values of the Greeks. So, ifthe individual sells, the seller will lose 57 dollars. Whatever hurts the buyer willhelp the seller.

This occurs because theta is the only Greek that will absolutely move forward.

Short options carry more risk (leverage), but it puts the constant variable of time in

your favor—the only real truth within the formula. It is always important (andalways worth the investment) to pay more for time. Without time, the marketwill work the trader instead the trader working the market.




One way to remind your-self, or verify that a market would be cash settled, is to lookthe volume for that ticker. In the case of SPX, this is cash settled because there areno actual shares of SPX or trade. It is simply a measure of the S&P 500 that gives usanother instrument or trade.

As the buyer, there is more flexibility than the seller, which is why most peoplebegin as a buyer rather than a seller. As a buyer, there is no risk when action is nottaken, which is untrue in the case of sellers.

Note: in this example, the “No Volume” option has been presented using the Think or

Swim website, which presents a flat-line for study.




In these two images, there is a different between SPX, with SPX expiring early. Makenote of the days left showing in your trading platform. These two images specificallyshow the difference of SPX against NDX, with NDX expiring a day earlier.

These were taken together to show that NDX has already expired. These platformscan actually take a great deal of the difficult work out of the equation.




Avoiding Major Pitfalls

First, choose your position size and manage risk accordingly. Understanding andmanaging risk based on the initial investment is perhaps the most importantaspect in trading.

Understanding implied volatility is another aspect of avoiding pitfalls. Withearnings, the market will make an example of you if your actions aren’t performedcorrectly, using all known information.

Much like covering a spread, many buyers will assume that APPL will make moneyduring earnings, which they usually do. However, even if they make money, theymay not make enough for the buyer to make a profit, or even break even.

This will lead to these buyers feeling as if market makers took advantage of them,when the truth is that they didn’t understand the inner workings of the system.

Finally, giving up your edge on entries is the last mistake to avoid.

Choosing Your Position

With options, there are countless variables to consider. Make sure to understandthose variables, giving each their fair share of understanding.

This will differ for everyone and is something each person must learn in order tomake progress in the market. This will also vary depending on what type of goalseach person has within their own specific portfolios.

Many people do not understand the risk because they assume they are choosing awinner. Like gambling, do not risk more than you can afford to lose.

As an example, let’s say you’re trading on a $100,000 account and you’re focused onsteady income and would like to limit drastic swings in the account. Meaning, youwill sit around the 2 percent range, which is $2,000 to risk.

While $100,000 may seem steep at first, it’s a solid number for providing examples.Feel free to scale this number to better fit your needs after understanding the basicsof the formulas.

Sizing up a 2 percent risk ($2,000), will differ depending on the strategy being used.Directional calls are easiest to measure in this case since it is a debit transaction,meaning you can add up contracts until you reach your limit of $2,000.




For example, if an option is $5.00, you can buy 4, because that $5.00 actually equals$500, and four would equal $2,000.

Situations where you sell a spread are different, but your risk has been defined.

If you’re selling a spread that is $5.00 wide and you take a $2.50 as a credit thatmeans you have $2.50 of risk ($5.00 - $2.50 = $2.50).

Then, using the max value, divide it by the dollar amount, meaning you could sell 8of these options at $250 x 8 = $20.00.

For smaller accounts, focus on doing longer-term, directional plays. Buy optionsaround 100 days out. When selling spreads, you must take into account the largerrisk, or loss, possible.

Look at risk with the attitude: “What is the absolute worst case scenario for my

position, and how much would I lose if that came to pass?”

Using this kind of risk control for your account does several things to helpnewcomers to the world of trading.

First of all, you’re never going to blow an entire account on a single trade, thoughthere might be some considerable damage. There are certain traders who feelthat the market (or the world) is against them. With this mindset, poor performancebecomes acceptable, which is wrong. Know your risks.

Next, you will have a more objective outlook on your position rather than being

stuck focusing on the P/L (profit and loss). Put on the spread and know how muchyou are risking by keeping a strict limit on what you can afford to lose.

Do not find yourself in a “deer in the headlights” situation, or, in a trade you can’thandle. Meaning, do not tense up due to exceeding your risk.




Understanding Implied Volatility

Implied Volatility is one of the Greeks previously discussed and is an enormousfactor to give an edge in options trading. This is a computed value that has to dowith the option itself rather than the underlying asset. Simply put, this states

that the intrinsic portion of an option will always remain the same. Thepremium portion of that option, however, has the ability to change drasticallydepending on surrounding circumstances. If the stock is right before earnings,there might be an extra $20 of premium since the implied volatility jumps up100%.

The above is why some traders have trouble with “straddles” prior toearnings, which is an options strategy that has the investing holding a positionin both a call and put, with the same expiration date and strike price.

The first way to understand this is to look at a direct comparison with basic implied

volatility. This indicator can be found on most trading platforms.

Here, we have the clean price option and the basic implied volatility. In this example,

we can see earnings as they arrive over the span of a year. These same earnings,which seem positive, can crush newcomers who do not understand earnings. If theimplied volatility is approximately 20% or anything up to 40%, that is a dealthat is safe and worth considering. If a deal is anywhere in the upper range—anywhere near 80% or higher—one should be extremely careful. There willbe a large premium attached to that deal.




