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Believe it or not…

When it comes to options strategy…

You should be mixing it up…

What I mean is… there’s a time when being a buyer of premium works…

And others…where being a seller of options premium makes sense. 

Most retail traders can’t tell the difference between high implied volatility vs. low. 

They wouldn’t know if options are historically rich or cheap…

But you know what?

You don’t have to be an expert if you trade spreads.

Why?

Because it reduces risk and limits exposure to volatility and time decay. 

Its primarily what I trade, and which has led me to a nearly flawless track record in 2020. 

 

Options Profit Planner

 

Before a trader can sell options, they need a reason to actually enter a trade.

And the indicator used at Options Profit Planner is shared with some of the most powerful mathematical models throughout nature and science.  

What are Fractals anyways?

Fractals are a never-ending pattern found throughout nature. Fractals are infinitely complex patterns that are self-similar across different scales. They are created by repeating a simple process over and over in an ongoing loop. 

When searching for ways to tap into the inner workings of the stock market, I knew right away Fractal Energy would do the job!

 

Fractal Energy Indicator

 

The power of fractals allows me to determine the strength of trends and how much “life” is remaining in a stock’s movement.  

And I must say, there are some ominous signs coming out of the fractal indicator. 

But first, there are 2 main components of Fractal Energy that you need to know.

Two components:

  1. Markets Fractal Pattern
  2. The Internal Energy 

Fractals are found throughout everything in nature, from plants to shorelines… and even the financial markets!

Energy is the term used to describe the stored or potential energy a stock has built up.  Like a spring that is compressed, it stores potential energy and erupts when you release the force that is keeping it held together.

And by combining those two different components you create a single indicator that is able to successfully determine the strength or weakness of a trend on any stock.

Fractals tap into the inner strength of every stock across every time frame giving you the most comprehensive understanding of what a stock is going to do in the future.

 

Source: TradingView

 

How should I trade this?

Let’s take a look at a way you could do this safely without trading naked calls or buying puts!

But first… let’s review the classic long put.

 

Classic Puts

 

Typically if a trader is interested in going short and using the options markets, the first thing that comes to mind is to purchase a Put.

A purchase of a put option does two main things for a trader.  It allows a trader to benefit from the decrease in the price of the asset and it limits or decreases the amount of loss they may incur.   

This is much less risky than shorting the underlying asset and the trader can use the leverage of options to increase their gains as well.  

Here is a payout diagram for both a short stock and put option.  

 

 

The diagram on the left shows a traditional short sale of a stock and on the right is a classic long put. 

By using either strategy, there is an unlimited loss as the share price increases!

Unfortunately, there is something I must remind you of.  If you are wrong on the timing, your options may expire and you will still lose the trade.

That’s the pain I feel all the time, and I don’t want you to go through this.

It really sucks to be right, just to be wrong.  

But I have a solution that you will like, and it may surprise you.

It’s called a Call Spread.  

I know that you may be confused, and it’s ok if you are.  

Because I just told you to trade a Call when I think the markets are going to go lower.  And that might be strange.

 

Selling Options and Credit Spreads

 

An alternative to buying a put is to sell a call.  

This is usually described as a naked call and is one of the most terrifying trades anyone could place.  Just ask one of the many hedge funds that blew up from this trade.  

It works… until it doesn’t.  

And what I mean by that is, you could end up bankrupting your trading account with one bad trade.

I know I don’t like those types of landmines in my portfolio that can go off at any random time.  

So how do you take advantage of a short call but keep yourself safe?

 

The Credit Call Spread 

 

The Credit Call Spread (or Bear Call Spread) is a bearish to neutral options trading strategy.

It aims to capitalize on both downward price movement of the asset and theta decay.

Credit call spreads work extremely well in both directional and sideways markets as the options will expire worthless at the end of the trade, leaving the premium for the trader to collect on.

What does that mean exactly?

It means that you receive the cash upfront …

That’s right, you get paid to take that trade! 

Another huge benefit of this trade is that it has a lower max loss compared to selling calls and even purchasing put options.

 

 

Which leads me to this trade in the SPY’s.  

Here is a trade coming up in the SPY’s with the help of Fractal Energy signaling the markets would go sideways to down for a few weeks.

