Chris Butler (YouTube Tutorial) finishes with the following words: Start with Vertical Spreads (buying call spreads, buying put spreads, shorting call spreads and shorting put spreads). They have limited risk you will pay less with a spread than you would simply Buying a Call or PUT. With shorting options we spoke about how much you can lose when shorting Calls without any protection or shorting Puts without any protection but you can limit the risks of those strategies by shorting a Call spread which is shorting a Call and then buying another Call at a higher strike price to limit your risk or you could Short a Put spread which would be shorting a Put and then buying another Put at a lower strike price you also may have heard of a strategy called an Iron Condor which is essentially the combination of the two where you make money if the stock price remains in a certain range. That said I would really advise against shorting naked options and these are going to be strategies such as just shorting the call, shorting Puts all by themselves mostly shorting Puts on leverage you can short cash secured Puts meaning you can actually buy 100 shares at the strike price if you are assigned or you want to buy the shares but there are also going to be more advanced strategies which are incredibly risky which are the short straddle which is when you short a Call and short a Put at the same strike price and in the same expiration and then there's the strategy called a Short Strangle which is shorting a Call and shorting a Put and you make money when the stock price stays in the middle but I would avoid those strategies as they have immense loss potential, with these strategies it is possible to lose more money than you have in your account. Stick to vertical spreads. From there learn about the Option Greeks which are measurements of expected Option price changes given a change in the stock price given the passage of time and given a change in implied volatility. So the Option Greeks will inform you of how your option strategy or your option position is exposed to these various effects or various factors discussed in the video. Clearly Vertical Spreads are nearing the top of my study list and clearly studying Straddles, Condors and the like are very low on my list and from what he says perhaps shouldn’t be on the list as I am never going to be doing them?
I did not watch this video, so I can only go by what you presented. I agree that those new to options should avoid naked options. I think that is good advice. What I want to suggest, that I have done many times on ET, is that you need to focus on the base Stock/ETF/Future first. When learning to do spreads or other strategies, you will start to look for and see opportunities to test a spread vs looking to match an expectation on the base symbol. I would start with developing a process to determine if the stock/etf/future with go down, stay the same or go up and over what time period. As you advance you will also look to have a process to “predict” changes in IVOL or have an opinion as to if the premiums on different strikes for expiration do not meet your expectation of future price movements. Then, and only then, with an opinion on the future, should you look at current options prices and premiums to see what is the best way to profit, given your individual risk/reward, and your expectations for the future.
Last week I stumbled across what is proving to be the best approach, to date, for me to begin getting familiar with options, which is to analyze a video recently uploaded to YouTube by an options trader named Peter Renicek. I keep hearing him referring to Vertical Spreads over and over again, so this seems to back up (in my mind) what Chris Butler was saying. I guess I'll have to check out Chris as well, thanks!
