Options Trading for Beginners

Investing Strategies You Need to Know to Generate Passive Income through Options Trading

Tim Shek

• Publisher: Abiprod
• Year: 2019
• eBook ISBN: 9781081670023
• Topic: Business
• Subtopic: Trading
• Index: Business

Are you looking to learn about investing?

Are there too many sources?

Are there too many books that are full of technical jargon that nobody understands?

No idea where to get started?

If your answer is "yes", then this book is the #1 guide to get you started.

Maybe you have money sitting in the bank that's not growing. Maybe inflation is eating it out faster than your dog would eat through a fried chicken. Maybe you made some bad investments in the past and are weary about the future.

The answer to all the above concerns is knowledge; and putting that knowledge to the test. The benefit of this book is that it explains the concepts of options in layman's terms. There is a section on technical terms; which explains each of them clearly.

You can learn why options trading is better than most investments out there.

While there are a 100 different ways to invest your money, there are very few ways to help reduce your downside risk. Options Trading, if done right, can help hedge against bad stock performance. However, options trading is very confusing; with lots of methods, long definitions and puzzling contracts. The media also tends to simplify the stock market by talking about stocks and bonds only. As a result, most people do not bother looking into options. Heck, a lot of people haven't even heard of options trading.

But, I assure you, options trading can be significantly profitable; and a great complement to your exisiting investment portfolio.

Here's What's Included In this Book: How Options Can be Superior to Stocks and how you can use this knowledge to maximize your profits

5 of the very best brokerages to get you started investing in options Why the "Strike Price" is the a very important part of an Options Chain; and other common definitions The one method used by Options Traders to Generate Passive Income in a Recession Why a 'Put' Option is safer than a 'Short' in a recession with several examples The Best Indicator to Determine if you are in a Bear or Bull Market 5 Advanced Options Strategies to take your Income to the Next Level

Many traders avoid options because of the myth that options are risky, difficult to understand, and that a good number of options expire worthlessly. However, this is not true. After reading this book, your mindset will change completely, and you will start seeing options trading differently.

The Basics of Options Trading

For many people, the first thing to touch on is what exactly options are. Here, we’ll go into detail on what options trading is, along with some critical examples that can help you.

Options at the Core

Let’s go to the very basics of options trading. Options are essentially contracts that give the investor a chance to buy or sell securities, such as an index or commodity, at a fixed price within a fixed period of time. So, the investor can buy or sell the security at that price irrespective of the actual trading price. He can also do so any time within the fixed period.

Buying and selling options are done within a market, and from there, these trades are done on contracts for various securities. If you buy an option, it allows you to buy shares later on, and they are called “calls”. If you sell these shares later, it’s called “put” options.

So let’s take an example where you have a house that is worth $1 million, and you then are given the option to buy the house at 800K over the next 3 months. So you pay a 2% fee of this to the seller for the option itself. 2% of the house is 20000 dollars of course, and you simply pay that for the option. So you have the house essentially as an option to buy within the next 3 months.

Now, let’s say that three months have passed, and now you can choose whether or not you want to buy the house, or sell the house. In this, you’re the buyer of the option, so you’re the one who chooses whether or not you want to buy the house, and the one who is selling the house is, of course, the seller. Of course, you have to pay the 2% options fee regardless. So, if you after a few months want to buy the house and from there, if it increases, you can buy it at a much smaller margin than what it may be.

So, let’s say the home value increases to 110000. You buy it at 80000 as per the contract. From there, it can be sold again in order to net a 280K profit (300K price increase – 20K fee). This is something that you should definitely act upon. It’s used in real estate investing too.

But, let’s say that you end up seeing the house depreciate over time, and now, unfortunately, after 3 months it’s $700,000, which is 100K less than what you were prompted to pay for it. You should at this point choose not to buy the house, and while you do lose the options fee, it’s not much. Because after all, losing 20 grand is much better than losing 100 grand, right?

Options are essentially the option to buy something, and you can choose whether or not you want to invest in this or not (after a certain period of time).

But are they the Same as Stocks?

Nope. That’s the short answer. But the long answer is because they aren’t representing the part of the company that you have owned. Instead they’re basically contracts of different investments, and for many people, they are better because you can walk away at any point.

With stocks, if you invest in it, unfortunately, you're stuck in it until you cash out, or you sell it to someone else. That means that there is more risk there.

However, when you buy and sell options, the trader or the investor does not have to invest in the stock at the end of the options period if he does not want to. Options are usually considered derivative securities, which entails that the price is derived from another value in the assets, or other underlying instruments. They are less risky than stocks, as long as you use these correctly.

