How to Make Money With Options Simply

[skiehawk11]

There is no secret way to make money with options. The fact of the matter is options are a investment vehicle that have a ton of leverage. Depending on the option you buy, you can have from x10 and up in leverage.

People get killed with options every year for a couple reasons:
* They buy the cheapest options (they are cheap for a reason!);
* They try to time the market and use options for this;
* They make a ton of money and reinvest all their profits into buying more options (recipe for disaster) losing all their profits in a single trade that went against them.

To be successful, you need to use leverage and risk management appropriately.

When to enter the trade:
Since we are not trying to time the market, we need to use options by using their strengths. That is, using momentum and trend indicators to determine market direction.

To keep this simple, I will focus on just buying calls. Buy a call when:
* 3, 13 SMA crossover occurs above 39 SMA,
* 13,39,3 MACD, MACD signal and MACD histogram positive.

So now you have identified when to buy a call and now you need to buy your options:
* Buy an at-the-money (ATM) call. You buy ATM calls because they depreciate in value very fast as they near their expiration date. Therefore it would be smart to buy an ATM call far enough from its expiration, but not too far where a solid move up is hampered by the time premium from a long time frame. Essentially, buy an ATM call between 15 - 30 days from expiration. You can play with this number. This will generally give you between x20 - x55 leverage.

How much should I place in the trade? Starting out, you should be aggressive, but not stupid.
Here is the risk schedule I've devised:
1,000 - 5,000: 50% of total balance
5,000 - 15,000: 30% of total balance
15,000 - 50,000: 20% of total balance
50,000 - 100,000: 10% - 15% of total balance
100,000 - 200,000 - 10,000: 20,000 per trade
200,000 - 1,000,000: 20,000 - 50,000 per trade
1,000,000+: 50,000 per trade

As your portfolio grows, invest these profits in conventional, safer securities. I would recommend dividend achiever and aristocrat dividend stocks, REITs, MLPs, long term corporate bonds, and high yield municipal bonds. These can either be etfs or individual securities.

With proper management and understanding how to use leverage, you can grow 5,000 dollars into a about 2 million dollars depending on your risk management and how you manage your trades in about 10 - 20 years.

Keep it simple. Remember that buying options you are essentially speculating the market is going to go up or down. Make sure you buy when a trend is confirmed. Stay away from possible reversal points. Just use common sense. Don't get greedy and don't be impatient.

[wolverine]

Skie, you are always too technical, make it simple.

[skiehawk11]

Skie, you are always too technical, make it simple.

Forgive me, but I think this is simple. There are essentially 3 steps I outlined:
* Know which way the trend is going,
* Buy the correct option,
* Use only a part of total balance as a way to manage risk.

[oldjack]

I am interested in options with a slightly different angle but have not made use of them for a couple of reasons.

But 1st I'd like to get clarification on the points regarding leverage. Skiehawk11 speaks of using options with significant leverage. But this is not the only way to use options. You can get started with Covered Calls and cash-secured Puts, these are 2 very safe ways to play options that involve no leverage at all.

All investment methods have their advantages and disadvantages. So it goes with options as well. But the key question is whether one can improve their returns with options and the answer is yes - but as with stocks this is not guaranteed, you need a disciplined strategy that keeps you going as skiehawk11 has presented above (though I'm not endorsing that particular strategy because I haven't looked at it in enough detail).

I would like to take advantage of options myself because it is possible to better define and control risk. It is also possible to more clearly define risk-reward ratios. However, some reasons I have yet to get involved with options include 1) each option contract covering 100 shares of an underlying security (meaning you may need big money if you get put a pricey stock) and 2) I question whether in opting for a cash-secured Put at a low price and later getting Put the stock, can I be sure I would want it after the price dropped. I understand #1 can be mitigated by rolling contracts forward, but still there is always the chance that you might get busy and miss your chance to do that. Also, the dreaded margin calls could be really nasty if you're using too much leverage and even if you're not - you have to be prepared for the possibility. All in all this has kept me from getting into options for now.

[oldjack]

Skie, you are always too technical, make it simple.

Forgive me, but I think this is simple. There are essentially 3 steps I outlined:
* Know which way the trend is going,
* Buy the correct option,
* Use only a part of total balance as a way to manage risk.

Skiehawk11, the strategy you mention could be used with any option/underlying issue. Are there any in particular you in mind (e.g., SPY)?

[skiehawk11]

oldjack,

I trade SPY only currently. Get to know one security really well and you'll become better at trading it. If you focus on several different securities you tend to become mechanical and forget to actually analyze trades which could hurt you.

[skiehawk11]

I am interested in options with a slightly different angle but have not made use of them for a couple of reasons.

But 1st I'd like to get clarification on the points regarding leverage. Skiehawk11 speaks of using options with significant leverage. But this is not the only way to use options. You can get started with Covered Calls and cash-secured Puts, these are 2 very safe ways to play options that involve no leverage at all.

All investment methods have their advantages and disadvantages. So it goes with options as well. But the key question is whether one can improve their returns with options and the answer is yes - but as with stocks this is not guaranteed, you need a disciplined strategy that keeps you going as skiehawk11 has presented above (though I'm not endorsing that particular strategy because I haven't looked at it in enough detail).

