Option Trading

Question 1

What are options?

Answer 1

• Options are a derivative security. A derivative is a security that gets it value from the value of another security.
• An option is a contract that allows you to buy or sell a stock at a certain price.
• There are two types of options, call and puts.
• Options contracts= 100 shares (Leverage)

Question 2

Why options

Answer 2

• Leverage
• Low barrier of entry
• Huge ROI (Return of investment)
• Strategy/insurance

Question 3

Why options: leverage and limited downside

Answer 3

• One contract is 100 shares

* This mean each dollar above the strike price earns you $100

Question 4

Low barrier to entry

Answer 4

To make big money in options you can trade $200 and get the impact of earning 100 shares and the same gain.

“I’ll never go broke as long as I have options and earning season”
-Todd Mili

Question 5

Huge ROI

Answer 5

• The same $200 option contract goes up $20 per shares
• That is $20 times 100 shares or $2000
• Your $200 investment turns into $2000
• 900% ROI

Question 6

Option Strategy: insurance

Answer 6

• Option allows you to provide insurance on your investment
• For example you can go long a stock and then protect the downside against a major block back with put option.
• You wouldn’t drive a car without insurance, don’t invest in risky investments without insurance.

Question 7

“Long a stock” means

Answer 7

A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. … Long position and long are often used In the context of buying an options contract.

To establish a long position, you simply buy shares of stock and wait for the price to rise. Once it does, you have a decision to make. Your gain exists only on paper until you convert it to cash by selling the shares.

Question 8

“Short a stock” mean

Answer 8

Shorting, or short-selling, is when an investor borrows shares and immediately sells them, hoping he or she can scoop them up later at a lower price, return them to the lender and pocket the difference. But shorting is much riskier than buying stocks, or what’s known as taking a long position.

Question 9

Printing money

Answer 9

• You can also print money by selling calls when you are a long stock.
• You can also do the same by selling a put when you are a long stock.
• Most companies will allow you to sell a covered call because worst case scenario you can exchange the stock.
• Selling a put on a company you love can allow you to make money if you have confidence it won’t go down.

Question 10

What is a “covered call”

Answer 10

Writing a covered call means you’re selling someone else the right to purchase a stock that you already own, at a specific price, within a specified time frame. Because one option contract usually represents 100 shares, to run this strategy, you must own at least 100 shares for every call contract you plan to sell.

Question 11

Call options

Answer 11

• A call options allows you to buy a stock at a certain price.
• A call option is a form of going long a stock
• When the price goes up you can buy it for the lower price and then subsequently sell it.
• Or the price of the options increases in relation to the higher price and you can sell the option at a profit.

Question 12

Put option

Answer 12

• A put options allows you to sell a stock at a certain price.
• The goal with a put option is to make money when the price falls.
• A put option is a form of shorting the market
• When the stocks falls you can sell it for a high price and make profit.

Question 13

Options fundamental

Answer 13

• Don’t buy options if you wouldn’t buy the stock.
• Try to buy at or around the money.
• Give your option time to develop.
• Avoid super short term options

Question 14

Straddle Option

Answer 14

The straddle option is a neutral strategy in which you simultaneously buy a call option and a put option on the same underlying stock with the same expiration date and strike price. As long as the underlying stock moves sharply enough, then your profit is potentially unlimited.

Question 15

Short straddle

Answer 15

A short straddle is an options strategy comprised of selling both a call option and a put option with the same strike price and expiration date. It is used when the trader believes the underlying asset will not move significantly higher or lower over the lives of the options contracts.

Question 16

Long straddle

Answer 16

A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price.

Question 17

Analyzing stocks and options

Answer 17

• Always analyze the stock not the option- the option is just a derivative of the stock
• Look at the chart.
• Look at the trend, 3m, 6m, 12m.
• Look at 52 week high and low.
• News aka market sentiment
• Is it a company that you like
• Would you buy the stock?

Question 18

Market Sentiment

Answer 18

Market sentiment is the general prevailing attitude of investors as to anticipated price development in a market. This attitude is the accumulation of a variety of fundamental and technical factors, including price history, economic reports, seasonal factors, and national and world events.

• Use the news to predict where the stock will go
• Usually this is helpful if you know the reality of the company not just the news
• Find real world examples of the stock success that critics might be missing
• Bet on the opposite of the market as the news is usually priced in

Question 19

Analyzing options: 3m chart

Answer 19

• 3m chart: this is important because it shows what the stock has done since the last earnings call.
• Over time companies become over bought on good earnings or over sold on bad earnings
• The new earnings usually allow for a correction up or down in opposite of the trend

Question 20

Analyzing options: 52 weeks high or low

Answer 20

• Typically a company that is flying high for the year will continue to fly high for that year.
• A company that is trending down for the year will continue to trend down for the year.
• Usually the length of the chart and the trend therein dictates how long it will take to reverse that direction

Question 21

Earnings whisper

Answer 21

• Battle plan

* Highlight the things you like and place it where I always see it as a reminder to place trades

Question 22

Delta

Answer 22

Delta (Δ) represents the rate of change between the option’s price and a $1 change in the underlying asset’s price. In other words, the price sensitivity of the option relative to the underlying. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. For example, assume an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option’s price would theoretically increase by 50 cents.