 

Source: Tradingview

 

Would you rather be long a put or short a call spread?

I hope your choice is short a Call Spread!  Because if you were to have traded the long puts, you actually would have lost money with the sideways market action!

So why do you want to sell call spreads?

As a seller of options, we can still make money even in a sideways market!

This is such a great strategy since it allows me to trade a short call and have a max loss on the trade.  

This is a must to capitalize on premium decay and also market direction on the trade.

Or more simply… to put the odds in your favor!

 

The Odds Are Stacked In Our Favor

 

Option sellers take maximum advantage of the option time decay theory, commonly known as Theta Decay.

OTM options lose value quickly and become worthless at expiration.  This allows traders to not have to worry about correctly predicting the market direction or timing the market perfectly to generate income.

We can take advantage and be the house with odds in our favor on every trade

Don’t forget that an option buyer needs to be right about direction and time!

Remember traders, there are many ways to make money in this market and selling options is one of my absolute favorite go-to strategies.  

Key Points:

  • Credit Call Spreads profit if the stock goes down, stays the same, or goes up 
  • Limited risk vs naked calls
  • Puts the house odds in your favor
  • Allows you to get paid to take risk

So if you’re looking to get short the SPY’s… next time you might want to consider using short call spreads instead of going long puts for your directional trades!

Click here to sign up for Options Profit Planner today!

 

Author: Dave Lukas

Naked Puts 101

 

The Naked Put is an options strategy that lets investors collect premium by selling an option, which are typically at-the-money or out-of-the-money.  

For example, suppose you aren’t happy with the cost of AAPL at $200 per share. And you would be more interested in getting long the stock only if it came down in price.

After doing research on the stock, you decide you are going to sell the $150 put options since that is the price you feel comfortable owning the shares if you are assigned the stock.

As a result you immediately receive $200 in options premium, since the $150 put options are sold for $2.00 per contact.

This means, if AAPL drops below $150, you will buy 100 shares of that stock at your desired price.  

How does this work?

Well all options come with two main criteria:

  1. Price obligation
  2. Time to expiration

 

Price Obligations

 

An obligation on selling put options is if the price falls below your strike, you will be required to own that stock (at the strike price), as the sample trade above.

Let’s take a look at a quick example…

 

Source: Thinkorswim

 

Each option contract has an associated strike price at which buyers and sellers agree upon buying and selling stocks.  

The value of the contract is what the markets are pricing the options at and are subject to change based on the supply and demand on that stock or option contract.

 

Options Expiration

 

Every option has a time and price associated with them and adjusts in price based on a number of underlying factors.  

One of the factors is time decay, and it is based on how much time is left on the options.  Typically, the value of a weekly call option is cheaper than that of a monthly all option.

For example, a weekly option that is expiring on Friday of this week has 5 days of time value added to the options price.

Theta is the value of time in the options contract, and the longer the amount of time, the more time value an option will have.  

Each day that passes, the value of these contracts will decrease by 1-day value of Theta. Also, it is important to know that Theta will speed up the closer you get to expiration.

Pro Tip: It’s a must to trade 90 days (or more) before expiration making sure to work with the flat-ish part of the curve.  

 

Example Trade

 

Let’s take a look at a sample trade on CLR that after researching the stock identified a price we would feel comfortable selling a put contract at.

Here is the chart and the price at which we would try to sell puts at. 

 

Source: Thinkorswim

 

And here is a sample option risk diagram of this trade.

 

Source: Thinkorswim

 

Trade Breakdown:

  • Sold 10 CLR 17 APR 20 250 puts for $1.35 per contract.

And this option is currently trading around $0.05 per contract.

Meaning… in just a few more days I will be able to capitalize on a 100% gain on this trade! 

It’s that simple of a trade! By only  using 1 option I am able to place a great position on CLR and return 100% of my capital in a few short weeks!

This trade is aiming to capitalize on the extended markets along with the increase of implied volatility in the markets when trading near its lows.

But I am sure you are asking… why would I want to sell puts that far out of the money?

Well because I feel confident that if CLR was to get down to that price I would like to own the stock.  

