Selecting The Ideal Option Strike Price Using Fibonacci Part III – Bonus Material

PART III – Bonus Material Fibonacci Strategies For Trading Options

ATM Debit Spreads Best with more inexpensive stocks or when trading smaller time frames with smaller expected price movement. OR when the spread between long and short options is less than $10.00 Even reward–to-risk ratios. Often around 1-to-1 risk reward with a 50% probability of success. With this methodology, the probability is higher.

Type 1 – ATM Call Debit Spread Cheaper stocks, or stocks when your target creates less than a $10.00 spread Buy ATM, or slightly ITM call. Sell OTM call at Fib projections / extensions

Type 1 – ATM Call Debit Spread

Type 1 – ATM Call Debit Spread Rules for Type 1 CDS – Identify a trending market – either 55 AM or higher major swing points Looking for 3 swing waves into 38.2%- 78.6% retracement. Can be major / minor swing waves

Type 1 – ATM Call Debit Spread 3. ENTRIES – entries occur after a 3 wave swing. LONGS – Swing wave low Swing wave high Swing wave low to new lows.

Type 1 – ATM Call Debit Spread 4. After a clear 3-wave swing, look for the first minor swing wave low. 5. When market moves ABOVE the low bar buy the ATM call options and then sell the OTM calls that match up with 127.2 external retracement.

Selecting Ideal Expirations For Spreads Measure the time elapsed between major swing wave low, and major swing wave high. Project that time from the end of your 3-wave corrective swing. 100% time projection is the minimum expiration you should use.

SBUX Trade June 16th – Long VIA ATM CDS

SBUX Trade June 16th – Long VIA ATM CDS

OTM Debit Spreads Best with more expensive stocks or when trading big time frames with lots of expected price movement. OR when the spread between long and short options is more than $10.00 Awesome reward –to-risk ratios. Often greater than 3-to-1 – risk $200 to make $600.

OTM Debit Spreads

Credit Spreads With debit spreads, you pay to get into the trade and you must overcome that cost before you are profitable. With CREDIT SPREADS, you ARE PAYED to get into the trade and must remain outside of a pre-defined zone in order to keep the credit There are certain volatility conditions when it’s ideal to use credit spreads. The other times it’s better to use debit spreads. Many times probability of success is greater than 65%

Current TLT – Credit Spread

TLT Position

Quoting Options – Short Options The “premium” or per share cost of the option contract. 1 contract reps 100 shares so selling 1 contracts will grant you $540 in credit. If you sold 3 contracts, your account is credited $1620 Trade action – either buy or sell Underlying Stock Expiration Year Either a put or a call Sell -1 AAPL June 15 127 call @ $5.40 Limit Quantity of option contracts purchased Month the option expires – usually the 3rd Friday of the month The “Strike”. Option can exercised if above this price for calls or below this price for puts

Bid / Ask Spread Market makers bids and asks are aggregated It fluctuates just like the stock’s bid / ask price Trade like a market MAKER, not a market TAKER “They say” you should buy on the ask, and sell on the bid, but…

EVERYTHING Is Negotiable – Including Options

Expirations Options Expire either weekly, monthly, or quarterly, On TOS, the weeklys are in red Each expiration month has a “days until expiration” Expirations are important to consider for purposes of trade plan, but a majority of options are not held to expiration and exercised

Today’s Option Statistics

Time and Sales

Intrinsic / Extrinsic Values

Extrinsic Value Extrinsic value is the MOST important component of option pricing Implied volatility combined with time until expiration Time until expiration is pretty straight forward

Call Options An Option Buyer – the purchase of a contract that gives the buyer the right, but not the obligation, to buy the underlying asset at a fixed price. COMPARISON 100 shares of GS = $208.52 * 100 = $20,852.00 Max Loss = $20,852.00 Max upside = unlimited

Stock Trade 100 shares of GS = $208.52 * 100 = $ $20,852.00 in capital Max loss = $ $20,852.00 Max upside = unlimited Option Trade 1 contract GS 100 shares Price for 1, $207.50 call contract is $3.65 x $3.75. Bid x Ask. You can buy on the “ask” “Ask” = $3.75 per (1)GS share $3.75 * 100 shares = $3750 in capital Max loss = $3750 Max gain = unlimited

Call Options Now, let’s jump in the time machine and go to expiration 06/19/2014 – the stock has moved up $1.00 or $209.48 Bot 100 shares of GS = $208.52 * 100 = $20,852.00 100 shares of GS = $209.48 * 100 = $20,948.00 Gain of $96.00, or 0.46% gain on investment

