OPTIONS TRADING FOR

BEGINNERS:

TRADE OPTIONS AND START

INVESTING AND TRADING. LEARN
ALL THE STRATEGIES TO TRADE AND
THE BASICS OF INVESTING IN THE
STOCK MARKET TO BECOME A REAL
STOCK TRADER.
Table of Contents
Introduction
Chapter 1: What is Trading and How to Start
Similarities Between Investing and Trading
What is Financial Planning?
Determination of Capital Requirements
Financial Policies Framing
What is a Financial Plan?
Chapter 2: What is Option Trading?
Call and Put
Practical Example
Notes:
Indicators:
A Bonus of Options
Chapter 3: What are Options Contracts on the Stock Market?
Components of an Option Contract
Different Types of Options contracts
Chapter 4: Understanding the Purchase of Options
Chapter 5: How to Start with Options Trading
Options Exchanges
Options Clearing Corporation (OCC)
To open a Trading Account
Options Agreement
Placing Your Order
Order Types
Types of Fill Orders
Timing Orders
Understanding Options Chains
Making Trades
Chapter 6: Tips for Success
Know When to Improvise Your Plan
Always Have Your Exit and Entry Plan Ready Before
Starting
Avoid Out-of-the-Money Trades
Don't Shrink Your Homework
Don't Trade for Wealth but Income
Never Believe in Unfounded Tips
Start with Enough Capital
Don't Purchase Too Much with Margin
Chapter 7: Options Trading Strategies
Let's look at some methods.
Analysis of market movements for options trading.
Chapter 8: Top Trader Mistakes to Avoid in Options
Trading
Going into a Trade Too Big
Not Paying Attention to Expiration
Buying Cheap Options
Failing to Close When Selling Options
Trading Illiquid Options
Not Having a Trading Plan
Chapter 9: Volatility in the Markets
Time
Volatility
Historical Volatility
Implied Volatility
Chapter 10: Trading Psychology
Fear
Looking at the Analysis
Hearing Rumors
Accepting Change
Greed
Know When to Stop
Accept Responsibility
Pigs Get Slaughtered
Discipline
Stick to Your Plan
Prepare for Risk Management
Determine What Works Best
Things That Distinguish Winning and Losing Traders in Options Trading
Chapter 11: Iron Condor
The Logic Behind the Iron Condor
When to use an iron condor
Why use an iron condor
Options Strategies
Chapter 12: Common Beginner Mistakes
Rushing in Headfirst
Using Brokers Who Charge Too Much
Investing in Penny Stocks
Buying an Option with High Volatility.
Basing Your Investments on ‘News’
Investing Your Cash Reserves
Putting All Your Eggs in One Basket
Not Cutting Out on Your Losses When Needed
Failing to have an exit plan
Chapter 13: Money Management
What Is Money Management?
The Basics of Money Management
The Advantages of Money Management
The Disadvantages of Money management
Why Is Money Management Important?
Chapter 14: The Terminology of Stock and Options
Trading
Chapter 15: FAQs
What is a dividend?
How to choose the right company to invest in
What is the difference between forex trading and stock trading?
What is the role of a shareholder?
How can I become a stockbroker?
What is the duty of the stockbroker?
What is the minimum amount to buy a stock?
What is the difference between mutual funds and stock exchange?
What happens when I lose my money in the stock market?
What does it mean to short a stock?
How can I measure the health of a stock?
Conclusion
Research
Write a Journal
Have a Plan
Take a Break and Have Fun
Introduction

There are numerous avenues available to the investor to manage their

wealth and make investments such as mutual funds, bonds, and stocks.
However, the opportunities to invest don't end with such traditional
investment options. Another powerful way to trade is called "day trading"
or "trading options" – a versatile method of making money through trading.
So, what are these "options," and how are they different from traditional
stock trading?
First, let me give a quick, simple comparison; assume there are many
traders, and company A stocks are available in the market. The average
price of good company stocks is relatively high – let think they are $200 for
representational purposes.
Ideally, buying a share of such stocks of a given company, say ten stocks of
$200 each, which is a lot of money that not everyone has to invest. The
person will have to raise $2,000, which is not always easy to do, even if
many can afford it. However, those that can afford it fall into the minority.
The rest might as well consider "options."
After investing in the company's stocks, one sells a portion and all shares
back in the market when the prices are suitable for making a profit or
avoiding complete loss. However, like any trade, no one can ever be sure of
how the market sways, thus making the option of trading stocks a very risky
one. Now say the person gets to sell the shares for $210 each, then the profit
will come up to $100. But most people don't sell at such a small profit and
wait until the profit margin rises to at least double the stock's price. That
could take 4 to 5 years or more, depending on the market conditions and
how well the company is faring. It is not everybody's cup of tea to wait out
that kind of time, and there will be many who will remain restless. For these
people, "options" represent the right choice.
On the other hand, "options" allow the traders to skip the intermediate step
of buying stocks and go directly to the making money part, allowing
investors to get directly involved with trading without actually buying
stocks! That's right. The person has a chance to deal in stores without
having to buy them, wait for them to grow in value, and then sell them. It is
possible to jump to the final step of trading in the market.
Therefore, an "option" is a solution to problems that many new traders face
in the world of stocks. Not all new entrants will have the confidence to
invest in stocks and will look for a safe place to start. "Options" allow you
to do a lot more than a traditional store, allowing one to gamble on a
changing stock index from a shielded position, thus cushioning yourself in
case there is a market crash. So, it is a safe bet to invest in stocks and avoid
market risks.
However, as cozy as it sounds, "options" used in day trading also come with
their limitations and risks, which could leave one with heavy losses if not
handled properly. As was said before, no investment is free from threats,
and "options" also come with their fair share. It would be foolish to think
that just by opting for "options," making a huge profit and turn rich within a
month will be possible. If it worked that way, then every other person
would be a millionaire. It is far from impossible to convert your hundred-
dollar bills into thousands, but it will require you to pay keen attention to
your trading.
"Options" are multifaceted, uncertain, contain risks, and are not for
everyone, which is a reason why someone might advise you to keep away
from the world of day trading. Well, but what is life without a little well-
informed, calculated risk? No risk, no gain - it's vital to take a little trouble
from time to time. You never know, you might make it big and live to speak
about it! Whether you take the plunge to trade or not, isn't it better to know
a little bit about an investment option instead of deceived into trading
"options" without knowledge? You will have a better insight into what you
need to do while trading "options."
By the end of this book, you'll have a basic idea of trading. You can even
read further and start practicing to learn the tricks of the trade. Remember,
all those traders out there did not begin successfully -it's taken them years
of experience to be where they are. You might think of it as being slightly
daunting, but if you use the right techniques, you will have a chance to
make it big in the world of stock trading.
An "option" is an agreement, which provides the buyer a legal entitlement
(but not an obligation) to buy/sell at a precise value for a given stock on or
before a specific date. It is insurance for a store or a bond; however, the
agreement is defined with clear conditions and terms.
It might still be ambiguous, so let's take a real-life example to understand an
"option" Consider finding a car used in a Bond movie with an unverified
authenticity.
You would like to buy it; however, you do not have the necessary finance to
purchase the vehicle for another few weeks – say two weeks.
You agree with the car dealer that you can buy the car in 2 weeks for $x.
The dealer agrees to it, but in return for this deal offered, you pay an
advance fee of $y.
At this point, two things could happen:
The car was indeed the original car used in the movie, which means the car
price rises steeply to a few thousand dollars more than they originally
agreed $x price. But because you already made a deal with the car dealer,
he has to sell the car to you for $x, which means you can sell the vehicle for
the new higher price value and take the extra money for profit.
However, on the contrary, if you find the car is not in good condition
needing a lot of repairs and making it is almost valueless. At this point, you
can decide not to buy the vehicle, thus saving $x. However, you will lose
$y, which you made as an initial payment.
Now the deal in that example can be mapped to "options," the car to the
actual stock, and so forth, giving a clear picture of the exact benefits of
trading options. First, it gives you a choice: you can always go back on a
deal if you see that it's going to turn out lousy "Options" are also called
"derivatives" for this very reason. That is, an "option" derives its worth by
relying on something else. Here, the result can be anything, and you will
have to trust your instinct. More than intuition, it is vital to trust your
judgment in understanding whether the stock will work out to be a good
"bet." It can be hard to do in the beginning but can get more comfortable as
you go.
Let us look at a monetary example for you to understand it better.
Suppose A offers you 100 shares of company XYZ for $50 each. So, he is
expecting you to pay him $5,000 for them. But you tell him you will pay
him $1000 in advance and pay the rest later, in say two weeks. He agrees
and keeps the shares for you. During the two-weeks, you find out that the
company is superb and that its share prices will rise due to favorable news
breaking out. If you pay him in the week, the price per share has increased
to $60. Now, you will still have to pay him the difference of the amount
after deducting the $1m000 that you had already paid him. It is because he
had agreed to give you the shares at $50 each, which means you got it at a
significant discount. You can then sell it at $60 and make a profit for it.
However, if the price drops to $40 due to, let's say, bad news about the
company doing the rounds, the seller will still demand $50 for the shares.
But if you think it is not worth your money, then you can refuse to pay it.
Here, you will have to part with your $1,000 that you had spent as an
advance but will have the chance to save $4,000 in the process. That refusal
to pay is your option. Your seller always wants a price reduction while on
the buyer's side is a price reduction plan.
There is a price increase in most cases, as there is a constant demand for
shares in the market. But you never know when the prices might change
direction as nothing is guaranteed in the stock market, so that it could go
either way.
Understandably, you will have many doubts about treading this path
initially and might need a lot of help in trusting this investment line.
Chapter 1: What is Trading and
How to Start

All traders usually engage in active trading. Active trading simply means
selling and buying securities based on price movement for fast and easy
profits. It is as opposed to buying then holding as investors do. The buy-
and-hold strategy is a long-term strategy where investors hope to capitalize
on eventual share price gain.
As a trader, you will engage in active trading in highly liquid markets,
searching for profitable opportunities based on price movements on specific
stocks and shares. The most commonly traded securities are stocks, even
though there is a broader option available.
As a trader, you will need to be a lot more speculative than the average
investor, which leads us to fundamental and technical analysis. Technical
analysis will come in handy when you plan your trades. You will also
require additional tools, including price charts, crucial tools for any active
trader.
You will need to make a lot of trades if you are to be profitable. High trade
volumes are volatile bu recommended. As a trader, you should find volatile
stocks with large volumes and plenty of price movement. The reason why
you should deal with high volume stocks is that price movements are often
small. So, to maximize profits, large volumes are necessary.
Another essential aspect of active trading includes the regular application of
limit orders. These orders enable you, the trader, to determine and set stock
prices ideal for selling your stocks. As a trader, you need to plan your trades
to know when to take profits and what points to exit a business. To go to a
non-performing place, you will need to define stop-loss points.
A stop-loss order is an order that you come with to prevent your trades
from losing your money. A typical stop-loss order identifies a price point
located at a lower position on the trend. Should the price fall to the stop-loss
point, you will automatically exit the trade and prevent further funds loss.
This point is considered the maximum loss that you can take per trade. It is
advisable to take this approach as you risk letting your emotions get the
better of you.
Sometimes traders, wildly inexperienced and novice traders, let emotions
get the better of their trades. In some instances, they are afraid of losing
money, so they exit trades at the slightest price pullback. Others allow the
price to fall astronomically, thinking they will recoup their money later.
They end up losing large amounts of their trading capital. Avoid the wrong
approach that should look at all costs.
Your trades are based on your analysis and not emotions. You need to sit
down and take the time to plan and work out your transactions. Use all the
tools at your disposal to chart your pathway. Along the path, you will need
to identify a take-profit point, as well as a stop-loss point. If you do your
analysis correctly and learn how to execute trades the correct way, you will
not need to let emotions take charge. Instead, you will allow your
businesses to run per the plan to the conclusion. It is a more stable, more
profitable, and the only recommended approach to active trading.
This way, you will be able to trade without having to watch your trades
closely. In rare cases, you may want to intervene. For instance, if you
collect the profits and the market continues on a bull run, you do not need
to exit right away. You can first collect profit and let your trade continue
with the winning trend. However, you should work out and define new
take-profit and exit points. These will ensure that your transactions remain
profitable until the trend changes direction.
Similarities Between Investing and Trading
Trading and investing have plenty of similarities. Both traders and investors
have a common goal of generating an income and investing the same as
required. Investors often buy long positions and then hold for a while.
Active investing, therefore, refers to all activities about stock's future.
Traders prefer taking short-term market positions so they can exit quickly
when the time comes. It is opposed to investors who love long-term jobs
and can remain in a place for more extended periods. As an active investor,
you will mostly be seeking alpha. The term alpha is used in finance to
indicate a strategy where a trader wins in the market and makes a profit. It
is considered a measure of performance.
In the case above, we can deduce alpha to imply the difference between the
returns received from a securities portfolio and a benchmark or index.
Actively traded portfolios are deemed to perform better in some cases
compared to passively traded ones.
What is Financial Planning?
Financial planning is an elaborate process and procedure for developing
economic policies and estimating capital requirements for investing
procurement and administration. Several objectives necessitate financial
planning. Companies undertake financial planning basically in search of
one of the following goals.
Determination of Capital Requirements
There are various ways of establishing the capital requirements of any
venture. It mostly depends on expected costs and expenses, such as fixed
and current assets, marketing costs, etc. Such fees and fees have to be
viewed both in the short and long term.
Financial Policies Framing
We also undertake financial planning to frame economic policies, especially
regarding borrowing, lending, and economic control purposes.
Also, officers' finance managers are tasked with ensuring that finances that
are a scarce commodity are prudently spent and utilized in the most
effective and best possible way. This way, companies can maximize the
returns on their investments.
What is a Financial Plan?
A financial plan is essentially a comprehensive statement regarding an
investor's long-term outlook and objectives. These objectives include
personal well-being, financial security, and detailed investments and
savings strategies. Such a plan can be created by an investor or with the aid
of a financial advisor. You should come up with a plan that suits your
ambitions and meets your investment desires.
You must understand the entire financial planning process. It is because you
will need to apply these principles in designing your investing strategy. The
initial step is always coming up with the contents of the plan. Therefore,
you will need to get a pen and paper and then put down all the aspects that
you consider essential. Financial plans care is developed for several
reasons. Some of these are listed below.
Determining cash flow
Calculating your net worth
Long-term investment plan
Tax reduction strategy
Retirement plan
Please note that there is no single template designed to come up with a
financial plan. In short, we can conclude that a financial plan is a strategy
that details an individual's investment goals and writes down the process
sequentially. The program should outline the investment's objective or
whatever other financial undertaking the individual wishes to undertake.
The program should start with a person's net worth or the number of funds
available for investment purposes.
Chapter 2: What is Option
Trading?