Here are some ideas for you guys WRT vertical spreads. Would you go to Vegas if the casino gave you a 60% chance of winning a 50/50 bet? Sure! This has that effect, at least with AAPL for the last 15 years. No, it's not quite that easy. And as usual nobody knows the future, but a characteristic of markets the last few years is that they tend to drop far and fast, then recover. So for example a stock may be at the same level after a year, but it dropped 3 months and rose 9 months. That's the idea here anyway. Here is APPL every 3rd Friday expiration for 15 years: Third Friday to third Friday changes (at Close) for AAPL Start 20060120 Price: 2.72 20060217, 2.51, %Chg: -11.31 20060317, 2.31, %Chg: -7.97 20060421, 2.39, %Chg: 3.46 20060519, 2.31, %Chg: -3.35 20060616, 2.06, %Chg: -10.82 20060721, 2.17, %Chg: 5.34 20060818, 2.42, %Chg: 11.52 20060915, 2.65, %Chg: 9.50 20061020, 2.86, %Chg: 7.92 20061117, 3.07, %Chg: 7.34 20061215, 3.13, %Chg: 1.95 20070119, 3.16, %Chg: 0.96 20070216, 3.03, %Chg: -4.11 20070316, 3.20, %Chg: 5.61 20070420, 3.25, %Chg: 1.56 20070518, 3.93, %Chg: 20.92 20070615, 4.30, %Chg: 9.41 20070720, 5.14, %Chg: 19.53 20070817, 4.36, %Chg: -15.18 20070921, 5.15, %Chg: 18.12 20071019, 6.09, %Chg: 18.25 20071116, 5.95, %Chg: -2.30 20071221, 6.93, %Chg: 16.47 20080118, 5.76, %Chg: -16.88 20080215, 4.45, %Chg: -22.74 20080320, 4.76, %Chg: 6.97 20080418, 5.75, %Chg: 20.80 20080516, 6.70, %Chg: 16.52 20080620, 6.26, %Chg: -6.57 20080718, 5.90, %Chg: -5.75 20080815, 6.28, %Chg: 6.44 20080919, 5.03, %Chg: -19.90 20081017, 3.48, %Chg: -30.82 20081121, 2.95, %Chg: -15.23 20081219, 3.21, %Chg: 8.81 20090116, 2.94, %Chg: -8.41 20090220, 3.26, %Chg: 10.88 20090320, 3.63, %Chg: 11.35 20090417, 4.41, %Chg: 21.49 20090515, 4.37, %Chg: -0.91 20090619, 4.98, %Chg: 13.96 20090717, 5.42, %Chg: 8.84 20090821, 6.05, %Chg: 11.62 20090918, 6.61, %Chg: 9.26 20091016, 6.72, %Chg: 1.66 20091120, 7.14, %Chg: 6.25 20091218, 6.98, %Chg: -2.24 20100115, 7.36, %Chg: 5.44 20100219, 7.20, %Chg: -2.17 20100319, 7.94, %Chg: 10.28 20100416, 8.84, %Chg: 11.34 20100521, 8.66, %Chg: -2.04 20100618, 9.79, %Chg: 13.05 20100716, 8.93, %Chg: -8.78 20100820, 8.92, %Chg: -0.11 20100917, 9.84, %Chg: 10.31 20101015, 11.24, %Chg: 14.23 20101119, 10.96, %Chg: -2.49 20101217, 11.45, %Chg: 4.47 20110121, 11.67, %Chg: 1.92 20110218, 12.52, %Chg: 7.28 20110318, 11.81, %Chg: -5.67 20110415, 11.70, %Chg: -0.93 20110520, 11.98, %Chg: 2.39 20110617, 11.44, %Chg: -4.51 20110715, 13.04, %Chg: 13.99 20110819, 12.72, %Chg: -2.45 20110916, 14.31, %Chg: 12.50 20111021, 14.03, %Chg: -1.96 20111118, 13.40, %Chg: -4.49 20111216, 13.61, %Chg: 1.57 20120120, 15.02, %Chg: 10.36 20120217, 17.94, %Chg: 19.44 20120316, 20.92, %Chg: 16.61 20120420, 20.47, %Chg: -2.15 20120518, 18.95, %Chg: -7.43 20120615, 20.51, %Chg: 8.23 20120720, 21.59, %Chg: 5.27 20120817, 23.15, %Chg: 7.23 20120921, 25.01, %Chg: 8.03 20121019, 21.79, %Chg: -12.87 20121116, 18.85, %Chg: -13.49 20121221, 18.55, %Chg: -1.59 20130118, 17.86, %Chg: -3.72 20130215, 16.44, %Chg: -7.95 20130315, 15.85, %Chg: -3.59 20130419, 13.95, %Chg: -11.99 20130517, 15.48, %Chg: 10.97 20130621, 14.77, %Chg: -4.59 20130719, 15.18, %Chg: 2.78 20130816, 17.94, %Chg: 18.18 20130920, 16.70, %Chg: -6.91 20131018, 18.18, %Chg: 8.86 20131115, 18.75, %Chg: 3.14 20131220, 19.61, %Chg: 4.59 20140117, 19.32, %Chg: -1.48 20140221, 18.76, %Chg: -2.90 20140321, 19.04, %Chg: 1.49 20140417, 18.75, %Chg: -1.52 20140516, 21.34, %Chg: 13.81 20140620, 22.73, %Chg: 6.51 20140718, 23.61, %Chg: 3.87 20140815, 24.50, %Chg: 3.77 20140919, 25.24, %Chg: 3.02 20141017, 24.42, %Chg: -3.25 20141121, 29.12, %Chg: 19.25 20141219, 27.94, %Chg: -4.05 20150116, 26.50, %Chg: -5.15 20150220, 32.37, %Chg: 22.15 20150320, 31.48, %Chg: -2.75 20150417, 