With options trading, you will have to pay an options fee. So even if you do not end up investing in the stock, it’ll need to be paid.

Investors use these because they are bets on whether something will go up, down, or hedge, and we’ll go into deeper details on what all of that means later.

More Examples

Let’s take a look at a couple more examples of different types of options. Let’s talk about stock options because this is one of the areas where beginner investors look at.

So, let’s say you have stock XYZ that’s at a certain number. Let’s say you can buy that stock for 50 grand, and that’s the option. So you could get that stock for 50 grand and let’s say that option expires at the end of 3 months. You agree to buy this stock, and then a 2% fee, which is a grand. You then put down 1000 dollars on that, and you watch it.

Now let’s say that after 3 months, this company does something super awesome, and from there, you notice their profits markedly increase. It ends up increasing to 150K in the stock share, and you’re like “of course I’ll take that share” and you decide to do that. That’s an example of the stock actually increasing, and you totally buy that option from another. That means you’re netting a 99K (100K profit – 1 K fee) profit, which is pretty killer, and you can from there sell the shares of that stock to others to net even more money. That is a contract that you can utilize.

But, let’s now look at a second scenario. Let’s say that you see the company tank. Which sucks, but that does happen when bad decisions are made, and everyone makes poor choices. It happens, but that means that the stock is going down, and it falls down the tubes. It only has a value of 10 grand now, which means it’s a 40K decrease if you choose to buy it. Now if you have faith in this stock somehow that it can magically recover, you might take the risk. But for beginner traders, you know better than that than to stick around with a sinking ship, so you refuse to buy. You lose about a grand, but of course, that’s not much compared to how much you could’ve lost if you actually bought the stock.

That’s an example of how it is used in stocks, which is another type of contractual obligation that you can utilize in order to get the full results from this.

Next, let’s take more examples of company investments. Let’s say you’ve got this company that you have a chance to buy. Let’s say that the going rate for this company is $2 million, but you have an option to buy the establishment for $1.5 million after a 6-month period. This could be a great investment, and you end up putting down the options fee, which let’s say is about 5 grand. Now, you watch this company, and it’s doing super well. The value of the company increases to 3 million after 6 months. You’d want to jump on that immediately, so you end up investing in this over time. That would be the smart option for this. You end up buying it. But, in a second scenario, let’s say there’s a problem with the company, and the value goes down. From there, you should from there leave the option, and while you may lose 5 grand, it’s definitely better than investing in a million-dollar sinking ship.

And as a final example, let’s take selling options on stock shares. You’ve been investing in general electric for a while, and this stock is increasing, and you might want to potentially set up some calls on your stock. Let’s say that you have a stock at 50, and you decide to put an option on there for 55 shares at a dollar. But, let’s say the stock doesn't increase and it stays at 50. If that’s the case, the option does expire, people won’t invest, and oh well, that stinks, but you can make a 3% return on the holdings within the market.

Essentially, it’s looking at all of the options and choosing for yourself what will be the best route for you to move going forward.

How and Where to Open an Options Account in the USA

Thankfully, there are a lot of places where you can get options accounts, and here, we’ll talk about some of the best types, and how to do so.

The best way to do it is through brokerage firms, but not all of them are equal. Here, we’ll talk about some of the best types, and why you should consider each of these.

• Interactive Brokers: They have the reputation of low costs, but it can be hard for a lot of people to navigate and is a difficult platform. It has the Trader Workstation platform, which is available in either a downloadable package or even from the website. There is also the IBot, which lets you ask questions in English and get an answer, and if you have more than 100K in assets, you don’t need to pay for it the asset fees.

• Lightspeed: This is another one that has low per-contract commissions, great software, and LiveVol X doesn’t have a monthly charge. But, you will need to have a higher balance in order to open an account, and Lightspeed needs to have a minimum charge of $100 a month on it, and if you're a beginner trader, it doesn't really teach you a lot, so be careful with that.

• TD Ameritrade: This is a great one for beginners because it has many educational resources, and you can practice options strategies. It also comes with a ThinkorSwim platform which allows you to choose different strategies that are available. The streaming data is available on all platforms. It does contain higher commissions and contract fees, and high margin rates, and it can be hard to balance it all. However this is probably the best one if you’re looking to understand the trades you’re doing.

• Charles Schwab: This is one of the best for options trading, and you can also get expert insight on how to use it. It does contain options research and tools, education, and also support for your options too. This is actually pretty cheap too, meaning that you can trade these options online for less than 5 bucks and then .65 cents a contract. You can also talk online with reputable traders to help you out.