Option contracts usually refer to the purchase or sale of certain assets.

An option is a contract between two parties (a buyer and a seller), in which
whoever buys the option acquires the right to exercise what the agreement
indicates, although he will not have an obligation to do so.
Option contracts commonly refer to purchasing or selling certain assets,
stocks, stock indices, bonds, or others. These contracts establish that the
operation must be carried out on a pre-established date (European, since the
US exercise at any time) at a fixed price when the contract after signing the
contract. Purchasing an option to buy or sell is necessary to make an initial
disbursement (called "premium"). Purchasing an opportunity to buy or sell
is essential to make an initial disbursement known as premium.
Premium value depends fundamentally on the asset's price as the contract's
object has on the market. The variability of that price and the period
between the contract signing date and expiration
Call and Put
The options that grant the right to buy are called 'Call,' and those that allow
the right to sell is called 'Put.'. Additionally, it is called European options
that can only be exercised on the date of exercise and American Options
that can be used during the contract's life.
When the time comes for the buying party to exercise the option, if it does,
two situations occur:
Whoever appears as the seller of the option will be obliged to do what they
said contract indicates; that is, sell or buy the asset to the counterparty, in
case it decides to exercise its right to buy or sell.
Who appears as the option buyer will have the right to buy or sell the asset?
However, if it doesn't suit you, you can refrain from making the
transaction.
An option contract usually contains the following specifications:
Exercise date: the expiration date of the right included in the
option.
Exercise price: agreed price for the asset's purchase/sale referred to
in the contract (called an underlying asset).
Option premium or price: amount paid to the counterparty to
acquire the right to buy or sell.
Rights acquired with the purchase of an option: Call (right of
purchase) and Put (right of sale).
Types of Option: there may be Europeans, are exercised on the date
of exercise or American, used at any time during the contract. There
are, besides, other more complex types of options, the so-called
"Exotic Options."
In international financial markets, the types of options traded on organized
exchanges are typically American and European. For example, in Chile, as
with futures, there is no stock market for opportunities.
Practical Example
Purchase of a call option by an importing company to secure the Euro price
on that day.
To better understand the use of options, this example is presented by an
importing company that wants to ensure against increases in the Euro price.
To do so, you can buy a European call option today that gives you the right
to buy a million euros, within three months, at $ 550 per euro. To acquire
that right, the company pays $ 2 per euro; that is, the option premium has a
cost of $ 2,000,000.
If on the expiration date of the option, the price of the euro in the market is
over $ 550 (for example, at $ 560), the company will exercise the
opportunity to buy them, as it will only pay $ 550 per euro.
Market The Prima C Value of the Result of the Disbursement for Total
exchange exercise options (1) options (2) purchase of euros disbursement
rate A price of the D = (A - B) E=D-C (3) F G=F+C
ption B

530 550 2,000,000 0 -2,000,000 530,000,000 532,000,000

540 550 2,000,000 0 -2,000,000 540,000,000 542,000,000

550 550 2,000,000 0 -2,000,000 550,000,000 552,000,000

560 550 2,000,000 10,000,000 8,000,000 550,000,000 552,000,000

570 550 2,000,000 20,000,000 18,000,000 550,000,000 552,000,000

580 550 2,000,000 30,000,000 28,000,000 550,000,000 552,000,000

On the contrary, if on that date the market price of the Euro was below $
550 (for example at $ 530), it means the company will not exercise the
option, since it makes no sense to pay $ 550 per euro on purchase at the
market at $ 530; In this case, the option expires without being exercised.
The cash flows are as follows:
Today (April 10, 20XX).
Buy a European call option, which gives you the right to buy USD
1,000,000 to $ 550 on October 10, 20XX, as the value of the premium is 2
and 1,000,000 contracts are purchased (which means that the notional of the
agreement is the US $ 1) there is a cash outlay of $ 2,000,000 for that
concept.
Expiration date (October 30, 20XX)
If the Euro is above the option's exercise price, it is exercised, and $ 550 per
euro is paid, $ 550,000,000.
Otherwise, the option expires if used, and the euros are acquired in the
market.
The euros purchased are used to cancel the importation of goods or
services:
The following table shows the results of the operation:
Suppose the option contract's expiration date and the market exchange rate
is lower than the call option's exercise price. The importer ends up paying
the market price per euro, the premium cost (in strict rigor, the bonus’ value
is updated for the interest that is earned if, instead of paying compensation
price, that money was deposited);
otherwise, One Euro will cost equal to the exercise price plus the premium.
That is, the importer will have made sure to pay a maximum of $ 552 per
euro.
Notes:
1. On the expiration date, if the Euro is lower than the exercise price,
the value of the call option will be zero (as it is not appropriate to
exercise the purchase right), whereas, if the opposite occurs, the
value of the call option will correspond to the difference between
those two prices.
2. That result represents how much money was paid or saved by the
fact of coverage.
3. Currencies are acquired when it is not optimal to exercise the option
or exercise the right of purchase when exercising that right is an
optimal decision.
Finally, note that if a forward-type contract with the same delivery price
were used to perform the same coverage, the importer would have ended up
always paying $ 550. However, it would not have had the opportunities
(which may appear when hedging with call options) to benefit from
declines in the market exchange rate.
Note that the operation is performed more comfortably. When purchasing,
you pay a premium option and on the expiration at least the agreed price.
How the Options Work
Option operators must understand the complexity that surrounds them.
Knowing the options' operation allows operators to make the right decisions
and offers them more options when executing a transaction.
Indicators:
The value of an option consists of several elements that go hand in
hand with the "Greeks":
The price of the guaranteed value
Expiration
Implied volatility
The actual exercise prices
Dividends
Interest rates
The "Greeks" provide valuable information on risk management and help
rebalance the portfolios to achieve the desired exposure (e.g., delta
coverage). Each Greek measures the reaction of the portfolios to small
changes in an underlying factor, which allows the individual risks to be
examined:
The delta measures the rate of change of the value of an option
regarding changes in the underlying asset price.
The gamma measures the change rate in the delta with the
modifications suffered by the underlying asset price.
Lambda or elasticity refers to the percentage change in the value of
an option compared to the percentage change in the cost of the
underlying asset, which offers a method of calculating leverage, also
known as "indebtedness."
Theta calculates the option value's sensitivity over time, a factor
known as "temporary wear."
Vega measures the susceptibility of the option of volatility. Vega
measures the amount of choice based on the volatility of the
underlying asset.
Rho represents the sensitivity of the value of a chance against
variations in the interest rate and measures the option's value based
on the risk-free interest rate.
Therefore, the Greeks are reasonably simple to determine if the Black
Scholes model (considered the standard option valuation model) is used and
is very useful for intraday and derivatives traders. Delta, theta, and Vega are
valuable tools to measure time, price, and volatility. The value of the option
is directly affected by maturity and volatility if:
For a long period before expiration, the value of the purchase and
sale option tends to rise. The opposite situation will occur if the
purchase and sale options' value is prone to a fall for a short period
before expiration.
If the volatility increases, so will the amount of the purchase and
sale options, while if the volatility decreases, the amount of the
purchase and sale options decreases.
The guaranteed value price negatively affects the purchase options'
value than on the sale options.
Usually, as the securities price increases, so do the current purchase
options that correspond to it, increasing its value while the sale
options lose weight?
If the cost falls, the opposite happens, and the recent purchase
options usually experience a drop in value while the value of the
sale options increases.
A Bonus of Options
It occurs when an operator acquires an option contract and pays an initial
amount to the option contract's seller. The option premium will vary
depending on its calculation time and the market options that led to its
acquisition. The bonus may be different within the same market based on
the following criteria:
What chance you chose, in-, at-, or out-of-the-money? At- or in-the-money
choice is traded for an advanced premium since the contract is now money-
making, and the buyer has direct access to the benefits obtained from the
agreement. Instead, at- or out-of-the-money options can be purchased for a
lower premium.
Chapter 3: What are Options
Contracts on the Stock Market?

We can define an options contract as merely an agreement made between a

seller and a buyer where the buyer of an option gets the right to purchase or
sell a specified asset at an agreed price and within a specified time. You will
find options contracts used in conjunction with commodities, securities, and
real estate transactions.
It is then accurate to claim that options contracts are price probabilities
about future events. If an event is likely to happen, then the costlier an
option relating to that event is expected to be. It is an immensely useful
concept, and understanding it is crucial to understanding the relative value
of different options.
Components of an Option Contract
There are various standardized components of option contracting that
enable ease in engaging in options trading. These components characterize
the mechanics of how options trading binds the parties involved and
demonstrates what profits they can generate if the market forces are
favorable. Among the elements of options trading are:
Underlying securities
Options that are traded on the market apply to certain assets. These assets
are referred to as underlying securities. The word shared can be replaced
with the word shares in certain instances. Some companies provide the
support against which the option operators list options. ASX is one operator
in the options trading market that has played a vital role in listing
underlying securities.
The term classes of options refer to the listing of puts and calls as the same
assets' options. As an example, when puts and calls are applied to a lease
corporation's shares. It does not consider the contract terms based on the
predetermined price or duration of the call's expiry and put contracts. An
operator of options trading usually provides the list of the available classes
for the benefit of investors.
Contract Size
The market standardizes the option contract's size at 100 underlying
securities on the ASX platform of options trading. One option contract,
therefore, corresponds to 100 underlying shares. The changes that can
happen only come when reorganization occurs on the initial outlay of the
underlying claim or the capital therein. Index options usually fix the value
of the contract at a specific stipulated dollar rate.
Expiry day
Options are constrained by time and have a life span. There are
predetermined expiry deadlines that the platform operator sets, which must
be respected. These deadlines are usually rigid, and once they are out, the
rights under a contract in a class of unexercised options are then forfeited.
Usually, the last day of the life span of a deal is the summative trading date.
For shares that have their expiry coming by June of 2020, the options over
them have their last trading day on a Thursday that comes before the
previous Friday that happens to be in the month. For those that expire
beyond June 2020, expiry is on the third Thursday in the month. For index
options. Expiries come on the concurrent third Thursday of the same month
of writing the option. But these dates can be readjusted by the options
platform operator when there is a reason for such action.
Exercise Prices
These are the buying price or the price of selling the assets or underlying
securities. These prices are also called strike prices. They are usually
predetermined in the option contract and need to meet if one has to exercise
the option's rights. Essentially, they are called exercise because the parties
are now invoking the rights stipulated in an opportunity to buy or sell. The
practice of the option is subject to the price stipulations.
The platform operator usually predetermines the prices. The different price
lists are available on the value of the underlying share value. If the value of
the underlying prices increases, the exercise prices also increase
commensurately. The need to offer a range of prices for the same option
contract to suit buyers' market conveniences of the arrangements. The buyer
can then match their expectations of the underlying shares' pricing given
their option contract position. The exercise prices can also be varied during
an active contract when market dynamics dictate that such a move a great
option.
Volatility
Another crucial factor that should be looked at is volatility. Volatility simply
refers to the sharp rise and fall in the price of a commodity. It can increase
the chances of a desirable event to occur. Increased volatility tends to
increase the odds of the event we wish would happen. As a trader, you want
to be on the lookout for volatile securities because they fare so well when it
comes to options. Volatility and options trading are closely related to each
other in this way.
Example with Volatility
Here is a look at a hypothetical situation. Let us assume that on June 2, the
share price of IBM is $125. Now, let us assume that a call option is on this
stock. The premium cost is at $3.50 for a July 130 call. It indicates that the
option will expire on the third Friday of the same month. The total cost of
this option is $3.50 * 100 = $350. Though there are commissions to
consider.
Within the US, the price quoted is often for 100 shares unless stated
otherwise. Hence, the contract price has a multiplier of 100. In our case, the
strike price is indicated at $130. It simply means the stock price needs to
rise above $130 for the option to be worth it. In our case, the breakeven
point should be $130 + $3.50 = $133.50. Assume that a month later, the
stock price gets to $143. You will note that the price has gone up
substantially in just one month.
$143 - $125 = $18
$18 * 100 - $1800. This is the amount that you make in a single month. You
can choose to take profits right away or perhaps let the option ride for even
higher profits. Assuming the price falls below our initial price of $125.
When this happens, the call option becomes useless, and you will have lost
the premium cost, which is $350. However, you will not lose anything more
than that.
Different Types of Options contracts
1. European and American Options
We can also define options or categorize them according to their time till
expiration.
Long-term equity anticipation securities also referred to as LEAPS,
are options whose expiry period exceeds a year.
Those whose expiry is within a year are known as short-term
options.
LEAPS are preferred by traders basically because they offer a chance to
manage and control risk and also speculation. They are almost similar in
most ways to regular options. While these options aren't generally available
on all securities, they are readily available in most regular stocks.
Some prefer to categorize options by the day or time of expiration. Over the
years, most listed options have expired on the third Friday of each month.
This Option has changed in some way due to increased demand. Listed
options now expire at the end of each week. Sometimes this happens at the
end of the month and sometimes every day.
2. American versus European Options
The European and American options have got nothing to do with the
geographical location of these continents. It is more of the time at which
they are exercised. Think about American possibilities, for instance. Such
opportunities can be executed at any time from the date of purchase until
the final expiration date.
On the other hand, European options are executed upon expiry or at the end
of their expiration dates. Thus, American options are practiced early while
the European options are exercised upon expiry. Many of the options found
on most stock exchanges are of the European type rather than American
ones. Even then, American options are valued a lot more due to the right
they carry of early execution.
3. Options Exchanges
We already learned about listed options and over-the-counter options. The
former is traded on options exchanges while the latter are traded across
counters. We have both electronic and physical exchanges where you can
trade options.
4. The Chicago Board Options Exchange
Options are traded between two or more parties through an exchange. Such
opportunities are referred to as over-the-counter options. Financial
institutions often use these institutions to carve out specific events that are
hard to come by with listed options.
In options trading, we have what is referred to as market makers. These are
often market participants or individual exchange members who purchase
and sell securities through principal trades agency trades. Their primary
purpose at the options exchange is to introduce much-needed liquidity. With
liquidity, it is feasible to attract traders and investors to the business.
Chapter 4: Understanding the
Purchase of Options

