Well guys the topic has come up a few times in the investing forum and even in GD. I thought we were due for a thread where we discuss options trading. I am NOT an expert nor do I claim to be. I've only been trading options seriously for the past year and a half but I've had more fun investing options than I've ever had doing technical analysis and picking direction on an underlying. I've developed an approach where I give up a lot of upside potential in exchange for a predictable rate of success. Generally I am selling options premium (more on this below) and betting on an underlying staying in a given range for a period of time. When I decided to start learning this I found an organization called "Tastytrade" which at the time was an educational firm whose mission was to get more 'average joes'  engaged in the various derivative markets. They have since opened their own for profit brokerage known as Tastyworks. I am not affiliated with either company although the educational content they offer for free is awesome and I will quote and link to a lot of it.

As I get input from everyone I will try and get more resources and education in this and the following posts. As I have time I'll start posting some of my own in work strategies. Lets start talking options!

What is a call? Basically, a call is a contract that allows the owner the ability to buy 100 shares of stock at a certain price (known as the strike) at  or before a certain date (the expiration date). Think about it like this: I can CALL stock to me if I own a call. So if I own a call with a strike of $100 and the underlying increases in value to $105 I can CALL or buy that stock at $100 when it is trading for $105 right now. Bam $5/share profit. The call contract owner makes money when the underlying increases in value.

A put works the exact opposite. A put is a contract that allows the owner the right but not the obligation to SELL 100 shares of stock at a certain price at or before a certain date. If I own the put contract I can PUT stock to you (aka force you to buy it) at a certain price. If I own  the $100 put contract and the underlying falls to $95 I can PUT or sell those shares for $100. The put contract owner makes money when the underlying decreases in value.

Everything has a cost however and if you want to own a call or a put contract you will need to pay for it. What you pay is called premium.

Now the above two descriptions are for an owned or ‘long’ position. But you can take the other side of the trade as seller. If you sell an option you are ‘ short’ the call or put. When you sell an option you collect the premium from the buyer. The seller hopes that the option will expire (go past its expiration date) without going in the money. If an option expires worthless (or out of the money) the seller keeps the premium paid.

So basically there are four types of trades:

Long call: You make money when the underlying increases in value
Long put: You make money when the underlying decreases in value
Short call: You make money when the underlying decreases in value (keep the premium)
Short put: You make money when the underlying increases in value(keep the premium)

The fun starts to take shape when you combine them. By combining the trades I can define risk and build protection into my trades. More on this as I have time to type…

If you are really new to trading here are a few videos on the basics of trading stock and some terminology. Its important to have a grasp on this before moving to options. I have found the visual teaching used in these videos to be exceptionally clear and easy to understand.

Ep 1.1 - Series Introduction
Ep 1.2 - Buying Stock
Ep 1.3 - Selling Stock
Ep 1.4 - The Trading Process

Once you have a grasp on these concepts you can start to learning the terminology associated with options trading. Its time for calls and puts!

Ep 2.1 - Intro to Options
Ep 2.2 - Calls and Puts
Ep 2.3 - Visualizing Options
Ep 2.4 - Options Basic Recap

Ep 3.1 - Intro to Options Mechanics
Ep 3.2 - Buying Calls
Ep 3.3 - Buying Puts
Ep 3.4 - Selling Calls
Ep 3.5 - Selling Puts
Ep 3.6 - Four Basic Trades Recap

I will add more resources as time allows but let me know what you wan to see and I will either discuss it with you or I will locate more relevant training videos.

I am not affiliated with Tastytrade or Tastyworks and endorse none of their products. I am not an expert. Nothing I say here should be perceived as financial advice. All trading is risky , you need to understand your risks before investing. (good enough disclaimer?)


MORE TO COME hopefully!

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TastyTrade....that's a cool name.

I always wanted to open my own hedge fund and call it something cool. Maybe "Prestige World Wide Asset Management"

Yes I would agree with you although to me the “speculation” and “income” categories are very similar.

For me I really like to sell premium. This means that I give up my unlimited upside since the most money I can possibly make is the premium paid minus commissions and fees. I do this because It enables me to make money the most ways. If I am short a call I make money when the underlying decreases in value and the strike goes further out of the money. Additionally as time elapses the value of the option decreases this is because there is less time for the price to change. An option is more valuable the more time it has left. So I can make money if the underlying stays the same. I also make money if the underlying increase but only if the increase in underlying value is small enough to be compensated by the value the option has lost in time. I lose money only one way: if the underlying increases in value substantially.

