• Document: Options Mastery Day 2 - Strategies
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Options Mastery Day 2 - Strategies Day 2 Agenda • 10:00-10:10 - Overview and Q&A from Day 1 • 10:10-11:00 - Morning Trade Walk Thru & Trade Plans • 11:00 – 12:00 - Options 101 Review & Long Call/Put Criteria • 12:00-12:15 - Break • 12:15-1:00 – Long Vertical Spreads • 1:00-2:00 – Short Vertical Spreads • 2:00-2:15 - Break • 2:15-3:00 – Iron Condors • 3:00-4:00 – Afternoon Update/Which strategy should I use? How do I setup a watch list? 1. Establish how many names you can trade at any given time. • How big is your account? If all your stocks setup at the same time would you be able to take all of the trades? • How much time do you have to monitor your positions? If you don’t have a lot of time then don’t trade 10 stocks. • If trading with a small account size focus on more ETF’s to start 2. Use a variety of tools to find the active stocks • Tradestation: Hot Lists • StockFetcher.com • moneycentral.msn.com • marketwatch.com How do I setup a watch list? 3. Criteria to look for in a scan: • Most active • Highest volume • New highs/new lows • Most active – call & put volume • Price of stocks • Make sure you can afford the expensive options 4. Once you have a decent number of names from your scan, start to narrow the list down to the number of names you are looking to trade. How do I setup a watch list? 5. Backtest those stocks using your trading system • Winning % • Average trade profile • Look for average holding time • Document volatility levels 6. Go through and document different trade types (long calls/puts, vertical spreads) to see if you can afford these trades over time Options 101 Review: What is an option? Options 101 Review: What is an option? Options 101 Review: Option Specs Options 101 Review: Expiration Implied Volatility – IV Percentile Options 101 Review: Greeks - Delta 1. Delta • The delta of an option is a measurement that estimates how much an option premium will increase or decrease with every $1 move in the underlying stock or index. Also known as the % change. • Calls will have a positive delta ranging from 0 to 1 • Puts will have a negative delta ranging from 0 to -1 • The delta of a call increases in value as a stock moves up and decreases as the stock moves down. • The delta of a put decreases as a stock moves up and increases as the stock moves down. • ATM options will have a delta close to +/- .50 • ITM options will have a higher delta which means they react faster to the movement in the stock • Delta will also increase and decrease faster as you get closer to expiration. Greeks – Delta cont. 1. Calls: • Positive delta • ITM delta >.50 • ATM delta=.50 • OTM delta <.50 2. Puts: • Negative delta • ITM delta > -.50 • ATM delta = -.50 • OTM delta < -.50 Greeks - Gamma • 2. Gamma – An option’s gamma is a measurement that estimates the rate of change in an option’s delta for each dollar move in the underlying stock. – The delta of the delta – Buy an option = long gamma – Sell an option = short gamma – Gamma will reflect the volatility of the stock – Higher volatility = lower gamma • This reflects the fact that a larger move on a volatile stock isn’t as significant as a larger move on a slower one. Greeks - Gamma • Example: – XYZ $30 – 30 strike call option $1.50 – Stock moves to $31 – Call option moves from $1.50 to $2.00 (delta of the option was .50) – Stock moves to $32 – Call option moves from $2.00 to $2.75 – Delta of the option during the move from $31 to $32 was .75 – This means the gamma of the 30 option was .25 (taking the difference between the deltas of both $1 moves) Greeks - Gamma • Gamma cont. – Gamma highest for the ATM options – Gamma highest in the front month options – Higher gamma is good for the option buyer as long as the stock moves fast enough – The further ITM or OTM an option moves the more stable gamma becomes. Greeks - Theta 3. Theta – A measure of time decay on an option with a one day change in time. – Options have 2 values • Intrinsic value – does not decay • Extrinsic value – value over and above intrinsic value. • Not the same for each option • Not the same each day – Decay at a non-linear fashion Time Decay Extrinsic (time) value of option 0 49 42 35 28 21 14 7 0 Number of days left before option expiration Greeks – Theta Cont. • Theta cont. – Highest with the ATM option • Decreases the further ITM or OTM you go – Hig

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