Let's suppose that you're interested in buying shares in Acme

Communications, and they are trading at $39 a share. To buy 100 shares it
would cost $3,900 plus brokerage/commission fees. For many people, that
is a lot of money to invest, and if you are a savvy investor, you might be
more interested in purchasing options that you would be in laying out that
much cash per share. Keep in mind that our discussion below doesn't
consider account brokerage commissions.
Suppose that instead, you purchase an options contract, and the price is
$2.50. The premium is quoted on a per-share basis, but an options contract
is for 100 shares, so the total amount you will need to invest in 100 x $2.50
= $250.
Now suppose that you're bullish on the stock, and you settle on a strike
price of $41. Let's say that on or before the expiration date, the market price
of Acme communications reaches $47.
Your gross profit per share is now $6. You’ve made $6 x 100 = $600.
Subtract the amount invested, not including commissions, and your profit is
$600-$250 = $350. That's a return on investment of 140%.
If you had bought the shares, you could sell them at $47 a claim for a profit
of $800. While that is a more significant number in absolute terms, your
return on investment would be about 21%.
Of course, depending on your financial situation, you aren't limited to
purchasing one option contract. Remember that the stock was $39 a share,
so if a person bought $3900 worth or 100 shares, they could have instead
gone with 16 options contracts for $250 x 16 = $4,000. While the direct
investor would have made their $800 profit, assuming that they sold when
the price hit $47 a share, the options trader would have made $350 x 16 =
$5,600 in profit (remember for both options – not considering
commissions).
The downside is the risk that the stock price won't exceed the strike price.
In that case, you're out of the premium. If you had purchased 16 options
contracts, then you'd be out the $4,000. The person who buys the stock
won't be out nearly that much money. Let's say that the stock dropped to
$37 a share. If they felt it would not be going anywhere anytime soon and
they should sell at a loss, the person who bought the stocks would sell for
$37 x 100 = $3700 and only be out $200 from their initial investment.
Using this example, you can see how investing in options contracts has a
significant upside in potential profits and a more substantial risk in losses.
When you are talking about trading a single contract for 100 shares, the
losses don't seem like a big deal, but you can see that going for more trades
means that you will have a lot more awareness of the risks.
Of course, the options trader has one significant advantage that the ordinary
stock investor will never have, and that is the possibility of betting on the
stock decreasing in value. Let's suppose that instead of dropping to $37 a
share, the stock fell by $10 to $29 a share. So, 100 shares would be worth
$2,900, and our investor friend would have lost $1,000 if they sell at that
point.
Now let's say that instead of a call, you invest in a put contract, the same
scenario, you buy 16 of them at $2.50, or $250 per contract. So, your total
cost is again $4,000. This time say you have a strike price of $35. Your
profit is $35-$29 = $6 per share.
This time you’ve made $9,600 ($6 per share, x 100 shares/contract x 16
contracts). The initial investment, you've made a profit of $5,600 on the
decline in stock price while your friend is nursing their losses. Again, you
made a 140% ROI.
So, we see that buying options contracts can carry more significant risks
while at the same time, offering the potential for more meaningful rewards.
Besides, they also contribute to reap the rewards when a stock drops in
price, something that just isn't possible with regular investing in stocks.
Chapter 5: How to Start with
Options Trading
Options Exchanges
Trades are made on one of the many exchanges that are monitored. On
multiple exchanges, most options are listed. Since options contracts are
standardized, this implies that between dialogues, they can be exchanged.
The existing eleven option exchanges are as follows:
•BOX Options Exchange
•NASDAQ OMX PHLX
•C2 Options Exchange
•NYSE Arca Options
•Chicago Board Options Exchange (CBOE)
•NASDAQ OMX BX
•BATS Options Exchange
•NASDAQ Options Market
•International Securities Exchange (ISE)
•NYSE Amex Options
•MIAX Options Exchange
Options Clearing Corporation (OCC)
The OCC was founded in 1973 and served as the clearinghouse for
contracts for options. For options and futures contracts, it is the issuer and
guarantor. The OCC should assure investors that they can settle their trades,
receive, pay premiums, and make all assignments according to regulations.
It is under the jurisdiction of the Commission for Securities and Exchange
(SEC).
To open a Trading Account
You'll need to open a brokerage account before you can begin trading
options. Including both full service and discount brokers, there are several
brokerage companies accessible. What sort you prefer depends on the
amount of advice you need. Discount firms provide reduced fees but do not
have customized advice. To assist you with your investment decisions, all
top companies offer a range of online resources and calculators.
Some of the brokerage companies that are top-rated include:
•Charles Schwab - www.schwab.com
•Merrill Edge – www.merrilledge.com
•Fidelity Investments - www.fidelity.com
•Interactive Brokers – www.interactivebrokers.com
•TradeStation – www.tradestation.com
•TD Ameritrade - www.tdameritrade.com
•OptionsHouse – www.optionshouse.com
•OptionsXpress – www.optionsxpress.com
•tradeMonster – www.trademonster.com
•E*Trade – www.etrade.com
•Place trade – www.placetrade.com
You will pick your account form after you have chosen your brokerage
firm: either a cash account or a margin account. You'd use collateral in a
margin account to borrow funds to finance transactions. In a cash account,
you can exchange your account with the cash available. You'll be mandated
to make a minimum deposit of at least $2,000 to open the bill if you choose
a margin account. Usually, a cash account requires either no deposit or a
small deposit for opening the account.
The amount of cash and assets you need to hold varies by brokerage house
in a margin account. If the amount falls below the amount required, then a
margin call will be given by the company. It implies that you would need to
add more money to the account to fulfill their minimum requirements. If
this is not done, then your assets will be liquidated by the brokerage
company. It is necessary to be aware of your margin requirements for this
reason.
Options Agreement
Before beginning options trading, the next step is to complete an options
agreement if you have opened your account. This agreement outlines your
basic understanding of trading options, loss-dealing financial capabilities,
and your level of risk. The brokerage firm will appoint you to an option
acceptance level after you complete the agreement.
Placing Your Order
Most beginners think that it's just a matter of choosing which options to buy
and when to sell them when they first begin trading options. It is not that
easy, however. Four different kinds of orders can be placed when options
are bought and sold. Buy to open, buy to close, sell to open, and sell to
close are these four types. You must also choose how to fill it through either
a limit order or a market order after selecting one of these order forms. You
have to allow your broker to distinguish the timing of your order as well.
Order Types
Here is a breakdown of the various forms of order.
Buy to Open. The fastest and most put the order for options is the purchase
to open order. To create a new role, this is used to purchase an options
contract.
To Close, purchase. It is used to close out and close the deal with an
established short place. If you had briefly sold a particular options contract
and wanted to get out of (close) the position, you would place a buy to close
order. For example, if the option contracts you sold have subsequently
declined in value, you can return to the lower price by using a purchase to
close order by locking in your profits from these contracts. On the other
hand, if your short-selling options have risen in value and you want to avoid
further losses, you can position a purchase to close the order and buy back
the contracts, avoiding any other future losses. Know if you've taken a short
position, so when the option's price has fallen, you make a profit, and you're
in a losing end when the cost of the vote has increased.
Please sell to Open. This order is used to open a position with the intention
of short selling it on an options contract. When you are selling a covered
call, you can use this sort of order.
Sell to Close. The sell to close order is used. It's just the order you use to
sell contracts that you already hold for options. The order is used for calls
or entries.
Types of Fill Orders
You need to choose how to complete the order after determining which
form of an order you want. Business orders, cap orders, stop orders, and
stop-limit orders are the options.
Your exchange is conducted at a price no higher (if you buy) or no lower (if
you sell) than the price level you specify with a limited order. It protects
you from purchasing contracts at a higher price than you planned or selling
at a lower than expected price.
At the current selling price, a market order would fill the order. It entails
some risk because options will often change in price rapidly, which means
you might end up purchasing the contracts at a higher price than you
expected or selling the contracts at a lower price than you expected.
When the price hits the stop price, It will fill a stop order. A stop-limit order
blends the characteristics of a stop order with the attributes of a stop order.
Timing Orders
You'll also need to specify the order length or timing when placing your
order. Day order, all, or none, fill or kill, good until canceled, good until
date, or immediate or cancel are the types of timing orders.
Order for the day is an order that must be fulfilled or canceled on the
trading day commencement.
All or none order must be filled. For example, if you are attempting to
purchase 30 option contracts at a specific price, but at that price, the broker
can only buy 25, then the order is not processed. It is important to note that,
unlike the day order, this order stays open and does not expire at the end of
the trading day, although you can cancel it anytime you want.
With the added condition that it cancels automatically when not filled
instantly, the fill or destroy order is like an all or none order.
The order that is good until canceled, or GTC, is an order that does not
cancel until canceled. This order will also stay available until you want to
cancel it or it is filled out.
The Good Till Date Order, or GTD, will remain open until the date is
specified and canceled if not completed.
The immediate or cancel the order is like, with one exception, the fill or
destroy order. If an order is filled immediately with this form of ordering
and the remainder is not, the remaining contracts that are not filled are
canceled.
Understanding Options Chains
Options chains provide useful knowledge that the investor wants to make
trades. Most financial websites and brokers offer Real-time choice chains.
Here's a short description of how to read a chain of choices.
The name of the underlying stock, its ticker symbol, the exchange list it
belongs, its current market price, and volume are at the top of the table.
Strike, symbol, last, change, bid, ask, volume, and open interest are the
columns in the option chain.
For the given a choice, the first column lists the strike price.
The second column contains the symbol for the option. For each strike
price, the chain displays information for both calls (C) and (P).
The bid is the current price for the option that buyers want to pay. The
request is the actual price that sellers are ready to sell.
The amount is the number of contracts for exchange options that day.
The column of open interest displays the number of available outstanding
contracts.
Making Trades
The actual execution method is straightforward and follows the same
procedure, whether you want to trade online or over the phone.
1. Placing the trade
You will need the following ones to position a trade:
The symbol of the option
Option type: a place or call option type
The sort of order to be filled: purchase to open, purchase to close, sale to
open, sale to close
The strike prices
The date of expiration
The price you are willing to pay: market or order limit:
Order timing: order of the day, delicate until filled, etc.
2. Order confirmation
Make sure you check all the details and make sure it is right before placing
your order. You will obtain the order confirmation after you have submitted
the order. The demand has yet to be granted, perhaps waiting to be filled
out.
3. Execution of Trade
It could be just a couple of minutes or possibly hours or even days before
your trade is performed, depending on your trade specifics. You should
receive a message informing you of the execution price once the order fills
up.
4. Wait
You just need to watch your positions now and follow through with your
strategy.
Chapter 6: Tips for Success
Know When to Improvise Your Plan
While having a plan in options trading is of utmost importance, it is
essential to know when your project needs improvement. There will be
times when you have to move away from your plan, even when your
emotions tell you to stick to it. A successful trader knows when their goal is
no longer valid for the current situation. Having a plan sets your path, but
this does not mean that you will follow it blindly to the end of the world.
Every trader comes to a point where something out of control happens,
which renders their plan useless for that situation.
That is why, when you plan, know what its weak points are and when it can
fail. The market conditions keep changing frequently, so what is true today
might not be applicable tomorrow. So, if you are thinking of following your
predetermined course of action even when the conditions of the market
have taken a 360-degree turn, then you are making a big mistake. It will
only lead you to your failure. Yes, it will require a lot of practice to
understand your emotions, hold you back, and change situations. But every
small step in the right direction is progress, which includes being aware of
the disparity.
Always Have Your Exit and Entry Plan Ready
Before Starting
When it comes to options trading, figuring out the right entries and exits is
probably one thing you should learn well. No matter how good your
adjustment techniques are, nothing can correct a wrong entry, and you
might end up incurring huge losses because of that.
But there is something else that is even more important than learning to set
the correct entry and exit points. Can you guess what it is? Understanding
that you have to exercise your entry and exit points before the money is off
the table. New options traders have this idea that every trade has to fetch
your vast profits, and you need every last cent out of it. But you have to
break free from this mentality. It can pose a big hurdle for every new trader.
As long as you have a trading plan that is solid and profitable, there will be
several trades in the future that can fetch you profits. So, sticking to only
one of them as if it is the last trade you will perform is wrong, and it will
only end up giving you a loss.
So, stop worrying about those small extra profits because you have already
made a certain amount of profit from the trade, and now you have to protect
that. Yes, there is a chance that if you ignore this advice and continue with
your trading mentality, you might make a few extra bucks here and there,
but the odds are that the loss will be more than the gain. You will end up
losing the profit you made without even getting the chance to pull the
trigger.
Avoid Out-of-the-Money Trades
A few strategies can help you make a profit by buying out-of-the-money
call options, but they are indeed the exception. You, as a new investor in
options trading, might feel attracted to the out-of-the-money call options
because they are affordable and cheap. Still, you need to remind yourself
that the stock market and the options market are two different scenarios.
Even if you look at the underlying stocks to buy the options, it is not viable
to buy low and then sell high. In case a call has become out-of-the-money,
then there is very little chance for it to rise to the required levels before it
approaches its expiration date again. If you still buy these options, you are
just a step away from gambling with your money.
Don't Shrink Your Homework
There are so many instances where options traders lose sides just because
they did not perform their homework. If you ask the new traders, you will
often find that they are guilty of not conducting extensive and adequate
market research. They even fail to possess due diligence before making a
trade. Do you know why I am stressing so much about performing your
homework correctly? If you don't, you will never be aware of the timing of
the data releases, the seasonal trends, or trading patterns, all of which are
experienced traders. New traders are so overwhelmed with the idea of
making a trade as soon as possible that they do not think it is ideal to do
some research, and then this turns out to be quite an expensive lesson for
them.
Even if you are not interested in an investment, you should still take some
time out to research it. When you perform thorough research, you will get
to know everything about a particular financial statement, and you will also
be fully aware of the path you are treading . For example, if you decide to
invest in options, you need to research the various strategies you can apply.
Remember that every other trader has access to the same information as
you, so you can even identify the investments that will provide good results
if you give the effort.
You should also make a promise to yourself t that you will read at least one
new book on options trading every week. When you read books, you learn
many secrets, and you also know many new things. You will also acquire a
more profound knowledge of the rewards and risks involved in options
trading.
Don't Trade for Wealth but Income
If you think that options trading will give you returns like 150%, you need
to take a step back and reconsider. Yes, there might indeed be certain
investments once in a while that will give you such figures, but not every
trade is like that. Most new traders think that options trading will make
them wealthy overnight, but there is no such thing as that.
If you believe that you are doing options trading for wealth generation, you
have got it all wrong. It is more like devising the right strategy to get a
regular income. If you become hungry for more profits, you will be more
likely to overlook the risky endeavors and invest your money anyway.
Never forget that options trading can be full of risks, so you must take your
steps carefully.
Never Believe in Unfounded Tips
Another prevalent mistake that new traders make is that they start believing
in random tips. This mistake is made by almost every trader at some point
or the other in their life. It might be that one of your friends or relatives has
been going on discussing a specific company whose stocks are performing
well, and maybe they are going to make a groundbreaking profit by
investing in that stock. What you should do is do your research before
believing anything. I am not saying whatever they are saying is false. It can
be correct, but that does not mean you have to pounce on it right away as if
it is the next big thing, and you are going to lose it if you do not go for it
now. Take a step back before rushing to your online brokerage right now
and do your research.
The example mentioned above is of only one source of unfounded tips.
Another one comes from social media and television. You will often find
investment professionals on both these media who can't stop talking about a
particular stock as it is a must investment. Still, if you probe into the matter
deeply, you will find that it has nothing extraordinary about it. You have to
remind yourself that if you keep following media tips, it is nothing more
than a speculative gamble in the world of trading.
But all this talk about unfounded tips does not mean you should turn a blind
eye to every information you receive. If there is something that has caught
your attention and you can't let go of it, then your first task would be to
think whether the source is reliable or not. The next step is performing your
homework, and this will give you the information you need. So, don't rely
on anyone telling you what to do. You need to figure out whether or not that
will be the right type of investment for you. You can also look for a second
opinion from someone reliable and unbiased.
Start with Enough Capital
Although you do not need much capital to start, it is also true that you
should have enough capital to get you set up. In simpler terms, wealth is the
amount of money you should keep in your trading account to clear any
money required for the transactions, and this same capital will help you if
you incur a loss during trading.
Your trading account should always have some amount of money on it.
When you are making trades, you should not worry yourself about funds
transfer, and the money already being present in your account means things
will work out smoothly. Your broker can also help you out without any
delay from fund transfer. If you ask the successful traders in the market, all
of them will say the same thing. They always keep some money in their
account and keep checking their balance from time to time so that even if
they have a few unfavorable trades in the future, the money in the report
will act as a cushion for them.
Don't Purchase Too Much with Margin
'Margin' was explained at the beginning of this book. It is when you
purchase options by borrowing some money from your broker. In some
cases, you can make more money with the help of margins, but on the
contrary, if you face losses, they will become even more exaggerated
because of the margins. So, you need to have a proper understanding of
how margin works. You also need to understand that using margins also
means your broker can ask you any time to sell your options.
New traders often get carried away because they think margins mean free
money, so they keep using it until the nightmare comes. For example,
suppose you have used margin, but then the investment turned worse.
It means you have a considerable debt obligation to the broker for nothing
because you did not get any profits at all. It is somewhat similar to buying
options with your credit card. Would you do that? No, right? It is the same
thing when you use margins excessively.
Chapter 7: Options Trading
Strategies