GS $207. 50 Calls at Expiration With Stock at $209 GS $207.50 Calls at Expiration With Stock at $209.48 – Theoretical Price

Option Trade Original Trade: $3.75 * 100 shares = $3750 Price for 1 contract is now $2.08 $2.08 per ( 1) GS share $2.08 * 100 shares = $2080 in capital $3750- $2080 = LOSS of $1670…?? Stock Trade 100 shares of GS = $208.52 * 100 = $ $20,852.00 in capital Max loss = $ $20,852.00 Max upside = unlimited

Think Again! You purchased the June $207.50 calls for $3.75. Your DEBIT or cost was $375.00 per 100 shares. The $207.50 calls are in the money (above the strike) by $1.00 as GS trades at $209.48 But you have not made money yet because you’re breakeven price is higher ---at $211.25

Breakeven on ThinkorSwim

Breakeven For Call Option Purchase Strike price + Option PREMIUM cost + commission = Break-even price Strike Price = $207.50 Option premium price = $3.75 Commission per contract = $1.00 BREAKEVEN = $207.50 + $3.75 + $0.015 = $211.265

Long and Short Options You can go long OR go short an option, much like you can go long or short a futures contract, 100 shares of stock or ETF’s Let’s say you are bearish Goldman Sachs. You have several “options” Short the stock Go long puts OR short calls

Goldman Sachs Options Chain - TradeStation

Bearish Goldman Sachs Go long puts, there is a fixed cost and a breakeven point that we’ve already discussed OR you can sell calls. Selling calls is an attractive option, but has some inherent risks Positives Negatives Credit received = immediately in the money Unlimited risk You have a profitability cushion at higher prices Ties up a lot of margin, or buying power Attractive in high volatility markets Max reward is amount of the credit received

Short Options Very attractive, but very risky. How can you reduce the risk? The MOST risk is selling IN THE MONEY options. Medium degree risk is selling AT THE MONEY options. Least risk is selling OUT OF THE MONEY options. How can we get REALLY SAFE and trade with some degree of protection…by trading with standard deviations….

Short Puts - PCLN If you think a low has been made for a stock AND implied volatility is high a short put position makes sense.

Short Puts - PCLN If you think a low has been made for a stock AND implied volatility is high a short put position makes sense.

Short Puts - PCLN If you think a low has been made for a stock AND implied volatility is high a short put position makes sense.

Vertical Debit Spreads Long one option and short another option in the same underlying and in the same expiration Risk is 100% CAPPED, but so is reward One of the most popular and easiest way to begin trading options. Your “theta” risk is minimized as you are long and short options in the SAME EXPIRATION so on the long option will lose on theta, but on the short option you will make on theta

Spreads – Long Call Vertical Bullish strategy Buy ATM or ITM CALL for - $ 2.00 Simultaneously short OTM CALL + $1.00 You will pay $2.00 for ATM CALL, but receive $1.00 credit for the higher OTM CALL. Net Debit is $1.00 to your account. MAX GAIN is difference between strike you’ve bought minus strike you’ve sold

Spreads – Long Put Vertical Bearish strategy Buy ATM or ITM put for - $ 2.00 Simultaneously short OTM put + $1.00 You will pay $2.00 for ATM put, but receive $1.00 credit for the lower OTM put. Net Debit is $1.00 to your account. MAX GAIN is difference between strike you’ve bought minus strike you’ve sold

Vertical Credit Spreads Short one option nearer to the market and long another option in the same underlying and in the same expiration but further away from the market Risk is 100% CAPPED, but so is reward Probability of success is often very high, but risk-reward ratio is often skewed

Spreads – Short Call Vertical Bearish strategy Sell ATM or ITM CALL for + $ 2.00 Simultaneously buy OTM CALL - $1.00 You will receive $2.00 for ATM CALL sale, but pay $1.00 debit for the higher OTM CALL purchase. Net Credit is $1.00 to your account. MAX GAIN is credit received, or difference between ATM call premium received and OTM call credit premium paid.

Here’s an SPY short call vertical I did today

Anticipation Equals Performance Anticipated Entries Equal Position of Strength That’s why we use leading indicators – not lagging indicators. “Remember this: Anticipation is the ultimate power. Losers react; leaders anticipate.” - Tony Robbins