Take a look at the small icon on the upper graph. As APPL earnings arise, the lowergraph falls tremendously. Buying high volatility in this example caused a big loss.

While the numbers do arise towards the day of earnings, it will then fall and thepattern will continue to repeat itself.

Now, let’s split the implied volatility into thirds. While these values aren’t exact, theycan be used for traders as a general measure on whether they should be buying orselling options.

The volatility analysis can help decide whether the numbers will rise or fall. Bysplitting these numbers into thirds, traders can compare the results of APPL to othernumbers along the same line.

Many traders will examine the results of Apple and then compare those numbers toGoogle, which is like comparing apples and oranges. Instead, use the graph above tocompare Apple’s numbers to Apple, extended over a period of time.

This visual graph shows the highs and lows to better help traders understand the

range. Draw a line at the highest point and the lowest point. Then, begin to thinkabout your individual contract, helping decide when and how to trade.

For Think or Swim users, there is also another way to analyze this value.




Check the Trade tab in Today’s Options Statistics. This is essentially the samenumbers as presented on the graph, but rather than an image, there is a numericalvalue assigned to each point.

Therefore, when examining the two graphs, notice that the 17 percent representsthe end of the green line of the graph above Today’s Options St atistics. Meaning,Implied Volatility is at a low point, when compared to the possibility of 100 percent,which would be the highest point that the green line reached.

The percentage comes from the highest and lowest point of the graph.




On this bar graph, it’s time to once again consider the rule of thirds. The Buy Optionsrepresents 0-33 percent. The Buy or Sell represents the middle of the range,providing options to traders. With Sell Options, the IV range (or implied volatilityrange) is the highest.

When the IV range is in the upper portion of Sell Options, it’s not possible to buyoptions.

Play volatility as its own independent trading instrument.

With the spread, buy a long contract with the hope of not having to use it. Much likeputting insurance on a home, it is something for safety that you hope not to use.




Giving Up Your Edge on Entries

This is a lesson on discipline.

With options, if you give up your edge, you can lose. When you first start trading

options, or trading in general, there’s a tendency to wait to get in until things “lookgood.”

The problem with this is once you think things look good, so does everyone else.This is typically where professionals are waiting to unload their positions (sellingthem at the ask in the most lucrative examples) giving buyers a bad buy.

To avoid these situations, just remember if it feels like you are chasing, then you are.

Step back and wait for retracement. Know what you are willing to buy and if pricesdon’t meet that point, wait for the next opportunity.

Also, do not buy extensions. In regards to extension, prices above 100 percent of agiven swing, typically 127.2 percent and 161.8 percent, these swing ratios arebeyond this text, but simple enough to understand to get an edge in options.

For those unsure of whether or not they are chasing, focus on extensions.

Looking at SYK, the closing bar notes a new 52-week high, giving a bullishappearance to the chart above. This also depends on the amount of data pulled(meaning for ten days, it would be the “high of ten days”).




This feature is especially useful to find a 1-year high or 5-year high. This data canhelp traders known when and how to make a purchase.

However, on this chart, when these new highs are compared to the 127.2 percentextension, traders can see that the risk to reward ratio is incomprehensible.

These results from Fibonacci ratios and their existence in the market.

Fibonacci Ratios

Fibonacci ratios are a tool that technical traders use to identify key numbers.Developed from mathematician Leonardo Fibonacci, the sequence of numbersresults in extreme points on a given graph. After levels have been identified, ahorizontal line identifies support and resistance levels, as presented above.

In the example above (page 23), the extreme high to the extreme low (swing high to

swing low), the horizontal line represents 100 percent. The point at the end of thegraph, the point represents 127.2 percent, as it sits above the swing high.

While fundamentals are important, the buy and hold era is coming to an end, sothese ratios are crucial when it comes to risk and profit.



Meaning, in this example, if you choose to buy at 84.12, this essentially means thatyou can make a dollar, but you are willing to risk six dollars, which is foolish. We aretrying to predict what will occur in the future, taking as little risk as possible.

When everyone is trying to buy, the higher-ups are most likely about to dump,

which can cause a loss to many newcomers within the market.

Closing Statements

Most individuals who trade options lose money. This is because the onlyapproach utilized is that of purchasing options. There need to be other optionstrategies in place, and players need to remember that 80% to 90% of optionsexpire worthless. The general public will buy options without paying attention

to the fair value of the option and the implied volatility. This can lead tobuying overpriced options and losing even more money. There are manybeginners’ mistakes that can ensnare the unsuspecting trader, such as notdiversifying strategies and not chasing out of the money options. However, atrader simply needs to purchase delta 70 options with an implied volatilitythat has not skyrocketed. Furthermore, do not chase a big move with an out ofthe money option.

With a bit of time, practice and patience, sticking to this fundamental outline willincrease returns, lower stress, and hopefully give you a relatively gentleintroduction into the world of options.

To learn more about options you need to bring theory into the real world. AtSimpler Options we have a nightly options trading video newsletter service that willprepare you for the next trading day. Normally this is $79 per month, but as areader of this e-book the first 30 days is only $7. If you would like to continue thisJourney with Simpler Options for 30 days for only $7 visit us at:

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