The first step toward profitable commodity trading comes with an accurate
forecast of the commodity schedule. The next step is to select the right
business vehicle that will convert the outlook into cash. There are countless
options and combinations of future strategies. For a given market forecast,
some cars will work, and some will not. Should I use options or futures or a
variety? Here are my tips on how to develop your leads in the overall store
selection process.
Let's look at some methods.
First, let's run a two-month COLORLESS cycle for each of the top twenty-
two products. "Impartial" means that we do not try to pay attention to the
name of the products or the news in the media, but that we rely only on the
models of the time cycle. Also, study the primary trend, double and triple
peaks, and other considerations. In case of doubt, the forecast prevails over
all other indicators.
The next step is to reduce the twenty-two forecasts to the promising ones. A
time cycle forecast that shows an abrupt change up to or down is in a
"possible" stack.
The time cycle calculated should be based on at least four individual time
cycles combined, which are sometimes synchronized to produce significant
changes. The forecast gives the duration and direction. They can be done by
spectral analysis and in combination with a neural network if one is tilted or
it will make a simple pair of dividers which estimate length. The question
is, how strong will this movement be? If all the cycles are in sync, look for
a targeted and robust price change. If the cycles conflict, there is more
likely a wide range. Knowing when to expect a failed market is invaluable
for option issuance strategies when collecting option elimination premiums.
Suppose the initial review gives us three market candidates expected to
move powerfully and three who will drop significantly. Now we have two
categories with six markets. We want to eliminate the often-redundant
needs, like soybeans and soybean meal or silver and gold, etc.
For hot candidates, screen out markets that are approaching more massive
peaks or troughs or that might have a hard time breakage through the
apparent barrier. Trendy bull or bear markets that look old and tired have
also been ditched.
We might want to sell option premiums at high prices. Take a look at each
candidate's bonus options to see if they are historically low. If so, turn them
off to sell options.
Finally, if you have more than three candidates in total, refine them again
using a raw time-cycle forecast. Remember that cycles take precedence
over other methods.
Now we have restricted ourselves to various markets. Then, in a fair, use
options analysis software to find the best strategies based on expected
market developments. Compare these options with combinations of options
in the future with combinations of options for trendy markets. To sell
options, we will consider expansion options. Spreads are generally only
used to reduce risk, if necessary.
There can be many verification strategies for each forecast. The computer
does all the preparatory work. Check your strategy selections for each
estimate that represents a trade-off between risk, reward, and simplicity.
Use your experience and intuition in the market to choose the best. In turn,
there is always the best strategy we can use. Keep this in mind when
tapering down your options. When done, we want to have a couple of
potential professions to work together. The few people selected are called
"high probability low-risk trading."
Over time, you will have an entry, exit, and vehicle strategy optimized for
these selected market forecasts. It is the kind of planning you want to do. If
fashion trading improves well, you will want to implement other strategies
that allow you to lock in profits while taking a big step forward. With
options for writing plans, you want to be able to "customize" if things start
to go wrong. If things go well, make a profit, and sell the options if the
premiums drop quickly and make the next strike or monthly series
attractive. It assumes that the weather cycle forecasts always predict a
continuation of the favorable trend.
Keep in mind that store planning is about more than posting forecasts. The
market can go as expected, but you can still lose if you choose the wrong
utility vehicles. Choose the right vehicles and strategies that will allow you
to stay in the market without unnecessary fear but with risk. You do NOT
need to risk, or the market will not pay for your services. Also, the vehicle
must move enough to make a profit without spending protection costs.
Protection can take the form of premium options, stop-loss orders, and
expansion strategies. Aligning forecasting with a plan is an important skill
necessary for successful merchandise trading.
One last point. I often see traders trading "just in case" as the market grows,
or "just in case" the market drops, etc., based on media news and general
fear. If, in the end, you don't have firm faith in the direction of the market or
the lack of it (a good forecast), merely investing money in the right
strategies will eventually cost you a lot of money.
They are going back to the old tripod. You need three legs. The prognosis
must be reasonable and have a real reason behind it. The fact that the news
is telling it is not enough. Then it would help if you had the right business
strategy and the right vehicle. Vehicles, risk, and survival are part of the
vehicle strategy. Finally, it would help if you had faith and confidence to
carry out the plan until it is realized. There is a fine line between
stubbornness and sticking to the program. That's why we need to know
when to break the rules. The rules should only change when it comes to
survival. Other problems are usually noise and your demons trying to come
up with a well-designed program.
Analysis of market movements for options
trading.
Almost every option trader has heard old-fashioned trading that says, "The
Trend is Your Friend." Options trading in the direction of a dominant trend
in the market puts the odds in your favor. Too many newbies to options
trading have lost all of their accounts when buying call options in a
downtrend market and call options in bullish market trends.
So, what exactly is the market trend?
Market trends are like tides. You know the tide is rising when you see the
sea rising more and more on the beach, and you know that it is the tide
going down when you see more and more beaches. Likewise, you know it is
an uptrend when you see major indices like the Dow Jones Industrial
Average or the S & P500 go up and up, and you know it is a downtrend
when you visit the significant indices decrease and more.
Yes, market trends are broad directions in which stocks seem to be moving.
Most commodities' prices will rise more and more in the uptrend, and in the
downtrend, most stocks' prices will move lower and lower.
However, one thing to realize about trends is that trends are "Branch of
motion." It does not mean that the market is only going up every day in the
uptrend, and it does not mean that the market is only going down in the
downtrend.
If you watch the tides and the oceans, the rising tide, the sea does not
continue to flow towards the beach, but it reaches the "Waves." A wave is
higher than the previous one. The same goes for stock market trends. In the
uptrend, you will see days intertwined with fall days. But the old days will
occur more frequently and create new highs after every slight pullback.
This fact often surprises new traders who interpret the bull's first day as a
"bear market." Therefore, novice and veteran options traders alike agree on
"Bull Trap" and "Bear Trap" trades, which are short countertrends that are
misinterpreted as trend reversals. Traders who fall into a trap are usually
surprised when the general trend continues, and they reach a losing position
that never changes.
Recognizing how trends work is only the first step in understanding market
trends. Have you ever concluded that the market is only going in a direction
that your peers disagree? How can two people looking at the same market
come to different conclusions about a market trend?
The complexity of recognizing market trends comes from the fact that the
market can be in all three ways on the same day at any time.
The market may be in a downtrend for daily traders, but on the same day, it
may be in an uptrend for a swing trader and a long-term neutral investor.
How is it possible?
There is not just one "market" condition, but many market conditions,
depending on your trading period! The failure to recognize that the market
trend is different for different trading horizons and investment goals have
led to all the unnecessary arguments about the market trend on TV.
If you have charting software, you might be surprised how often you will
see a completely different chart shape on the same index or stock.
Depending on the period you are looking at, 1 Minute Chart, Daily Chart,
Weekly Chart, or Monthly Chart, each seems to be talking about something
different.
A chart that looks extremely bearish on a 1-minute table can look
extraordinarily healthy and bullish on the daily chart. As such, trend
analysis requires, above all, an understanding of the exact time frame in
which you are trading.
Recognizing the exact period you are trading is an essential prerequisite in
options trading where the contract options and positions you have bought
are time-sensitive. Yes, options positions do not last forever, and all options
strategies have an ideal time frame that maximized returns.
For example, if you trade options daily and write or buy votes at the end of
a trading day to close them for profit, the market trend that you should be
concerned about would be the most commonly identified intraday trend
with the minute cards. In this case, if the market goes up or down in the
long run, it no longer affects your trading. The world might be whipping the
whips, but if your minute cards point to a bear day, then a teddy bear is the
direction you make money.
If you are trading with a covered call option, you may want to write call
options on a relatively crabwise stock on the daily scale and change the
market in the normal range if you're going to avoid giving up. Actions.
Conversely, if you buy LEAPS options for the long term, you may be more
concerned with the long-term market trend than with too much daily
instability.
Chapter 8: Top Trader Mistakes to
Avoid in Options Trading