I sell premium with the following trades:

Short Strangle: I sell a call and a put on either side of the underlying price. As long as the underlying stays between the short strikes I make money. I close a straddle once I have collected 25% of the initial premium. If the underlying goes over one of my short strikes the trade goes ‘in the money’ (ITM). Once this happens I start to lose money on the trade quick. My loss risk is technically unlimited.

Short Straddle: I sell a call and put on the closest strike to the underlying (at the money). You collect the most premium with his trade and the only way to make max profit is if it expire worthless at the same price it was when you sold it. This is very unlikely so my goal is to collect 25% of the premium I will close a strangle once I’ve collected 25% of the premium. The further the underlying gets from my ATM strike the more money I lose. Once this happens I start to lose money on the trade quick. My loss risk is technically unlimited.

Iron condor: This is the same as a strangle however you buy an option further out of the money on either side. This has the benefit of limiting your risk. Now your max loss is defined by the short strikes instead of being unlimited. You collect less premium however because you spent a little of it buying the long strikes. Defined risk, less reward. I will close an iron condor once I have collected 50% of the initial premium.

There are more but thats all I have time to type right now.

Of course these all benefit from high implied volatility because the options will be worth the most with high IV.

ETA: clarified I'm talking about short trades

Well yes in a long straddle you would buy the call and put ATM and hope for a big move either way. This would be a move for a potential earnings play.

I was speaking to a short straddle (premium play). A short straddle will respond the opposite of a long straddle.

It does speak to the confusion that a lot of people (myself included) have with the aspect that you can take either the long or the short side of a trade and often the trades have similar names. When some people say straddle they are automatically assuming 'long straddle' when I say straddle I mean 'short straddle' mostly because I rarely buy premium.

I always thought it was a silly name... silly name with good education.

As the late great Louis Rukeyser said, the options terminologies sound like the menu at an Havana brothel.

I keep it fairly simple.  I sell puts, only on stocks I wouldn't mind owning.  Occasionally, I will sell calls, especially on stocks that I wouldn't mind selling.

Spreads can be entertaining.

Yes and you have reinforced the lesson that the terms are confusing and not always consistently used. A straddle to you and me could mean different things depending on our default trading strategy. You might use a long straddle to play earnings I might short a straddle for a premium play. We both say we are using a straddle but our trades are very different.

This is essentially how I started but I didn't like tying up my capital in long stock. More recently I've taken long stock with the intention of selling covered calls against it its worked ok. Ideally you could develop a covered call strategy where you sell the put (hopefully you could sell several cycles before you are assigned) and when you are assigned you sell calls against the long stock. repeat over and over. Success would be determined by how many contracts on each side you could sell that expire worthless before you finally expire ITM.

For me (and I stress again that I am not a pro) I have a series of searches and checklists before I will go.

My #1 requirement is liquidity. Not just underlying liquidity but options liquidity which is somewhat less plentiful. I'm looking for an underlying with lots of contracts moving. SPY, QQQ, IWM are examples of ETFs that meet these requirements. Lots of options liquidity means I get better bid ask spreads and most most importantly means that I can get in and out of trades on my terms. A trade like an iron condor has four legs I need a counter party that will take all four of them not just one. Liquidity is king. Some of the really good traders know how to effectively trade illiquid products but I am not one of them. After liquidity I am looking high implied volatility, specifically IVR or implied volatility rank. IVR is the measure of IV compared to itself (confusing huh) If an underlying has had IV of 25% to 75% and its current IV is 50% its IVR is 50% or roughly half its range in the past year. I can 'grade' how much value IV is bring to the table. Short strategies like I use are the most profitable when IV is high. IV is extremely important too. Lastly I am looking for any binary events that are coming. Not that I care what they are but I need to be aware of potential large moves. An example of this is earnings season with a conventional stock. This is another reason I prefer ETFs. Just less moving parts to keep track of.

Basically I use the tools in my platform (I use thinkorswim) to assess: options liquidity, IVR and binary events. Once I have these checked off I move to strategy selection.

As I wrote this I realized that IV is a topic that needs more coverage. IV is a big deal when selling options because of two reasons, IV increases an options value and therefore I can sell it for more money. IV also always reverts to the mean. meaning an underlying with high IV will reduce its value quickly (usually in less than a week) and I can close trades much much faster. IV is nearly always overstated so its a double win. Sell the option for more money and keep the trade for less time. IVR is how I judge if the stated IV is actually high or just appears high. I make money without high IV but less money and it takes longer to make that smaller payout. YAY volatility!


So now I'll throw it back at you.... what are you looking for when you make a trade? How to you filter underlying and set up for the order?