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

2. PART III – Bonus Material
Fibonacci Strategies For Trading Options

3. 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.

4. 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

5. Type 1 – ATM Call Debit Spread

6. 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

7. 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.

8. 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 external retracement.

9. 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.

12. SBUX Trade June 16th – Long VIA ATM CDS

13. SBUX Trade June 16th – Long VIA ATM CDS

14. 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.

15. OTM Debit Spreads

16. 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%

17. Current TLT – Credit Spread

18. TLT Position

19. 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 $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

20. 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…

21. EVERYTHING Is Negotiable – Including Options

22. 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

23. Today’s Option Statistics

24. Time and Sales

25. Intrinsic / Extrinsic Values

26. 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

27. 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 = $ * 100 = $20,852.00
Max Loss = $20,852.00
Max upside = unlimited

28. Stock Trade
100 shares of GS = $ * 100 = $ $20, in capital
Max loss = $ $20, Max upside = unlimited
Option Trade
1 contract GS 100 shares
Price for 1, $ call contract is $3.65 x $ 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

29. 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 = $ * 100 = $20,852.00
100 shares of GS = $ * 100 = $20,948.00
Gain of $96.00, or 0.46% gain on investment

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

31. 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 = $ * 100 = $ $20, in capital
Max loss = $ $20, Max upside = unlimited

32. Think Again! You purchased the June $207.50 calls for $3.75.
Your DEBIT or cost was $ per 100 shares.
The $ 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

33. Breakeven on ThinkorSwim

34. 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 = $ $ $0.015 = $

35. 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

36. Goldman Sachs Options Chain - TradeStation

37. 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

39. 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….

40. 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.

41. 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.

42. 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.

43. 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

44. 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

48. 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

52. 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

53. 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.

57. Here’s an SPY short call vertical I did today

60. 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