Options trading is an entirely different animal as compared to traditional

stock market investing. Let's think for a moment about the common wisdom
dispensed about stock market investing. The general idea is to buy and
hold, keeping your investments for a very long period. It's expected that you
keep your assets until retirement. People do various strategies, such as
rebalancing their portfolio to match their goals, diversification, and dollar-
cost averaging.
Options trading is a different way of looking at things. First of all, even if
you are a day trader or engaging in activities like swing trading, the general
goal, when it comes to stocks, is to buy when the price is at a relatively low
point and then sell at a high price. In reality, the day trader, the swing trader,
and the buy-and-hold investor are no different. Buy-and-hold investors
think that they are unique and above everyone else; they are, in reality, just
trying to make money off the stock market too. The only real difference,
unless you are a dividend investor, is the time frame involved. So, your
buy-and-hold investor will hold the stocks for 25 years, and then they will
start cashing them out for money. A swing trader makes money in the here
and now.
Going into a Trade Too Big
One of the mistakes that people make when they start options trading is
making their positions too big. Since our options don't cost all that much
relative to stocks' prices, people aren't used to trading in small amounts.
Even people who are not rich or anything thinks about the stock price and
how much 100 shares cost. This idea can set up people for trouble. The
temptation will be there to move on a large number of contracts when you
start making your trades if you have the capital to purchase or sell them. It
can get people into trouble. It's not the dollar amount that's a concern, but it
could get you in a position where you're not ready to act as quickly as you
might need to depend on the situation. So, if you find trade and decide to
sell 20 contracts if the business goes south, trying to buyback those 20
contracts might be problematic. Or you might end up buying a bunch of call
options and have trouble getting out of them on the same day. It's better to
have a few different small positions with the options than to have multiple
functions when they are a large number. Remember that options prices
move fast. You don't want to over-leverage your trades and be in a place
where you can’t find a buyer to pick up all 10 or 20 contracts.
Not Paying Attention to Expiration
This description is probably one of the most common mistakes made by
beginning traders. WE consider the expiration date as one of the most
critical factors as you enter your trades. And once you’ve entered a
business, you need to have the expiration date of the options tattooed on
your forehead. It is something that is not amenable to being ignored. First of
all, choosing the expiration date when entering the position is just as
important as picking the option's strike price. A beginner must focus too
much on the price of the opportunity and the price-setting for the strike. The
cost of the opportunity and the strike price is essential; the expiration date is
also crucial.
Buying Cheap Options
There is a saying that says you get what you pay. There are reasons to buy
out of the money options sometimes, but you shouldn’t go too far out of the
money. Unfortunately, many beginning traders fall into the temptation of
going far out of the money for the sake of buying a low-priced option. The
problem with these options is that even though out of the money options
can make profits. If they’re too far out of the money, they only aren’t going
to see any action. So, there’s no sense buying a cheap option just because
you can pick it up for $25. You don’t want to be sinking your money into
options where a massive price move would be necessary to earn any profits.
It’s fair to buy options that are near the capital. Opportunities close to being
in the money can be very profitable even though they are out of the money.
So, if you’re looking to save a little bit of money when starting your
investing, that is always something to consider. But to make profits, the
basic rule is there having to be some reasonable chance that’s the stock
prices going to move enough, to make the option you purchase going the
money.
Failing to Close When Selling Options
If you want to remember just one thing from our discussion about selling
options, whether it’s selling put credit spreads or naked puts, you should
keep in mind that it’s always possible to exit the trade. The way that you
leave the employment when you sell to open is you buy to close. You want
to be careful about doing this because it’s too easy to give in to your
emotions and panic, and prematurely exit a trade. However, you need to be
aware at all times of the possibility of needing to close the business. Riding
out an option to expiration is a foolish move unless it’s evident that it’s
going to expire out of the money.
As a part of this problem, new options traders often come to the market,
focusing on hope as a strategy. When it comes to investing, hope is not a
strategy. Hope is something that belongs to casino slot machine games.
When you’re training options, you should make as rational a decision as
you can make it given the circumstances. So, when the expiration date is
closing, and the trade will not be profitable, don’t give in to the temptation
to wait around for a reversal in direction.
For those who are buying options to open their positions, this is the worst of
all possible strategies. Remember that when you buy to open a part, time
decay is working against you at all times. So, unless the stock is moving in
the right direction, there isn’t a reason to hold the option. For sellers, time
decay works in your favor. But there can be situations when it’s just smart
to get out of the trade.
Let’s look at a couple of examples.
If you sell to open an iron condor, and for some reason, the stock has a
breakout to one direction or the other, it’s better to get out of the iron
condor now. We aren’t talking about a one or two-dollar change. If the stock
goes in such a direction that one of your options goes in the money by a
small amount, that type of trade is worth waiting out to see what happens.
But if there is a big break to the upside or the downside, it would be foolish
to stay in the trade. For one thing, there would be at risk of assignment, but
the most likely situation is that you’re just going to lose the maximum
amount of money.
But if you have a good strategy and only get involved with options with a
high level of open interest, almost no matter what the situation is, you
should be able to buy and sell that option pretty quickly.
Trading Illiquid Options
This term is such an important issue I will repeat it. Liquidity is essential
when trading options. What liquidity means is the ability to buy and sell
financial security quickly and turn it into cash. It’s not enough to like the
company to start trading options on the company. If the open interest for a
vote is only 8, 10, or even 45, that will throw up obstacles when you need to
move to get rid of an option fast. The largest companies generally have
liquid options, but you should always check. Index funds also have liquid
options. Avoid any companies that have small open interests. The only way
that you would trade when the genuine part is small is if the probability of
losing out on the trade is minuscule. So, besides the strike price, share price,
an expiration date, you need to be looking closely at open interest. You
don’t want to get in a situation where you cannot exit a position.
Not Having a Trading Plan
One of the best things about options trading is that it’s straightforward. So,
you have this relatively low-cost way to get involved in the stock market,
and it’s also relatively easy to manage on your own. These are positives
generally speaking, but there is a downside. That downside is the fact that
it’s so easy people just start trading on a whim. Make no mistake; just
because it’s easy, that doesn’t mean the money and potential losses are not
real. So, you need to treat this with the utmost seriousness. Take some time
to develop a trading plan. The trading plan should include many of the
things we mentioned earlier, such as the level of profit that you’re willing to
accept on any trade. It should also set up a limit used to determine when to
exit your positions. But I forgot to mention one crucial thing. Your trading
plan should also pick out a maximum of five financial securities you will
focus on when trading options. In my opinion, doing more than five
financial guarantees is more than your mind can handle. You should be
keeping close watching over each of the companies for index funds that you
were trading. If you have more than five, that isn’t going to be possible.
And as I’ve said before, one of the things about options trading is that the
pricing can move very quickly.
So, if you’re trying to spread your attention in 20 different directions,
you’re probably going to lose money because you simply cannot keep track
of everything.
You should also include some diversity in your trading plan. When you pick
out the five securities you will use for the following year to trade your
options, don’t pick them from the same sector. You can choose a couple
from the same industry but be sure to have a different couple.
Chapter 9: Volatility in the
Markets