And by selling puts you can get paid upfront for telling the markets you would like to own stock at that price.

What do I want to happen?

  1. The market to rally
  2. The market to continue to sell off and I get to own CLR at a great price

 

Wrapping up

 

The good news is that there are many trades you can place every day based on market conditions. And as the markets continue to sell off more and more of these trades become available for you to take advantage of. 

One benefit of trading the naked put is that you are able to generate steady and consistent income. This strategy lets you place the house-odds in your favor compared to going long an option. This is unlike long options, where you have very little odds of having a winning trade. 

So here is a quick breakdown of the pros and cons of trading Naked Puts

Pros:

  • House odds in your favor of over 60%
  • Ability to purchase stock at a significant discount
  • Can win in a up, down, or sideways market

Cons:

  • Limited upside gains

Want to find out more, watch this special training class here. 

Author: Dave Lukas

There are several ways a trader can go short the market…

They can:

  • Sell stock
  • Buy puts
  • Buy a bear ETF
  • Buy a volatility ETN

But you know what?

Each strategy has its limits…

And whenever you short something…

You better be aware of your risk exposure…

That’s why I utilize a better strategy to get short…

One that is safe and yields some amazing results. 

 

Options Profit Planner

 

Options Profit Planner is focused on the use of technical analysis and Fractal Energy but there’s a handful of trading strategies that still need to be studied.

Typically if a trader is interested in going short and using the options markets, the first thing that comes to mind is to purchase a Put.

A purchase of a put option does two main things for a trader.  It allows a trader to benefit from the decrease in the price of the asset and it limits or decreases the amount of loss they may incur.   

This is much less risky than shorting the underlying asset and the trader can use the leverage of options to increase their gains as well.  

Here is a payout diagram for both a short stock and put option.  

 

 

The diagram on the left shows a traditional short sale of a stock.  With this, there is an unlimited loss as the share price increases!

The diagram on the right shows the purchase of a put option.  With this, there are limited losses as the share price increases!

Pro Tip:  If you want to short a stock and you are aggressive with the direction, buying at the money puts gives you the most bang for your buck.

So what’s the benefit of using this strategy?  

  1. There is limited risk if you get the trade wrong
  2. There is unlimited upside gains if you get the trade right

Now… there is something I must remind you of…

If you are wrong on the timing, your options may expire and you will still lose the trade.

And a solution is a strategy called a Credit Call Spread.  

 

The Short Call

 

An alternative to buying a put is to sell a call.  

This is usually described as a “naked call” and is one of the most terrifying trades anyone could place.  Just ask one of the many hedge funds that blew up from this trade.  

It works… until it doesn’t.  

Why?

Because unlike naked puts, the naked call strategy has unlimited upside risk potential.

 

The Credit Call Spread

 

The Credit Call Spread (or Bear Call Spread) is a bearish to neutral options trading strategy.

It aims to capitalize on both downward price movement of the asset and theta decay.

Credit call spreads work extremely well in both directional and sideways markets as the options will expire worthless at the end of the trade, leaving the premium for the trader to collect on.

What does that mean exactly?

It means that you receive the cash upfront …

That’s right, you get paid to take that trade! 

Another huge benefit of this trade is that it has a lower max loss compared to selling calls and even purchasing put options.

 

 

As a seller of options, we can still make money even in a sideways market!

This is such a great strategy since it allows me to trade a short call and have a max loss on the trade.  This is a must to capitalize on premium decay and also market direction on the trade.

 

Wrapping Up

 

Option sellers take maximum advantage of the option time decay theory, commonly known as Theta Decay.

OTM options lose value quickly and become worthless at expiration.  This allows traders to not have to worry about correctly predicting the market direction or timing the market perfectly to generate income.

We can take advantage and be the house with odds in our favor on every trade

Don’t forget that an option buyer needs to be right about direction and time! 

There are many ways to make money in this market and selling options is one of my absolute favorite go-to strategies.  

Key Points:

  • Credit Call Spreads profit if the stock goes down, stays the same, or goes up 
  • Limited risk vs naked calls
  • Puts the house odds in your favor
  • Allows you to get paid to take risk

Click here to sign up for Options Profit Planner today

Author: Dave Lukas

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