Phil’s Lessons Learned….. Options are the wild west vs stocks - always, always, always use a limit order!!!! Options.

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Presentation transcript:

Phil’s Lessons Learned….. Options are the wild west vs stocks - always, always, always use a limit order!!!! Options should be monitored closer than stocks or use/set stops/limits. Options are binary directional – get the direction right (profit) and wrong (loss). An Option contract represents 100sh of an underlying asset – this means leverage!!! Option prices swing quickly and dramatically. - Call Options will typically go up slower and down faster. - The same but opposite for Put Options Most Long Option purchases don’t make money – they should be considered either insurance/protection or lower, fixed cost direction bets (vs stock). Be happy you don’t use your life insurance… Folks rarely wait till expiration – they close out positions before expiration. Higher market Volatility and in particular Implied Volatility vs Historical (Statistical) Volatility in the underlying stock increase Option premium. - Try to buy Options during Lower Volatility (sideways, low volume) market conditions The last month of decay in option value is an exponential killer!!! - Close losing positions well before the last month begins - Provide some time to be right (~90 days/3-4 months out) A good rules of thumb is choose Options about 3-5% of the underlying asset price at 90 days/3-4 months out. Try not to let winners turn into losers – if not certain they will continue be profitable, then close and take the profit. Start thinking about selling when returns top 50%.

An Example….. Phil thinks in late Dec that early Jan will be volatile and may see a market drop. On Dec 24 he buys 1 insurance/protective SPY (S&P 500 Index) Put 12/24/2014 (SPY is at 208) Strike price 195 selected (about 7% correction) Expiration March 20 (std contract, 3 rd Fri of month, 3 months out) Premium $2.54 ($254) plus contract price $8.25 = $ Premium About 1.2% of SPY at 208 (low market volatility) On 1/6/2015 Phil sold to close Net proceeds = $ (92% profit in 2 wks) With close to a double, I chose to lock in the profit During this time the overall portfolio still net lost (I have several hundred shares overall – net long), but less due to the protective put. The Put helped!

Another Example….. Phil now thinks in early Jan that there will be a 1-2 day pop and then more down, he thinks Jan will be volatile and may see a market drop On Jan 8 he buys 1 portfolio protective SPY (S&P 500 Index) Put 1/8/2015 (SPY is at 204) Strike price 195 selected (about 5% correction target) Expiration March 20 (std contract, 3 rd Fri of month, 2.5 months out) Premium $3.90 ($390) plus contract price $ 8.25 = $ Premium About 2% of SPY at 204 (moderate market volatility) As of Jan 12 the Put is still open/on The Premium/price is now $3.59 (a loss of $39.25, 10%) During this time the overall market is up to sideways The portfolio has made $ overall (I have several hundred shares overall – net long), but less due to the protective put loss. Should have waited till later to buy that Put…

Another Example….. Phil thinks that ONNN has behaved very well over the last month – in good and bad market conditions. He’s still concerned that ONN is at it’s recent high. Micron, another major semi also recently 2 nd Q warned. So, he will make a Bullish bet with Call Options vs stock. On Jan 12 he buys 2 ONNN Call Options 1/12/2015 (ONNN is at 10.4) (200sh - $2,080) Strike price 11 (about 6% + move) Expiration Apr 17 (std contract, 3 rd Fri of month, 3 months out) Premium $0.55 ($110) plus 2 contracts price $9.25 = $ Premium About 5.7% (on the expensive side) Unlimited upside, downside risk capped at $ If I’m wrong & ON drops by $0.6 or more the Option trade loses less Could have also reduced my cost and capped my earnings by selling another higher strike call (a Bull Call spread) – but that is advanced Options trading. Lets keep it simple and see how this trade goes….