As an options trader, you need to learn about the variables that can affect an
option's price and the ins and outs of implementing the right strategy. A
stock trader who is familiar and good with predicting future stock price
movement might think that shifting to options trading is easy, but it’s not.
There are three changing parameters than an options trader must deal with –
the underlying stock’s price, the time factor, and volatility. A change in any
of these factors will affect the cost of the option.
The price of an option is also called the premium, and the pricing is per
share. The option seller receives the tip, which gives the buyer any right
that comes with the option. The buyer is the one paying the information to
the seller, and they can exercise this right or just allow the opportunity to
expire without any worth in the end. The buyer is obliged to pay the
premium whether he exercise the option or not, which means the seller will
keep the tip in the future, no matter what.
Let’s have a simple example. A buyer paid a seller for purchasing rights to
stock ABC for 100 shares and a strike price at $60. The contract expires by
June 19. If the option position becomes profitable, The buyer exercises the
option. If it does not seem to bear profit, the buyer can just let the contract
expire. The seller then keeps the premium.
There are two sides to the premium of an option – its intrinsic and time
value. You can compute an option’s intrinsic value by getting the difference
between the strike price and stock price. For the call option, it is a stock
price minus strike price. For the put option, it is the strike price minus the
stock price.
To value an option, at least theoretically, you will need to consider multiple
variables such as the underlying stock price, volatility, exercise price, time
to expiration, and interest rate. These factors will provide you with a
reasonable estimate of the fair value of an option that you can incorporate
into your strategy for maximum gains. We will only be discussing the time
and volatility factors in detail. The primary goal for option pricing is to
compute the possibility that a particular option will be ‘in the money’ or
exercised by the time it expires.
The value of puts and calls are affected by underlying stock price
movements straightforwardly. That means when the price of a stock rises,
there should be a corresponding rise in call value as well since you can
purchase the underlying stock at a reduced price compared to the market’s,
while there is a price decrease input. Conversely, there should be an
increase in the value of put options when the stock price dives and a
decrease in the cost of call options since the holder of the put option has the
chance to sell the stock at above-market prices. This pre-set price you can
sell or buy is called the strike price of the vote or its exercise price. If the
option’s strike price gives you the advantage of selling or buying the stock
at a cost that gives you immediate profit, that option is considered ‘in the
money.’
With the underlying stock price and strike price out of the way, we can now
discuss the other two major factors that can significantly affect an option's
price – time and volatility.
Time
Time is money. This adage still holds true and even applies to options
trading. Thus, understanding how the Greek theta works are essential and
affect the pricing of options. If you still remember, the Greek letter theta
represents the effect of time decay on the value of a chance. All options,
call or put, lose their weight as the contract expiration nears, but the value
loss rate of an option contract is a function of the amount of time remaining
before it expires.
The irrelevant part of the value of an option is the only factor affected by
time decay. That means an option that’s ‘in the money’ will have the same
intrinsic value until the contract expires. For example, stock trades at $3, a
call for a 30-strike price, will retain its inherent value of $3 from the start
until expiration. Still, any deal that exceeds $3 is considered an extrinsic
value and will be affected by the time decay.
Theta represents the loss of value over time, so a negative value typically
represents it. And since time is irreversible, time only decreases and never
stops or goes back. For example, assume theta is equal to -0.28; the
corresponding option contract loses $0.28 in value daily.
However, theta does change over time. Let’s assume that a stock’s price
remains unchanged, and a $2.75 ‘out of the money’ option with a -0.15
theta will have a reduced value of $2.60 by the following day. The theta
then may only be set to -0.12, which means the option's cost will be down
to $2.48 the next day if stock prices remain unchanged. The option’s value
will gradually approach zero while it’s still ‘out of the money.’
You also need to remember that theta's effect becomes more and more
apparent as the expiration nears. You should anticipate a rapid acceleration
of the time decay within the remaining few days before the contract
expires.
Options that are ‘at the money’ possess the highest value, extrinsically.
That’s why these options have their thetas set to highest. Deep options ‘in
the money’ or ‘out of the money’ have their thetas lower because ‘at the
money options,’ they have lower extrinsic values. And the less extrinsic
value an option has, the less they will lose as time decays.
The only way for the theta position to be favorable is to have short options.
It is because short option positions work best when the market is stable.
Wide swings both up or down hurt option positions, and only time will help
as it passes by. Other strategies also benefit from time’s passage, such as
neutral strategies, e.g., long butterfly. The less time there is before the
contract expires, the less probability for the underlying stock to rise or go
down and reach unprofitable territories.
There will always be a trade-off between market movement and time for
every option position. It’s impossible to benefit from the two at the same
time. If time is helping your option position, it will be negatively affected
by the price movement. The same applies the other way around. Revisiting
our Greeks, gamma (or price movement) is theta’s flip side. A favorable
theta position (position benefitting from time’s passage) will incur a
negative gamma. Conversely, a negative theta position (function negatively
affected by time’s passage) will incur a positive gamma.
Volatility
Volatility affects most investment forms to some degree, and as an options
trader, you should be familiar with this element and how it affects options
pricing. By definition, volatility is the tendency of something to fluctuate or
change significantly. In general investment, volatility refers to the rate at a
financial instrument’s price rises or falls.
A low volatility financial instrument has a relatively stable price.
Conversely, a high volatility financial instrument is prone to dramatic price
changes, either way. In general, we measure financial market volatility. So,
when the market becomes difficult to predict, and prices keep on regularly
and rapidly changing, the market is volatile.
Volatility can affect option pricing significantly. Many beginning options
traders tend to ignore the implications, which can lead to substantial
investment losses.
Before entering any kind of trade, options trading included can be useful to
know its volatility. For options, volatility is a crucial factor in how they are
valued and priced. Two volatility types are relevant – historical volatility
and implied volatility.
Historical Volatility
Historical or statistical volatility measures the price of the underlying
option, so it depends on actual and real data. Let’s refer to it as HV for the
rest. HV shows how fast the stock price has moved. The higher HV is, the
more the stock price has moved during a specific period. So, when a stock
has a high HV, the price is more likely to move, at least theoretically. It’s
more of a future movement indication and not a real guarantee.
On the other hand, a low HV might indicate the stock price hasn’t moved
much, but it might be going in one direction steadily.
You can use HV to predict somewhat how much a security’s price will
change based on how fast it changed in the past, but you can’t use it to
indicate an actual trend.
HV measurement is over a certain period, such as a week, month, or year
and you can compute it in various ways.
Implied Volatility
Options traders should be aware of implied volatility or IV. Whereas HV
measures a security’s past volatility, IV is more of an estimate of its future
volatility.
IV is a projection of how fast and how much the stock price is likely to
change in price. Many beginning traders focus on the profitability
(difference in strike price and stock price) and the contract expiration when
considering an option’s worth, but IV also plays a significant role.
You can determine an option’s IV by considering factors such as the stock
and strike prices, length of time before expiration, current interest rate, and
HV. Since an option’s IV may indicate how much the stock will change in
price, the price gets higher when the IV itself increases. Because
theoretically, you get more profit when there are dramatic movements in the
underlying stock's cost. An option's value can also change even when the
stock price remains the same, and its IV usually causes this.
For example, ABC is about to release a new product and speculations build-
up that the company is about to announce it. The options’ IV for stock ABC
can be very high since there are expectations of significant movement in the
underlying stock price. The announcement might be valid well, and the
stock price might go up, or the audience will be disappointed with the new
product, and stock prices can drop quickly. In this scenario, the stock price
might not move since investors will be waiting for the press release before
buying or selling stocks. There will then be increases in extrinsic value for
both puts and calls, rather than movement in the stock price. It is one way
that IV can affect option pricing.
If you’re betting that a stock’s price will dramatically increase after that
announcement, you may purchase at the money’ call options to maximize
probable gains for that increase. If ABC announced and were received well,
causing the stock prices to shoot up, there would have been significant
gains in the call options’ intrinsic value.
Chapter 10: Trading Psychology
Fear
Fear can be one of the most dangerous weapons that we use against
ourselves. It holds us back from the things we want and makes us push
away the things that we need. If you let fear control your life, you’ll never
really be in charge of any of your thoughts or emotions. Fear can make us
nervous, grumpy, and even sick. Almost as bad as this, it can make us lose a
ton of money.
Those going into options trading need to make sure that they don’t allow
fear to hold them back. Though you have to be cautious, you should
understand that you can’t be too afraid of making a move you might trust.
Know the difference between being smart and safe and blinded by worry.
Looking at the Analysis
It’s essential to understand how to perform a proper technical analysis to
determine the value of a particular option and make sure you don’t scare
yourself away with any specific number. You might see a dip in a chart, or a
price projection lower than you hoped, immediately becoming fearful and
avoiding a particular option. Remember not to let yourself get too afraid of
all the things you might encounter on any given trading chart. You might
see scary projections that show a particular stock crashing, or maybe you
know that it’s projected to decrease by half. Make sure before you trust a
specific trading chart that you understand its development. Someone that
wasn’t sure what they were doing might have created the display, or there’s
a chance that it was false as a method of convincing others not to invest.
Always check sources, and if something is particularly concerning or
confusing, don’t be afraid to run your analysis as well.
Hearing Rumors
If you hang around with other traders, maybe even going to the New York
Stock Exchange daily, there’s a good chance you are talking stocks with
others. Ensure that any “tips” or “predictions” you hear are all taken with a
grain of salt. Tricking others into believing a sure thing is right about
different stocks and options can sometimes dapple into an area of legal
morality. However, it’s crucial to make sure you don’t get caught up with
some facts or rumors twisted.
You should only base your purchases on concrete facts, never just
something you heard from your friend’s boyfriend’s sister’s ex-broker.
While they might have the legitimate inside scoop, they could also be
completely misunderstanding something they heard. Before you go
fearfully selling all your investments from the whisper of a stranger, make
sure you do your research and make an educated guess.
Accepting Change
As animals, we humans are continually looking for a constant. We
appreciate the steadiness that comes with some aspects of life because it’s
insurance that will remain the same. Sometimes, we might avoid doing
something we know is right just because we are too afraid to get out of our
comfort zone. Make sure that you never allow your fear of change hold you
back.
Sometimes, you might just have to sell an old stock that has been gradually
plummeting . Maybe you have to accept that an option is no longer worth
anything, even though it’s been your constant for years. Ask yourself if you
are afraid of losing the money or just dealing with the fear.
Greed
Greed can be one of the most significant issues that specific traders incur.
The reason we’re doing this in the first place is for money, and some people
think that’s greedy enough. While we do need money to feed our family,
pay off debt, and just have some cash to live from day-to-day, there are
other income sources than stocks. Still, you get the opportunity to make big
money only from the money that you already have. If you are good enough
at trading, you can even make it your full-time job.
To ensure that you are trading for the right reasons, always ask yourself
questions. Why do you need to take such a significant risk? Is it worth
sacrificing money that could go towards a vacation? Are you making these
decisions to feed your family, or are you doing it so that you can go on an
indulgent shopping spree?
We indeed deserve to have some “me time,” and we all should spoil
ourselves every once in a while, as we can’t depend on other people to
always do that for us. However, greed can be a downfall if we’re not
careful.
Know When to Stop
Knowing when to stop can be the most challenging part of life. It’s so hard
to say no to another episode when your streaming service starts playing the
next one. How are we supposed to say no to another chip when there are so
many in the bag? Sometimes, if you see your price rising, you might just
want to stay in it as long as you can. In reality, you have to make sure that
you know when it’s time just to pull out and say no.
If you wait too long, you could end up losing twice as much money as you
were expecting to make. It is when the gambling part comes in, and things
can get tricky. Ensure you are well-versed on your limits and are not putting
yourself in a dangerous position if you don’t trust your self-control.
Accept Responsibility
Sometimes, we don’t want to have to admit that we’re wrong, so we’ll end
up putting ourselves in a false position just to try to prove it to someone,
even just ourselves, that we were right. For example, maybe you told
everyone about this significant investment you were going to make, sharing
tips and secrets with other trader friends about a price you were expecting
to rise.
Then, maybe that price never rises, and you have just the same amount you
originally invested. You were wrong, but you are not ready to give up yet.
Then, the price starts rapidly dropping, but you are still not prepared to
admit you are wrong, so you don’t sell even though you start losing money.
You have to know when to accept responsibility and acknowledge that you
might have been wrong about an individual decision.
Pigs Get Slaughtered
It is a common saying in the stock market world. It means that pigs, anyone
who becomes too greedy, will get destroyed by the stock market because of
their blind desire to make money. Make sure that you are not a pig. To
avoid always wanting more and having a mentality that puts pressure on
doubling profits, make sure you keep track of just how much you’ve been
making.
This record might include just some notes in your journal about how much
money you’ve made so far. You’ll want to continually look at how much
money you’ve made to make sure that you keep perspective on how far
you’ve come, rather than continuously looking to the future and worrying
about how far you have to go. Remember that any sort of considerable
fortune takes time to build.
Though you might hear some stories about people that made thousands
overnight from a great tip, remember that this isn’t common. You very well
could be the next person to get a considerable sum of money from a small
investment in a quick way, but you can’t allow yourself to bank on this.
Discipline
Having a good knowledge and understanding of different stocks and options
is essential, but discipline might be the most critical quality for a trader. Not
only do you have to avoid fear and greed, but you have to make sure to stay
disciplined in every other area.
On one level, this means keeping up with stocks and staying organized. You
don’t want just to check things every few days. Even if you plan on
implementing a more comprehensive strategy for your returns, you should
still keep up with what’s happening in the market daily to make sure that
you are not omitting anything.
On a different level, you have to stay disciplined with your strategy. Decide
where personal rules might bend and how willing you are to go outside your
comfort zone. While you have to plan for risk management, you should also
plan that things might go well. If the price moves higher than you expected,
are you going to hold out, or are you going to stay strict with your strategy?
 Stick to Your Plan
If you don’t stick to the right plan, you might end up derailing the entire
thing. You can remember this element in other areas of your life. You can
be a little loose with the plan, but if you go off track too much, what’s the
point of having it in the first place? If you are too rigid, you could
potentially lose out on some great opportunities, but also loose can make
everything fall apart.
Prepare for Risk Management
Aside from just knowing when to pull out to avoid being greedy, you also
need to make sure that you are doing it so you don’t end up losing money.
Have plans in place for risk management, and make sure that you stick to
these to ensure you won’t be losing money in the end.
Determine What Works Best
The most important aspect of a trading mindset remembers that everyone is
different. What works best for you could be someone else’s downfall and
vice versa. Practice other methods, and if something works for you, don’t
be afraid to stick to that. Allow variety into your strategies, but be
knowledgeable and strict with what you cut out and what you let in.
Identify your strengths and weaknesses to grow your plan continually and
always determine how you can improve and cut out unnecessary losses.
Things That Distinguish Winning and Losing
Traders in Options Trading
As an options trader, you need to know how to calculate and find the break-
even point. In options trading, there are two break-even points. With short-
term options, you need to use the commission rates and bid spread to work
out the break-even point. It is if you intend to hold on to the options until
their expiration date.
If you seek short-term trade without holding on to the options, find out the
difference between the asking price and the bid price. This difference is also
known as the spread.
Chapter 11: Iron Condor
The Logic Behind the Iron Condor
The iron condor combines a put credit spread and a call credit spread into a
single trade. I know, it sounds incredibly complicated. Now we are talking
about four options in a single business. But the truth is that it’s not that
complicated.
So, to set this up, you estimate what the range of the stock is. You want to
look over a reasonable time and then determine the lowest share price the
stock will hit. This observation doesn’t predict what will happen in the
future, but it does give us a boundary point that we can use. It is all about
playing the probability game. So, we estimate the probability that the stock
will stay within some range of values.
Now we do the same for the upper bound. If a stock price doesn’t change
very much, it will be ranging between these two values without having any
breakout.
It is the secret of the success of the iron condor. The first step to set it up is
to sell a call option at a higher boundary price. Then, we sell a put option at
the lower boundary price.
Selling these two options gives us a net credit.
The iron condor is another limited risk strategy, though. To minimize the
risk, we are going to buy two options that lie on the outside range. You will
buy a put option with a lower strike price than the put option that we sold.
You can see now that we have set up a put credit spread.
Next, we buy a call option with a higher strike price than the call option that
we sold. So, this sets up a call credit spread.
But when you combine the two into a single trade, you set up an interior
boundary for the stock to move around in.
Suppose that a stock is trading at $100 a share. We could sell a call option
with a strike price of $105. Then we could sell a put option with a strike
price of $95. It sets up our profitability zone. Provided the stock stays
within the range of $95 to $105 per share until option expiration, we are in
a good situation. To mitigate the risk, we buy two options with outside
strike prices. We could go with a call option with a strike price of $110 and
then buy a put option with a strike price of $90.
The strategy on these is to wait and hope the stock price doesn’t break out.
If it doesn’t, you can let the options expire, and you will earn a profit from
the net credit you have received. The net credit is going to be given by:
Credit received selling high strike put + credit received selling low strike
call – debit paid for high strike price call – debit paid for low strike price
put.
There is some argument about whether or not you buy or sell an iron
condor, but people arguing about this are confused. You are selling an iron
condor. It is because you are selling to open, and you receive a net credit for
the trade.
If things go wrong, that is, the stock does have a breakout one way or
another, you will have losses but be capped. If it’s not working out, you can
always buy back the iron condor to close the position.
As with other trades, if you are risk-averse and worried about something
fantastic happening with the stock on the expiration date, you can always
buy back the iron condor to close the position early. Remember that this
move will cut down on your profits, which are limited already by the credit
received for entering the class.
When to use an iron condor
You want to use an iron condor when there is no expectation for stock to
move very much. Some people pick options with shallow delta values like
0.16, so they are far outside the money. It can give the store a more
comprehensive range of values to oscillate around in, but you will make
smaller profits per option contract. That said, it increases the probability of
earning a profit. So once again, we have a tradeoff.
You will not want to put an iron condor on when the stock has a high
amount of implied volatility. High implied volatility will mean that there is
a higher probability that the stock will move outside one of the boundaries
that you have setup with the iron condor.
One situation that definitely would not go with an iron condor is before an
earnings call. You do not want to have an iron condor on a stock before the
earnings call. If the stock rises to a new range, then it might be possible to
use an iron condor to earn income off the store after it has settled down.
You might choose low volatility stocks for iron condors. For example, a
relatively stable supply like IBM (outside of earnings season) could be a
possible choice. But like any options trade, you will want to see what the
open interest is on the options you are considering for your iron condor.
Why use an iron condor
Traders use iron condors because it’s a limited risk strategy that can
generate a regular trading income. Selling an iron condor is analogous to
selling a put credit spread in that you are going to need a certain amount of
collateral to cover the trade. So, while the iron condor is in your account,
the money you use to protect it will be held until you close the position, or
you let the options expire, assuming that you don’t incur losses because the
share price remains in the range that you’ve set up for the trade.
Let’s consider a real-world example. The losses are not necessarily equal. In
this example, we think of an iron condor on Facebook with strike prices of
$192.50 and $212.50. It is quite a wide range; it’s wide enough that it might
survive the upcoming earnings call. Maximum losses occur when the share
price goes above the high strike price call or below the low strike price put.
In this example, the high strike price call is $215. The short strike price set
is $187.50.
To the upside, if the share price rises above $215, there is a maximum loss
of $55.
On the downside, if the share price goes below $187.50, the maximum loss
is $305. The collateral required is always the larger of the two potential
losses, so to enter into this trade, you’d have to deposit $305 into your
account.
You can see that if the share price stays in between the inner strike prices,
the maximum profit of $195 (the credit received for selling to open the
position) is realized.
The assignment's risk is the same as for a put credit spread or calls credit
spread – it's not something you have to worry. Provided there’s an assigned
assignment that is all handled automatically by the broker, and the stocks
will be quickly bought and sold without you even noticing.
So, the credit received on a per-share basis is $1.95. The upper put strike
price gives the breakeven point on the downside minus the credit received,
$192.50 - $1.95 = $190.55. The upper breakeven point is provided by the
lower call strike price plus the credit received, so in this case, that would be
$212.50 + $1.95 = $214.45.
For the strike prices, you choose out of the money values. An iron condor is
considered a non-directional strategy. You only care that the share price
stays within a given range of values – you don’t care if it goes up or goes
down within that range.
Options Strategies
There are many choices available to options traders to either profit from
stock moves or earn income. Different strategies are used in different
situations. If you want to become a successful options trader, you need to
memorize which trades are used in which position.
Some traders specialize in only doing one or two types of trades. So, for
example, a trader might only go along with calls and puts. That is a simple
strategy that is easy to understand, but there is also the highest risk of
entering a losing trade when following that type of procedure.
However, among those, traders tend to specialize. So, there are traders who
will do nothing but iron condors, while other traders will do nothing but put
credit spreads. This approach can have its advantages because you will
become an expert on one type of trade. When you become an expert on a
kind of marketing, you will have a higher probability of success.
It will give a summary of the types of trades for different situations.
Non-directional Trade but stock not moving much: Used for a store
expected to range between two values. Use the iron condor—stock
not expected to move by a large amount.
Stock will move by a large amount in a non-directional trade: Use
strangles and straddles.
You think a stock will go up, and you want maximum profits: Buy a
call option.
You think a stock will go up, but you want to limit risk and are
willing to limit profits to cut risk: Buy a call debit spread.
You think a stock will go down, and you want maximum profits:
Buy a put option.
You think a stock will go down, but you want to limit risk and trade
limited profits for your protection: buy a put debit spread.
You want to earn income but think the stock will go up or stay about
the same: Sell a put credit spread.
You want to earn income but think the stock will go down or stay
about the same: sell a call credit spread.
 You own shares of stock and want to earn money against them: Sell
covered calls.
You have cash on hand and want to earn money without buying stock: Sell
protected puts against the capital.
Chapter 12: Common Beginner
Mistakes

