DISCLAIMER This material is for educational purposes only copied mainly from tastytrade.com and TD Ameritrade. Those in italics are mainly my thoughts and trading preference taken from books or manuals that I read and liked. KEY DECISIONS FOR OPTIONS STRATEGY What are the key decisions? 1. Strategy (Bull Put Spread, Bear Call Spread) 2. Duration (Expiration) 3. Strike Price 4. Entry Price (PITM) How to decide? 1. Direction (Up, Down, Sideways – Rangebound) 2. Degree of Bullishness or Bearishness 3. Time (reach target price / profit) 4. Volatility (IVR) 5. Defined Risk / ROI How to make trade decision? 1. Determine overall market sentiment 2. Determine specific stock direction 3. Determine major levels for entry point, profit target, stop loss 4. Determine Options Strategy that match the direction 5. Check reward vs risk CHECKLIST BEFORE ENTERING A TRADE 1. CHECK for any latest overall market sentiment risks (CNBC, marketwatch, finance.google.com) 2. CHECK for latest events for the stock Page 1
Transcript
DISCLAIMER
This material is for educational purposes only copied mainly from tastytrade.com and TD Ameritrade. Those in italics are mainly my thoughts and trading preference taken from books or manuals that I read and liked.
KEY DECISIONS FOR OPTIONS STRATEGYWhat are the key decisions?
1. Direction (Up, Down, Sideways – Rangebound)2. Degree of Bullishness or Bearishness3. Time (reach target price / profit)4. Volatility (IVR)5. Defined Risk / ROI
How to make trade decision?
1. Determine overall market sentiment2. Determine specific stock direction3. Determine major levels for entry point, profit target, stop loss4. Determine Options Strategy that match the direction5. Check reward vs risk
CHECKLIST BEFORE ENTERING A TRADE
1. CHECK for any latest overall market sentiment risks (CNBC, marketwatch, finance.google.com)
2. CHECK for latest events for the stocki. Next earnings dateii. Next dividends ex-dateiii. Company’s most recent earnings and forecasts
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iv. Any positive or negative news. Example heavy selling, insider selling /buying, takeover
MISTAKES TO AVOID
1. Use wrong strategy (@ current market direction/sentiment)
2. No evaluation of reward / risk vs probability of success
3. Pay overpriced premium4. Keep rolling over and pay premium (not admitting
mistakes)5. Trade in poor liquidity options6. Lack of knowledge or experience to handle
assignment7. EXPOSING TO UNLIMITED RISKS
tastytrade approach to Vertical Spreads:tastytrade.com
Vertical spreads allow us to trade directionally while clearly defining our maximum profit and maximum loss on entry (known as defined risk).
While implied volatility (IV) plays more of a role with naked options, it still does affect vertical spreads. We prefer to sell premium in high IV environments, and buy premium in low IV environments. When IV is high, we look to sell vertical spreads hoping for an IV contraction. When IV rank is low, we look to buy vertical spreads to stay engaged and also use it as a potential hedge against our short volatility risk.
Since the maximum loss is known at order entry, losing positions are generally not defended. We always look to roll for a credit in general, and doing so with vertical spreads is usually difficult.
Thinkorswim’s Recommendation :
1. Defined risk
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2. High Probability Trade3. Time Decay
TYPES OF SPREADS1. Vertical
i. Same expiry, different strike priceii. Example Bull Call Spread, Bear Call Spread
2. Horizontal (Calendar Spread)i. Same strike price, different expiry
3. Diagonal (Diagonal Spread)i. Different strike price, different expiry
TASTYTRADE.COM
Vertical Spread1. Short Put Vertical Spread
A short put vertical spread is a bullish, defined risk strategy made up of a long and short put at different strikes in the same expiration.
Directional Assumption: Bullish
Setup:- Sell OTM Put (closer to ATM) eg WFC Sell Put $55- Buy OTM Put (further away from ATM) eg WFC Buy Put $53
Ideal Implied Volatility Environment: High
Max Profit: Credit received from opening trade
How to Calculate Breakeven(s): Short Put Strike - Credit Received
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Summary Bull Put Spread strategy
1. Pick a fundamentally strong stock (growth stock)2. Wait for price retracement to Key Support Level3. Sell a Put at/below Key Support Level Strike Price4. Buy a Put @ lower Strike Price at the same time
2. Short Call Vertical Spread
A short call vertical spread is a bearish, defined risk strategy made up of a long and short call at different strikes in the same expiration.
Directional Assumption: Bearish
Setup: - Sell OTM Call (closer to ATM)- Buy OTM Call (further away from ATM)
Ideal Implied Volatility Environment: High
Max Profit: Credit received from opening trade
How to Calculate Breakeven(s): Short call strike + credit received
Summary Bear Call Spread strategy
1. Pick a fundamentally weak stock2. Wait for price retracement to Key Resistance Level3. Sell a Call at/Above Key Resistance Level Strike Price4. Buy a Call @ higher Strike Price at the same time
