Options Trading FAQs

Options are a derivative of stocks that offer fantastic leverage for 3 reasons:

1. You don’t have to invest a lot of money to get started.
2. You can achieve enormous returns if you are correct on direction and time.
3. Risk is manageable; you only can lose what you put into the trade as a buyer.

Traders use call and put options as the vehicles of choice for stocks, etfs (exchange-traded fund), or commodities.

I prefer to choose the strategies that best fit a particular situation, like a strangle, vertical spread, or even a condor.

The main difference between stocks and options is time – options have an expiration date, while stocks do not. However, the leverage gained from options is enormous. Trading shares of Apple with their high price may be prohibitive, while trading the options with a lesser amount of capital can be lucrative.

Like any career, trading successfully takes a great deal of time, patience, and experience – you cannot just pick it up and expect instant success (unless you are very lucky!). Additionally, it is important to remember that trading is not a game of perfect. There will be losses, and there will be failures.

Though trading options for a living is not easy, it can be a highly rewarding experience. I suggest starting with a practice account, educating yourself as much as possible, and putting together a plan of action.

To jumpstart your education, check out my free trading resources, including the Glossary of Terms and blog posts on basic options trading strategies – and sign up for my free weekly newsletter.

I believe in the principle of “Options Trading Made Easy;” therefore, I try to explain what I’m doing and how I’m doing it in a transparent way. If you pay attention to the alerts, read my blog posts, join in the webinars, follow my tweets, and actively participate in the chat room, you will gain the most from membership.

Yes, it is complicated – and it’s even more complicated for option traders. My best advice is to contact your tax adviser or accountant for his/her recommendation in terms of status and treatment.

It is the perfect way to create a nice income stream. Basically, you are selling calls, puts or spreads to collect the premium. If these are out of the money, then you are collecting a time premium. In this case, the clock is your friend.

By selling a spread for a credit, you reduce your risk if the price goes through the strike you sold – your loss is limited to the amount of the spread.  If you sell a five point spread for $2, the maximum loss is $5, or another $3.

One week of decay translates into lower risk, plus, if you find a stock that is on an upward trend, this short time frame can be very rewarding.  As a buyer, time is the enemy, so finding the best trending names can overcome the decay.

Volume, along with price, is one of my main key indicators of where the big money is flowing. It’s not difficult to interpret – a stock surging on big volume has institutional sponsorship, while a stock sinking on huge turnover is being distributed. Often big volume events are a precursor to more price action in the same direction.

As a buyer, time decay is the enemy, so intuitively you want the least amount of time remaining if you are trading options. A high beta name, like Apple, is more likely to trade actively during expiration if there is expected movement due to option volume, open interest, news and recent price action. I have picked up some of the best gains with only days or hours left prior to expiration.

It’s really no different than a regular account, except there is no margin allowed. All transactions, therefore, are conducted via a cash account. Note that naked selling in IRA accounts is illegal.

Volatility is the expected movement of a stock; options are priced based on the implied move. Now, that doesn’t mean it’ll happen – it’s all about expectation. Oftentimes, in-front-of-earnings option pricing is naturally elevated because of the excitement over possible moves after the earnings report is released. Marketmakers will price options based on demand; when movement is lower than expected, volatility is in line with more historic norms.

The Greeks (delta, rho, gamma, and theta) are a mathematical way to estimate an option move based on the stock price, the effect of decay, a change in interest rates and a change in price due to time. The Greeks are also useful when figuring out if pricing is good on a particular option.