31.19, %Chg: -0.92 20150515, 32.19, %Chg: 3.21 20150619, 31.65, %Chg: -1.68 20150717, 32.40, %Chg: 2.37 20150821, 26.44, %Chg: -18.40 20150918, 28.36, %Chg: 7.26 20151016, 27.76, %Chg: -2.12 20151120, 29.83, %Chg: 7.46 20151218, 26.51, %Chg: -11.13 20160115, 24.28, %Chg: -8.41 20160219, 24.01, %Chg: -1.11 20160318, 26.48, %Chg: 10.29 20160415, 27.46, %Chg: 3.70 20160520, 23.81, %Chg: -13.29 20160617, 23.83, %Chg: 0.08 20160715, 24.69, %Chg: 3.61 20160819, 27.34, %Chg: 10.73 20160916, 28.73, %Chg: 5.08 20161021, 29.15, %Chg: 1.46 20161118, 27.51, %Chg: -5.63 20161216, 28.99, %Chg: 5.38 20170120, 30.00, %Chg: 3.48 20170217, 33.93, %Chg: 13.10 20170317, 35.00, %Chg: 3.15 20170421, 35.57, %Chg: 1.63 20170519, 38.26, %Chg: 7.56 20170616, 35.57, %Chg: -7.03 20170721, 37.57, %Chg: 5.62 20170818, 39.38, %Chg: 4.82 20170915, 39.97, %Chg: 1.50 20171020, 39.06, %Chg: -2.28 20171117, 42.54, %Chg: 8.91 20171215, 43.49, %Chg: 2.23 20180119, 44.62, %Chg: 2.60 20180216, 43.11, %Chg: -3.38 20180316, 44.51, %Chg: 3.25 20180420, 41.43, %Chg: -6.92 20180518, 46.58, %Chg: 12.43 20180615, 47.21, %Chg: 1.35 20180720, 47.86, %Chg: 1.38 20180817, 54.40, %Chg: 13.66 20180921, 54.42, %Chg: 0.04 20181019, 54.83, %Chg: 0.75 20181116, 48.38, %Chg: -11.76 20181221, 37.68, %Chg: -22.12 20190118, 39.21, %Chg: 4.06 20190215, 42.60, %Chg: 8.65 20190315, 46.53, %Chg: 9.23 20190418, 50.97, %Chg: 9.54 20190517, 47.25, %Chg: -7.30 20190621, 49.69, %Chg: 5.16 20190719, 50.65, %Chg: 1.93 20190816, 51.63, %Chg: 1.93 20190920, 54.43, %Chg: 5.42 20191018, 59.10, %Chg: 8.58 20191115, 66.44, %Chg: 12.42 20191220, 69.86, %Chg: 5.15 20200117, 79.68, %Chg: 14.06 20200221, 78.26, %Chg: -1.78 20200320, 57.31, %Chg: -26.77 20200417, 70.70, %Chg: 23.36 20200515, 76.93, %Chg: 8.81 20200619, 87.43, %Chg: 13.65 20200717, 96.33, %Chg: 10.18 20200821, 124.37, %Chg: 29.11 20200918, 106.84, %Chg: -14.10 20201016, 119.02, %Chg: 11.40 20201120, 117.34, %Chg: -1.41 TOTAL MONTHS = 178 DOWN MONTHS = 66 UP MONTHS = 112 %UP MONTHS = 63 AVG PCT UP = 8.48 %DOWN MONTHS = 37 AVG PCT DN = -7.35 AVG MONTHLY RETURN = %2.6 DROPS >= -8% = 21 CHANGES BETWEEN -3%/+3% 45 UP CHNGS >= 1% = 108 UP IN A ROW ONE IRUP = 19 TWO IRUP = 5 THREE IRUP = 6 FOUR IRUP = 3 FIVE IRUP = 4 SIX IRUP = 3 SEVEN IRUP = 1 EIGHT IRUP = 1 NINE IRUP = 0 TEN IRUP = 0 DOWN IN A ROW ONE IRDWN = 26 TWO IRDWN = 12 THREE IRDWN = 3 FOUR IRDWN = 0 FIVE IRDWN = 0 SIX IRDWN = 0 SEVEN IRDWN = 1 EIGHT IRDWN = 0 NINE IRDWN = 0 TEN IRDWN = 0
So AAPL has gone up for 60% of the months. Here is a $50 "Bet" it will go up next month: You can almost always structure a vert to have a 50/50 R/R (at least on liquid higher priced stocks). The graph shows worst case, but I very often get these $1 wide spreads for $50 or less. Max you can lose in that case is $50. But note that disasters can easily happen at expiration, if you aren't careful. You can throw money management at it, but I wouldn't Martingale (double down). You could try "Oscar's Grind" maybe. You only add contracts when you "win" the month. Do this until you are ahead on the series. If the results are choppy though you can get into a lot of contracts.
In my opinion another important strategy that gives nice probability of profit in situations of excess volatility is the ratiospread, given that you do not hold it until expiration but close everything at 25% of profit. Or the ladder, that is the same strategy. I would definitely recommend study this one after the spreads. I have talked about it on www.sunnymoney.cloud
Hey Bob... OT, but I saw you were in the house and wanted to ask. Take a look at the Dec.18 $22 strike on $RIDE. It closed right at $22, why the huge difference in premiums? Isn't that an arbitrage opportunity? I'm sure there's no dividend. Is that because the borrow rate is so high?