Question 23

Theta

Answer 23

Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option’s time decay. Theta indicates the amount an option’s price would decrease as the time to expiration decreases, all else equal. For example, assume an investor is long an option with a theta of -0.50. The option’s price would decrease by 50 cents every day that passes, all else being equal.

Question 24

Gamma

Answer 24

Gamma (Γ) represents the rate of change between an option’s delta and the underlying asset’s price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option’s delta would increase or decrease by 0.10.

Question 25

Vega

Answer 25

Vega (v) represents the rate of change between an option’s value and the underlying asset’s implied volatility. This is the option’s sensitivity to volatility. Vega indicates the amount an option’s price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option’s value is expected to change by 10 cents if the implied volatility changes by 1%.

Question 26

Rho

Answer 26

Rho (p) represents the rate of change between an option’s value and a 1% change in the interest rate. This measures sensitivity to the interest rate. For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

Question 27

Study the trend

Answer 27

• Determine what direction the stock is heading by using the trend lines.
• Important to look at the trend.
• Also important to look at the trend over the course of different timelines because it can be different
• Zoom in and zoom out.
• 1D, 1W, 1M, 3M, 1Y

Question 28

Read the articles

Answer 28

• Weigh the information in the article with what you personally know and believe about the company.
• DONT negate your real world experience and understanding as a consumer of these products.

Question 29

Technical analysis

Answer 29

is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

Question 30

Moving average

Answer 30

(MA) is a simple technical analysis tool that smooths out price data by creating a constantly updated average price. The average is taken over a specific period of time, like 10 days, 20 minutes, 30 weeks or any time period the trader chooses.

Question 31

Fundamental analysis

Answer 31

Is a method of valuing a security that entails attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.

• Is the company growing?
• Do people love their product?
• Are they underestimate valued or under valued?

Question 32

Company analysis

Answer 32

52 week high and low, sales, revenue and profits.

Question 33

Economic conditions

Answer 33

Laws and regs, current political climate, things that have nothing to do with the company’s but is bringing the entire market down.

Question 34

Future profit outlook

Answer 34

Is the company growing or is it’s best days are behind them?

Question 35

Implied volatility

Answer 35

represents the expected volatility of a stock over the life of the option. As expectations change, option premiums react appropriately. Implied volatility is directly influenced by the supply and demand of the underlying options and by the market’s expectation of the share price’s direction.

Question 36

Things to remember

Answer 36

• There’s no SURE thing
• The goal is to make an informed decision not predict the future
• If you are unsure about your decision cover you back with puts
• Analyze what you know not what you think is going to make you money
• You make money over night but the work is done over time
• Start small and learn this before going big
• Its ok to paper trade using thinkorswim

Question 37

Initial Public Offering (IPO)

Answer 37

An initial public offering (IPO) or stock market launch is a type of public offering. … Through this process, a private company transforms into a public company. Initial public offerings are used by companies to raise money for expansion and to become publicly traded enterprises.

Question 38

RSI

Answer 38

Relative Strength Index.

It’s a momentum indicator

Question 39

Index

Answer 39

An index is an indicator or measure of something, and in finance, it typically refers to a statistical measure of change in a securities market. In the case of financial markets, stock, and bond market indices consist of a hypothetical portfolio of securities representing a particular market or a segment of it.

Question 40

RSI goes up when…

Answer 40

Average gains greater than average loss (size of bullish candles are larger than bearish ones)

Question 41

RSI goes down when…

Answer 41

Average gains smaller than average losses (size of bearish candles are larger than bullish ones)

Question 42

RSI above 50

Answer 42

Long term upside trend

Question 43

RSI below 50

Answer 43

Long term downside trend

Question 44

How to time your entries with precision

Answer 44

• 10- period RSI
• Look to buy when RSI is below 30
• When the price breaks above previous day high, or bullish reversal candlesticks pattern

Question 45

How to better time your exits

Answer 45

Long setups
Exit when RSI crosses above 60

Short set up
Exit when RSI crosses above 40

Question 46

RSI over 70

Answer 46

Indicates that the stock is over bought

Question 47

RSI below 30

Answer 47

Indicates that the stock is over sold

Question 48

ATR

Answer 48

Average True Range

Question 49

MACD

Answer 49

Moving Average Convergence/Divergence

Question 50

EMA

Answer 50

The Exponential Moving Average (EMA) is a technical chart indicator that tracks the price of an investment (like a stock or commodity) over time. The EMA is a type of weighted moving average (WMA) that gives more weighting or importance to recent price data.