Many online discount brokerages provide potential investors with the

means to trade in stocks at the click of a button. This easy access to
investing is excellent as people now feel more encouraged to try their hand
at investing in the markets rather than depend on fund managers.
However, there are numerous pitfalls that a first-time investor has to watch
out for before attempting to choose stocks.
Rushing in Headfirst
The fundamentals of investing are simple – buy when low and sell when
high. However, you have to be aware that what you might consider high
might be regarded as inadequate by another investor. Everything depends
on different metrics and ratios in the financial markets, so different
conclusions can be made from the same market information.
What you have to do is train yourself to study the basics. You should
understand some terms such as dividend yield, book value, and price-
earnings ratio while learning how to calculate them and their weaknesses.
There are online stock simulators that you can use to practice and gain
trading skills before delving into the real thing. Sure, the actual market is
more complicated, but you will be better positioned to understand what is
happening and react.
Using Brokers Who Charge Too Much
When you are investing, it is crucial to cut down your costs as much as
possible. While you do not want to be cheap and cut corners, some brokers
will charge way more for their services than others. You can choose to go
with another option that will save you some money.
You do need to do some research ahead of time. Just because a broker
charges less doesn’t mean that they are the best ones for you. Many brokers
will charge you a fair rate, but make sure that you look at some of the
features that each one offers and pick one that will provide you with the
results you would like.
As you can see, some common mistakes that beginners can make will cost
them a lot of money on options trading. But when you learn about these
mistakes and how to avoid them, you have a head start to make money with
your options trading
Investing in Penny Stocks
It may seem like a good idea to invest in cheap, penny stocks. With penny
stocks going for as little as $1 per share, you might be tempted to buy more
of them instead of blue-chip stocks going for $50 per share. An increase of
$1 in penny stock share price might double your money, but the volatility
associated with them makes them a poor choice.
Penny stocks can go up rapidly, but they can also crash at any time, not to
mention their exceptional susceptibility to illiquidity and manipulation. It is
challenging for an investor who is still learning to obtain credible
information about penny stocks, so steer off penny stocks until you have
adequate market knowledge.
Now that you know all you need to know about the basics of investing let’s
see how you can go about creating an investment plan.
Buying an Option with High Volatility.
Another mistake that you can make is to purchase options in a time of high
volatility. During these times, option premiums will often get overpriced,
and if you are buying an alternative, you could still lose. There are times
when the stock can move sharply in line with what you are expecting; a
significant drop in the implied volatility could make the price of the option
fall quite a bit, resulting in you losing money.
You want to make sure that you are purchasing options when the price is
not so volatile. It will ensure that the option's price or the stock doesn’t go
down further than you expected and that you will not pay too much for your
options premium.
Basing Your Investments on ‘News’
Maybe you’ve heard of a revolutionary new product or a rumor of an
investment that offers earth-shattering returns and have decided to base
your investments on such information. For a first-time investor, this is a
horrible movie. Sure, you might hit the jackpot and repeat the trick, but the
worst-case scenario is that you will be investing in a false rumor or putting
your money in late.
The best investments for beginners are companies that you are familiar
with, as this will make it easier for you to spend time researching that
particular investment option.
Investing Your Cash Reserves
According to market studies, you will earn a better return on investment if
you put your cash into the market in bulk instead of in small increments.
However, do not take this to mean that you should invest to the point where
you don’t have any cash reserves left.
Whether you are a trader or an investor who buys and holds, investing is a
long-term game that requires maintaining cash for opportunities and
unforeseen emergencies. If all you have is cash to invest with no emergency
reserves, you will probably not be ready to invest in the market seriously.
Putting All Your Eggs in One Basket
It is unwise to invest all your capital in one specific market, be it
commodities, Forex, bonds, or the stock market. As a first-time investor
who does not have adequate know-how of market operations, it is better to
diversify and risk small amounts of capital at a time. You may choose to put
all your investment in one vehicle once you are familiar with the markets.
However, this is still not advisable.
There will be times when you will make a bad trade, no matter how much
time you have spent in the options market. An experienced trader knows
that they should never place all of their bets on a single trade. If you do this
and the business goes wrong, you will lose a lot of your capital, all in one
place.
Professional traders know that they should spread out their risks across at
least a few different trades so that they won’t lose all their money in one
place. It is best to keep no more than five percent of your available capital
in one trade to keep things safe. So, if you have $10,000 to invest in total, it
is best to never enter into a transaction where you will risk losing over $500
if things go wrong. If you can follow this practice, it will ensure that losing
on occasion can happen without eating up all of your cash reserves. If you
do not follow this advice, you can easily place too much of your money into
one trade, and if it goes wrong, you will lose a lot of your capital.
Not Cutting Out on Your Losses When Needed
A good saying that you should stick with when it comes to options trading
is to cut your losses short and let the winners run. Even those working in
options trading will find that one of their trades has poorly gone on
occasion. The difference between the novice and a more experienced trader
is that the professional trader knows when they have lost and should get out
of the market. Many beginners keep holding on to trades that are losing in
the hopes that these options will bounce back, and they will make money.
The issue with this is that when they hold onto these options, they have onto
them a lot longer and lose a big chunk of their capital. Rather than losing a
lot of money, an experienced trader will know when to admit that they were
wrong, and they will pull out early when the losses are low. Then they will
still have some capital leftover to spend on another options contract.
Cutting your losses in time is crucial, especially if you are working with a
directional strategy, and you make the wrong call. The most practical thing
that you can do is exit your losing position once you notice that it is moving
against your expectations, and it erodes over two to three percent of the
total capital you want to earn.
If you like to use the spread-based strategies, your losses will always be
limited when you have made a wrong call. However, no matter what system
you are using, once you notice that your trade will not profit you well, it is
time to cut off the losses and choose to reinvest in a different position to
bring in better profits.
Failing to have an exit plan
You should have an exit plan for every one of your trades. I prefer to have
an overall exit plan and have every business follow the same basic rules. An
exit plan will help you minimize your losses. It goes back to the problem of
beginning traders holding onto an option until the expiration date. That is
more likely to happen if you haven’t formulated a strategy to exit your
position. You can help keep a notebook to record all your trades and write
down each work's rules. That way, you can refer to it when things are
fluctuating about, and possibly putting you into a situation where there are
catastrophic losses. Now, of course, they aren’t disastrous, assuming that
you are reasonable in the number of options contracts that you trade in a
single move. But you want to have some kind of rule to exit the trade if the
losses exceed a certain amount. Of course, sometimes, you’re going to
make a mistake. So, in other words, if you have some kind of rules such as
you are going to sell to close if the loss reaches $ 50, something I can
guarantee is at some point, you are going to do that, but the stock is going
to rebound, and if you had stayed in, you would’ve made $ 200 or
something like that. You just have to accept that, sometimes, if you will
miss out on situations like that. But on average, that’s not likely to happen.
So, if an option is going south and you have a $ 50 exit rule, it’s a good idea
just to follow it and live with the consequences.
A similar situation happens on the other side. So, as I suggested, I maintain
a $ 50 profit rule. Whenever I’ve invested in options, and it reaches 50
dollars per contract profit, I exit the trade. There are going to be times when
the profit could’ve been $ 100 or even $ 200. So, when you have a rule like
that, you will miss out on some upside once in a while.
Chapter 13: Money Management
What Is Money Management?
Money management is how you handle your finances, your savings, your
expenditure, and investments. It is making sure you can survive a financial
crisis. It means planning a budget for your long-term goals and making
investments to achieve your goals successfully. When you manage your
money, you will be able to make wise purchases. Otherwise, you will
always complain of having less money no matter how much your income is.
It is known as investment management.
Money management is more about risk. When you have better money
management skills, you will reduce the risk. You must understand all the
areas of money management to be able to avoid any risks. Plan with a
negative bias, always asks yourself "what-if" scenarios, act, and technique.
When budgeting for money management, make sure you are spending less
than what you save. Excellent money management will help you monitor
your spending before going beyond your budget. By doing this, you will
secure your savings.
You will be able to invest if you make the right decisions. Avoiding taking
on more risks will help you reach your financial goals. The strategies you
use in your investments play a significant role in your success. When you
decide to invest, the first important thing to focus on is the risk involved,
and you can avoid it. Here are some of the basics, advantages, and
disadvantages of money management.
The Basics of Money Management
Money management is a broad term that involves solutions and services in
the entire investment industry. You can now have a wide range of resources
in today's market and also phone applications to help you manage all your
finances. Investors can also seek services from a financial advisor for
professional money management. Financial advisors work with private
banking and even brokerage services to offer money management plans
involving retirement and estate planning services.
The Advantages of Money Management
1. Better tracking of your money. When you have a reasonable
budgeting plan, you can track how you use your money and
monitor every expense. It is a significant benefit to you, as you
can spend less and end up saving more money. Monitor your
costs for some months and then change your budgeting by
removing the less required payment and allocate that money to
your savings plan, a retirement plan, or a vacation fund.
Excellent money management will help you stay on track; you
will be able to pay your bills on time, will be able to stay
within your limit, and avoid bank account overdraws. Poor
money management can put you in bad debt quicker than a
blink of an eye. You can prevent those nasty fees charges when
you go over your limit. By having an excellent budgeting plan,
you will avoid overspending.
2. A good retirement plan. Better money management and
savings programs will help you in the long term. You will be
able to secure your future and have an excellent retirement
plan. With better money management skills will give you a
better retirement plan for you. No matter how much you save,
even when you save and invest a small amount of money, it
will provide you with a more significant amount for your
retirement later in life.
3. Peace of mind. Proper money management brings you peace of
mind. Having bills on the counter and having no idea how you
will pay the bills or not having the money to purchase
something you needed. All these issues can be difficult to face
each day. Managing your money wisely and experience all the
benefits of sound money management, you will enjoy peace of
mind, and you can provide for yourself and your family, too.
The Disadvantages of Money management
1. Rapid changes. With the rapid changes in the financial world,
It can change your management plans every time. It is
sometimes challenging to adjust your planning to incorporate
the fast-changing situations. Unless your project can help to
adopt the new techniques, it will be limited.
2. Time-consuming. Managing your money can sometimes be a
time-consuming exercise. It requires you to make the estimates
as accurate as possible. However, you can use software and
mobile applications to assist you with planning, and this may
reduce the time you will take if you were not using the
technologies. And if you have less knowledge about money
management, it will take you more time to achieve this.
3. Inaccuracy. When planning, you make a lot of assumptions in
terms of estimation of your expenses. Any shift like an
economic downturn or the change in the currency rate or
interest rates can change your planning estimates.
Why Is Money Management Important?
Money turns to wealth when it is well-managed. It is an instrument used to
pursue wealth. For wealthy people, having and spending money does not
bring them happiness, which gives them joy, a steady income, achieving
their goals, and leaving a legacy to their loved ones. Money management
focuses on your habits, and your decision making can have affected the
outcome of your long-term strategies. In pursuit of wealth, there are many
powerful elements such as debts, risks, and taxes that can take away all the
hard work you have put in to achieve your goals. It is a life skill that
everyone must learn. You don't have to be financially savvy to start
managing your money. There is plenty of information available to help you
better understand your finances. The following are the importance of money
management:
You are establishing clear goals. Have a transparent approach to your
decision in money management to build your wealth. Making the best
decision will bring you closer to your goals. Also, set some clear and
realistic goals you want to achieve and set a time horizon to perform them.
Setting up clear goals will help you track where you are, and this will help
you see your progress towards your goals. Some people give up earlier due
to not being able to see their progress. You can see your progress and stay
encouraged if you break your goals into short term milestones. Finally, have
clear and quantifiable goals to help you to make clear decisions. Abandon
any choices that will not get you closer to your destination.
You are controlling your cash flow. Spending less than what you earn will
help you accumulate wealth. You can't be financially successful if you are
not tracking and monitoring your expenditure. Drawing up a spending plan
and religiously following the program might seem trivial, but it's central to
the world's wealthiest people's success. If you own a business, your goal
will be to increase your monthly profits, which you will invest in for more
growth. You will learn how to prioritize your spending when you have a
solid money management plan and make the right decisions, which will
bring you closer to your goals.
Budgeting. Creating a household income budget is an essential part of
personal money management. Budgeting will help you better understand
your cash flow, thus giving you a clear understanding of your current
financial situation.
Debt management. There is proper financial education to help you
understand consumer debt and how it works. Financial advisers and credit
counselors advise how you can review your debts, your loan terms, and
how you can pay off the debt quickly and stress-free.
You are managing your risks. Your risk exposure increases as you continue
accumulating your wealth. You might think that wealth can make life easier,
but it does not. The ignored reality is that it can make life more
complicated. You are getting a bigger house, expensive cars, and lavish
lifestyles. These bring financial exposure and the potential to lose if all is
great.
Have a risk management assessment in your money management plan with
protection strategies to prepare you for the unexpected. Some of the
unintended exposure include:
Income loss due to illness or accident
Death of the breadwinner in the family
Asset exposure to liability claims
Money management will provide you with a 360-degree view of your
financial status, and having financial discipline will help you overcome
these obstacles. With a solid money management principle, you will have
better control of your financial goals.
You are taxing efficiently. Paying taxes is a responsibility; however, there is
no obligation to spending more than necessary. Most people are not aware
of how much taxes they are paying and unnecessary taxes and how it affects
their wealth accumulation abilities. Money management does not focus on
what you make but what you get after paying your taxes. Consider the Tax
characteristics of your investment and your overall portfolio. The first thing
to consider is the account location, the money allocation on different
accounts based on respective tax treatment. Secondly, the asset location,
wherein you allocate different types of investments among the different
types of funds on the tax treatment, giving your least tax-efficient assets to a
tax-deferred account such as 401(k). The taxable accounts can hold in a tax-
efficient investment such as low turnover funds. It will give you more
income distribution options in the more tax-efficient retirement, thus
enabling you to accumulate more wealth faster.
Chapter 14: The Terminology of
Stock and Options Trading