• Etrade: Finally, we have Etrade, which has a low account minimum, and it’s one of the most popular due to the fact that the tools are super easy to use. They also offer tiered commission that favors those traders that use it, but this can add up a lot for some of the more casual investors.

You will first and foremost need to know where you can open up an account, and from there, you’ll proceed to set up an options account with the brokerage. How to do it is pretty simple, and it involves the following steps:

First, you need to open up a brokerage account. You should compare commissions and look for ones that offer low or no commissions. Read the reviews and learn from mistakes. Make sure to always research the platform.

You should look into whether or not you are going to need a cash account or margin account. Cash accounts will only allow for purchases or opening up positions. If you want to sell options to open up the account without having underlying assets, you need to have a margin account. You should look to see if the brokerage has safe forms of payment, or if it’s using third-party payments.

Next, let’s say you find the right company that you want to work with, and now, you need to get approval before you begin. The brokerage will look at your submission and from there, set limits on trading based on the experience you have and the amount of money you possess. And of course, each firm has its own requirements for this. If you need help, you can always choose a broker that has extra services to assist you and help you learn the ropes. Remember, you can’t write these covered calls without an options account, because this will prevent any risk that may happen. Covered call writing is, of course, selling the right to buy the stock that’s there. The buyer, of course, always has this right, not the one that’s selling. The stock has to be within the brokerage account, and cannot be sold, or even transferred, while the call is on the able.

At this point, once you get approved, you can start options trading. It is good to have a decent amount of money saved up to begin with. Some of these brokers allow you to start with a low amount of money, but a couple of grand might be a better option for you if you’re worried about your hard-earned cash possibly going down the drain.

The difference between Level 0, 1, 2, and 3 Accounts

When you begin with this, you’re going to have different account levels. You’re going to begin at level 0. most brokers don’t classify every option, but for the most part, Level 0 is trading stocks and funds. Each options broker might do it differently, but for the most part, the various criteria are relatively the same.

Level 1 allows you to only do covered calls, along with protective puts. This is more hedging than speculative in nature, and this usually requires the options trader to own the stock underneath it all. Covered calls are used when you’re using different call options on these stocks in order to hedge against this small drop in the price on the stock underneath it all. Protective puts are when you put options on there as protection on this stock. Currently, you can’t buy these call options or put options without having the underlying stock. So if you want to use put and call options on say, some Apple stock, you got to own it first at this levels.

Level 2 is essentially a step forward, and it allows you to buy the call or put options that are there, on top of what Trading level 1 lets you do. This is where most beginners start at, and usually, this is usually just one singular direction of steps. They simply buy puts or calls without writing them or anything more.. The risk on this is limited in terms of money before you purchase these options as well, so remember that.

Finally, you've got level 3, which is where you trade debit spreads, which are on top of everything that 1 and 2 allow you to do. Debit spreads are essentially strategies that allow you to pay cash on, but credit spreads give you the cash when you put these on. We’ll go over different spreads later, where you can write various options to secure a position on the market. Usually, the risk is limited to the money that’s paid towards putting these on a spread. However while the risk is limited, it’s much more complex than simple calls and put options, and usually, you’re going to need more knowledge as an options trader.

Most transactions are typically determined by the trading level, and the experience that you have, along with your net worth. So the more experience that you have, the lower your risk is to both the broker and yourself. Which is why a lot of questions that are on the risk assessment form include how long you’ve been trading, and the instruments that you’re trading with are asked. The richer you are, the more losses you can take on, and you’re essentially much lower risk. This is why we stated beforehand that you should make sure that you do take the time to assemble a small nest egg of savings to trade with since it can help you immensely. You will not have to worry about verification or proof of the info provided. But this creates a problem because some of these beginner traders think they can handle some of these larger account trading levels, but that isn’t the case.

So how do you increase it? Well, they automatically don't increase. You may need to call up the broker to discuss it with them, and your options broker can look at your track record, and your account size to figure out where you should be placed. Usually, though, level 5 naked calls don’t require more than a larger amount of funds and the like to satisfy the requirements. You typically can get into these larger accounts if you have more than 200k in your account or more.

So, don’t despair if you start off at a lower level. This allows for less risk between yourself and your broker, and that means you won't have to worry about potentially losing a ton of money.

Volatility and O...

Table of contents

• Title Page
• Copyright Page
• Table of Contents
• The Basics of Options Trading
• The Covered Calls
• A Step-By-Step Way to Sell Covered calls
• All About Buying Covered Calls
• Buying and Selling Puts
• Advanced Strategies
• Knowing your Markets
• Conclusion