Active Income: The state whereby a person has to trade time for an income
actively.
Asset: A property that is valuable and accessible to meet financial
obligations and development.
At the Money: The asset price and strike price are the same, and so the
options trader does not make a profit, but neither does he or she cause a loss
on the transaction.
Basket Option: Options that use a group of securities as the asset associated
with the contract.
Bear Call Spread: A bearish trading approach for advanced options traders.
Beta: A Greek measurement that helps predict stock volatility.
Bearish Outlook: Characterized by the decreasing value of the associated
asset attached to an option.
Bear Put Spread: A bearish trading approach for beginner options traders.
Binomial Option Pricing Model: An options premium pricing model
commonly used for pricing for American options.
Black Scholes Model: An options premium pricing model commonly used
to price European options.
Breakeven: The state whereby a trader does not make a profit or loss from
an option.
Bull Call Spread: A bearish trading strategy for beginner options traders.
Bull Put Spread: A bullish trading strategy for advanced options traders.
Bullish Outlook: Characterized by the rising value of the associated asset
attached to an option.
Butterfly Spread: A neutral strategy for advanced traders.
Calendar Call Spread: This strategy is for a trader who wishes to benefit
from the associated assets staying stagnant in the market while also helping
from the long-term call position if the stock becomes more valuable in the
future.
Call Options: This type of option gives the trader the right to buy the asset
on or before the expiration date.
Cash account: An account that is loaded with cash to facilitate the buying
of options.
Commodity Options: Options that use physical commodity as the asset
associated with the contract.
Covariance: A measure of a stock’s sensitivity relative to that of the
financial market.
Covered Call: This describes the act of selling the right to purchase a
specified asset that you own at a specified price within a specified amount
of time, which is usually less than 12 months. Also known as a buy-write.
Credit Spreads: This describes selling a high-premium option while
purchasing a low-premium option in the same class (calls or puts).
Currency Option: Options that use the type of security grants the right to
buy or sell a specific currency at a previously agreed-to exchange rate. It is
also a forex option.
Day Trading: A method of options trading involving trades that do not last
more than a day as profits, losses, or breakeven realized by the end of the
day, and so the options are closed.
Debit Spreads: This describes buying a high-premium option while selling a
low-premium option with the same associated asset attached to both
options.
Delta: A Greek that describes an option’s sensitivity concerning the price of
the stock.
Derivative Contract: A contract that derives its value based on the value of
the underlying asset.
Dividends: The distributions of portions of a company's profit at a specified
period.
Earnings: The measure of a company’s profits allocation to each share of
stock.
Emergency Fund: A reserve of cash or other assets developed to help
navigate away from financial problems or unexpected financial pitfalls.
ETF: Exchange-traded fund.
Expiration Date: The date at which the option (contract) expires.
Financial Freedom: The ability to make decisions without financial
limitations.
Financial Independence: Having personal wealth to maintain the desired
lifestyle and living standard without trading daily hours for money.
Financial Security: The condition whereby a person supports their standard
of living presently and in the future by having stable income sources and
other resources available.
Financial Slavery: The state of having decisions and opportunities limited
by finances.
Fixed Mindset: A state of mind whereby a person believes that their
qualities are fixed traits that cannot be changed.
Futures Option: Type of option that gives the trader the right to assume a
specific position at a future date.
Gamma: A Greek that reflects the rate of change of the delta.
Greeks: A collection of degrees that provide a measure of an option’s
sensitivity concerning other factors.
Growth Mindset: A state of mind whereby a person believes that their most
basic abilities are subject to development with hard work, continuous
learning, and dedication.
Historical Volatility: This is a measure of how a stock has performed over
the last 12 months.
Implied Volatility: This is a measure of how a stock will perform in the
future.
In the Money: This means the asset price is above the call strike price, and
so the options trader makes a profit on the transaction.
Index: A measure of the stocks, bonds, and other securities a company
possesses.
Index Options: Options that use a company’s index as the asset associated
with the contract.
Interest Rate: The percentage of a particular rate for the use of money lent
over a period.
Intrinsic Value: The difference in the current price of an asset and the
option's strike price.
Iron Butterfly Spread: A neutral strategy for advanced options traders.
Iron Condor Spread: Neutral options strategy. Similar to the iron butterfly
spread.
Lambda: A Greek that describes an option’s sensitivity with the associated
asset’s value.
LEAPS: The acronym stands for Long-term Equity Anticipation Securities.
They are a type of option with expiration dates that are longer than
expected.
Legging: The process of separating individual transactions in an option.
Legging Out: One leg of the option closes out and becomes worthless to the
options trader.
Liquidity: This describes how quickly it is converting an asset to cash
without a significant price shift.
Long Call: This is an options strategy considered by options traders who
want to profit from an asset that increases the price above the strike price.
Long Position: The investor owns the asset associated with the option.
Long Put: This type of option gives the trader the right to sell the associated
asset at the strike price on or before the expiration date.
Long Straddle: This is a neutral position in options trading. Also known as
the buy straddle.
Long Strangle: This is a neutral position in options trading. Also called the
buy strangle.
Loss: The negative difference between the amount earned from an option
and costs associated with that option.
Margin Account: An account that allows an options trader to borrow money
against the securities' value in the trader’s account.
Market Makers: Options traders who ensure that the market is liquid and
has transactions to be engaged in by buyers and sellers.
Market Volatility: This describes the rate at which prices change in any
financial market.
Options: A derivative contract that allows the contract owner to have the
right to buy or sell the securities based on an agreed-upon price by a
specified period.
Out of the Money: Here, the price is below the call strike price, and so the
options trader makes a loss on the transaction.
Naked Options: This is an option where the option's seller does not own the
associated asset attached to that contract.
Naked Call Option: A bearish options trading strategy.
Naked Put Option: A bullish options trading strategy.
Passive Income: The state whereby a person earns income without the
active input of time as an exchange.
Position Trading: This is a low-maintenance options trading style that
introduces low risk but requires an advanced trader’s knowledge and
understanding of options and the financial markets.
Premium: The price paid by the buyer of the option.
Price Volatility: This describes how the price of an asset moves up or down.
Profit: The positive difference between the amount earned from an option
and costs associated with that option.
Put Options: This type of option gives the trader the right to sell the
specified asset at the predetermined price by the expiration date.
Reverse Iron Butterfly: A volatile strategy for advanced traders.
Rho: A Greek that describes an option’s sensitivity to the interest rate.
Rolling Down: This is the method that involves closing one existing
position while opening a similar situation with a lower strike price at the
same time. It is the opposite of rolling up.
Rolling Forward: This involves moving an open position to different
expiration dates to extend the contract's length. Also known as rolling over.
Rolling LEAPS Options: This involves selling LEAPS before the expiration
date while buying LEAPS with similar characteristics with at least 2-year
expiration dates at the same time.
Rolling Out Options: The process of rolling out explains replacing an
expiring option with an identical one.
Rolling Up: This involves closing one existing option position while
opening a similar situation with a higher strike price at the same time. It is
the opposite of rolling down.
Securities: The assets attached to options. Examples include stock,
currencies, and commodities.
Short Butterfly Spread: A volatility-based strategy that is typically practiced
by medium to advanced options traders.
Short Position: The investor does not own the asset associating with the
option.
Short Straddle: This is a neutral options trading strategy. Also called a sell
straddle.
Short Strangle: This is a neutral options trading strategy. Also called a sell
to strangle.
Slippage: This is the circumstance that results when there is a time delay
between two related options, which results in a price change during that
time.
Stock Option: Options that use stock in a publicly listed company as the
asset associated with the contract.
Stock Volatility: A stock price’s sensitivity to the financial market.
Straddles: This is an options trading strategy whereby the trader protects
themselves regardless of whether the stock price moves up or down.
Strangles: This is an options strategy employed when the trader strongly
believes that the stock price will move either up or down but still wants to
be protected if he or she is wrong.
Strike Price: The trader's price strikes against the asset's underlying value
associated with the options to make a profit. Also called the agreed-upon
price.
Swing Trading: A style of options trading that is particularly useful for part-
time trading and beginners who are just getting the hang of things.
Theta: A Greek that describes an option’s sensitivity to how time affects the
option's premium.
Time value: The difference between the intrinsic value of an option and the
premium.
Trading Plan: A comprehensive decision-making guide for an options
trader.
Uncovered Call: A two-part strategy that describes the act of selling the
right to purchase a specified asset that the investor owns at a specified price
within a specified amount of time, which is usually less than 12 months.
Also known as a buy-write.
Variance: A measure of how the market moves relative to its mean.
Vega: A Greek that measures an option’s price sensitivity to implied
volatility.
Volatility: Describes how likely a price change will occur during a specified
amount of time on the financial market.
Chapter 15: FAQs

Are you lost or confused about trading in a stock? Do you have some
questions that have been bothering you? I understand that you may be upset
about the numerous thoughts and questions popping up in your head, with
nobody to ask. You are not alone on this; at every point in our lives, we
learn something new, and despite the excitement that comes from learning,
we may also be confused by a few things.
What is a dividend?
I bet that this isn’t the first time you see or get to know the word dividend,
is it? A premium is a commonly used word in the business/ finance industry
used in the stock exchange industry.
Whether you know the exact meaning of the word or not, the dividend is
known as a portion or fragment of a company’s profits paid to shareholders.
In other words, the shareholders of your company are the receivers of the
dividend. Depending on the company's method or agreement or agreement
with shareholders, the premium must be paid according to each
shareholder's shares, either as an extra incentive to motivate investors to
buy stocks or quarterly.
How to choose the right company to invest in
There are various companies that you can invest. However, each company
operates differently. If the company's policy or agreement favors you, you
will benefit from the investment in the long run. Albeit choosing the right
company should be a priority for you as a beginner. To choose the right
company, keep the following tips in mind:
Invest in stocks that allow you to have a clear and in-depth
knowledge of the company's business and structure model. For
instance, if you want to invest in Apple or Amazon, you need
crystal-clear understanding of how these two companies run.
Invest in companies with excellent structure, top-notch strategy, and
model. Great recognized brands on Forbes today are all great and
competent companies with a unique layout.
Checkmate the financial health of the company. Do they have law
cases in court? How many times have they run into bankruptcy?
How many recognized shareholders do they have? What is the stock
market saying about them? Do they always make headlines on
subject matters like fraud, bankruptcy, or illegal marketing?
Focus on companies that are willing to pay dividends to their
investors. Like I mentioned earlier that each company has a policy
that makes them different from others. Perhaps, a specific company
has met the first three criteria that I have highlighted, but they do
not pay a dividend to their investors. Would you instead invest in
such a company?
What is the difference between forex trading and
stock trading?
Forex market is different from the stock market, even though both are
excellent means of investments. Here is the main difference if you do not
know the difference between forex trading and stock trading. When you
trade forex, you are buying and selling currencies. It is different from
buying stocks; when you are trading stocks, you are either buying or selling
shares.
What is the role of a shareholder?
I know you are excited about buying and selling shares because of the
profits. But being a shareholder is far beyond just profits. But there are
responsibilities that you must take. The following are the responsibilities of
a shareholder:
A shareholder brainstorms and makes decisions in the company. A
company’s director has no right to make decisions, create a change,
remove, or replace a significant manager or executive without
informing the shareholders.
Shareholders decide how much the employees, staff, and directors
of the company earn.
Shareholders have the power to make changes to the constitution or
policy in the company.
Shareholders make, check, and approve financial projects and
statements of a company.
How can I become a stockbroker?
By now, you know that stocks are bought and sold; however, not everyone
who buys and sells supplies is a stockbroker. In the business world, there is
always a middleman, which is most times a distributor. In the stock
industry, a middleman is a stockbroker.
What is the duty of the stockbroker?
A stockbroker can sell and buy stocks
A stockbroker can become a consultant; they can offer advice to
interested people in the stock market.
A stockbroker may be employed to monitor the stocks of an
investor.
Being a stockbroker can be very challenging, but it is lucrative, and you
have to know your options if you must succeed. To become a certified
broker, you need to be a registered member of the Financial Industry
Regulatory Authority in your country and pass your exams.
What is the minimum amount to buy a stock?
It is a general question that people ask. Well, you can invest any amount in
shares. However, just people you start investing save at least your income
for six months. So, if your income is $1000 per month, and you save $500
per month, at the end of 6 months, you would have $3000. That is enough
to buy some shares and give you some mouthwatering profit.
What is the difference between mutual funds and
stock exchange?
As I mentioned, numerous investment plans can give you some good
profits, but you need to know what is best for you. Mutual funds are
different from the stock exchange; they do not share the same similarities,
aside from the fact that they both yield profits.
The stock market involves investing in the shares, and stocks of a company,
becoming a shareholder and making profits. On the other hand, mutual
funds are a collective investment that involves different kinds of investors
to buy things like bonds, money, or stocks.
What happens when I lose my money in the stock
market?
Every business has its ups and downs and believes me when I tell you that
the stock market is different. You may lose your money in the stock market
for several reasons, including one of the most common causes – the stock
market crash.
A stock market crash is a sudden decline in the prices of stocks across the
stock market. When this deflation happens, it leads to a significant
reduction in paper wealth. When this happens, what should you do? Get
yourself together, get some good counsel from financial advisors, heal from
the loss, learn from the event, and reinvest.
What does it mean to short a stock?
Shorting a stock is the same thing as to the above heading, and it is the act
of borrowing some supplies, according to your needs from stockbrokers,
intending to sell them to other buyers who want. Albeit, shorting a store
does not occur every time; it often happens when the store is over-valued.
The risk that accompanies this exchange, a broker or a buyer may run into a
significant loss.
Shorting your stock is a highly risky and painstaking strategy; if it works,
then you will have your gains and nothing to lose. If it fails, you will regret
and wish you never made that decision.
It is also necessary to verify rumors about the stock market before making a
move with your stock. The truth remains that longing your stock is safer.
How can I measure the health of a stock?
Like every disease in the world has its signs and symptoms; similarly, every
stock has its signs and symptoms to show if it is healthy or unhealthy.
Numerous indicators can predict the outcome of a store, describe how
beneficial the store is. There are a few tips to help you recognize a healthy
reserve.
Carefully compare the ratio of the company’s total earnings, divided
by the whole numbers of investors. The answer will reveal to you
the earnings per share of the company.
Investigate the price-book ratio. The price-book ratio's essence is to
help you predict the value of the stocks; in comparison to the actual
price, the shareholders are willing to buy them. When the stock's
value is less than 1, it shows that the stock is trading less than its
actual value. It also indicates that it is the best time to buy stocks,
especially when they are the same type.
Investigate the future of the stock market. The price of a stock per
dollar will help you indicate the future movements of the market.
For example, when you find a stock with a lower price-earnings ratio, it
could indicate that hard times or stock prices have increased. On the other
hand, higher price-earnings could suggest a good time
Here are some frequently asked questions about the stock market. If you
still have lots of items on the stock market and stock exchange, I
recommend that you should ask your financial advisors some questions.
Conclusion
To wrap up, here are our takeaway tips for becoming a top trader:
Research
Regardless of the investment that you make, be sure always to do your
research. Doing research is a must. It is what will increase your chances of
making the right investment decision. As the saying goes, "Knowledge is
power." The more you understand something, the more likely you will
predict how it will move in the market. That is why doing research is
essential. It will allow you to know if something is worth investing in or
not. Remember that you are dealing with a continuously moving market, so
it is only right that you keep yourself updated with the latest developments
and changes. The way to do this is by doing research.
Write a Journal
Although not a requirement, writing a journal can be beneficial. You do not
need to be a professional writer to write a memoir; however, you need to do
two things: Update your journal regularly and be completely honest with
everything that you write in your journal. By having a journal, you will be
able to identify your strengths and weaknesses more effectively. It can also
help you realize lessons that you might otherwise overlook.
Have a Plan
Whether you will start forex trading or trade in general, it is always good to
plan. Make sure to set a clear direction for yourself. It is also an excellent
way to avoid being controlled by your emotions or becoming greedy. You
should have a short-term plan and a long-term plan. You should also be
ready for any form of contingency. Of course, it is impossible prepare for
everything. If you are suddenly facing an unexpected and challenging
situation, take your time to study the problem and develop a new plan.
Never act without proper planning. Poor planning leads to poor execution
but having a good idea usually ends up favorably. You should stick to your
list. However, there are certain instances when you may have to abandon
your project, such as when you realize that sticking to the same program
will not lead to a desirable outcome or in case you find a much better idea.
Proper planning can give you a sense of direction and ensure the success of
execution.
Take a Break and Have Fun
Making money online can be fun and exciting; however, it can also be a
tiring journey. Therefore, give yourself a chance to take a break from time
to time. When you take a break, do not spend that time thinking about your
online business. Instead, you should spend it to relax your body and clear
your mind. If you do this, then you will be more able to function more
effectively. It is an excellent time to go on a vacation with your family or
friends or at least enjoy a movie night at home. Do something fun that will
put your mind off of business for a while. Do not worry; after this short
break, and you are to work even more. Nonetheless, I hope you learned a lot
from this book, and if you did, make sure to leave us a good rating.