I would like to take advantage of options myself because it is possible to better define and control risk. It is also possible to more clearly define risk-reward ratios. However, some reasons I have yet to get involved with options include 1) each option contract covering 100 shares of an underlying security (meaning you may need big money if you get put a pricey stock) and 2) I question whether in opting for a cash-secured Put at a low price and later getting Put the stock, can I be sure I would want it after the price dropped. I understand #1 can be mitigated by rolling contracts forward, but still there is always the chance that you might get busy and miss your chance to do that. Also, the dreaded margin calls could be really nasty if you're using too much leverage and even if you're not - you have to be prepared for the possibility. All in all this has kept me from getting into options for now.

Oldjack, my personal recommendation when being a seller of options is to be much more savvy in regards to understanding the technicals of options. The reason is that selling options you have potential unlimited loss. Of course you can mitigate your loss through different spreads, etc, but generally this is out of the realm of expertise for most investors.

Also, covered call strategies are really only beneficial if you own a large amount of stock as it is. So essentially, a portfolio of 100k or more.

With credit spreads, you need to take volatility and time into account. For instance, selling ATM options would be appropriate for near expiration options since time decay accelerates quicker for those options and vice versa for OTM options.

Oldjack, do you have any experience with options? If you want to brush up on credit spreads and covered calls, let me know. I can guide you to some good resources.

[skiehawk11]

To clarify, even though you are selling options, you still have massive amounts of leverage involved. You are selling the obligation to buy say 3,000 shares at a certain strike price. For this obligation, someone is paying you say 1 dollar to 4 dollars a share. So you are getting paid 3,000 dollars to buy say 20,000 dollars worth of stock if it reaches that price or someone decides to exercise their options. It is leverage with no backstop for loss.

[tspnoob]

Skie I am interested in options but I gather the important part is knowing where the market is headed. Have you seen the Ebb guys triples patterns in his Ebbchart primer. His 11 triples patterns predicted the market direction in the bear and the bull market. He got the first wrong and then the 11 he correctly predicted. In the right hands with options knowledge this is a goldmine. I want to research the options in the future. Again don't take my word for it and read read read the Ebb guys Ebbchart primer . A must read and I see you prefer SPy than TNA. Check his TNA too, you won't be sorry. Good luck in your investment. I used to read Ebb but he went premium and I am following again in full circle. Peace.

[Painter]

Thanks Skie,

I always find your posts interesting. I am beginning to study options now, and found your comments useful. On another note, have you had success using your 3, 13, 39 SMA strategy to sort of swing trade your TSP account? I'm desperately trying to take the guessing game out of entering and exiting the market, and haven't found anything consistent enough to stick with. If worse comes to worse, I'm going to use the the 200 SMA. If the closing price at the end of the month is above the 200 SMA I will enter or remain entered if already in, and if its below, then do the opposite, exit or stay out if already out.

[tspnoob]

Painter I am tired of T&A analysis, I read it for the entertainment purpose.. They speak together with one mind. SMA, hi low lower hi, higher hi, lower lo ad nauseum. I tell you why the Ebb guys triples patterns work. He proccess them numbers data, translate them to his patterns, proccess the patterns again. He present it in a silver platter, finish product ready for the consumption. No guesswork. No waiting for this line to hit this line. No cup a noodles. No golden cross overs,hindenberg,head n shoulder shampoo. Every single one I read speaks in tongues. May God save our souls. Peace.

[skiehawk11]

Skie I am interested in options but I gather the important part is knowing where the market is headed. Have you seen the Ebb guys triples patterns in his Ebbchart primer. His 11 triples patterns predicted the market direction in the bear and the bull market. He got the first wrong and then the 11 he correctly predicted. In the right hands with options knowledge this is a goldmine. I want to research the options in the future. Again don't take my word for it and read read read the Ebb guys Ebbchart primer . A must read and I see you prefer SPy than TNA. Check his TNA too, you won't be sorry. Good luck in your investment. I used to read Ebb but he went premium and I am following again in full circle. Peace.

From what I've seen, Ebb Charts does pretty well. I read Ebb Chart's primer Friday, but will re-read it again today and post what I think. I have not yet found any historical performance data on his system besides the 2012 YTD info.

TSPnoob, you are correct. It is important to know which way the market is headed. The good thing is that the shorter the time period, the easier it is to predict price direction. You don't want to be in long, but at the same time you want to make a decent return.

[skiehawk11]

Thanks Skie,

I always find your posts interesting. I am beginning to study options now, and found your comments useful. On another note, have you had success using your 3, 13, 39 SMA strategy to sort of swing trade your TSP account? I'm desperately trying to take the guessing game out of entering and exiting the market, and haven't found anything consistent enough to stick with. If worse comes to worse, I'm going to use the the 200 SMA. If the closing price at the end of the month is above the 200 SMA I will enter or remain entered if already in, and if its below, then do the opposite, exit or stay out if already out.

Painter, I have had success with the 3,13,39 strategy and options. I will post some options trades today if I make any on the intraday and will post any on a longer term basis.

[tspnoob]

Skie I am interested in options but I gather the important part is knowing where the market is headed. Have you seen the Ebb guys triples patterns in his Ebbchart primer. His 11 triples patterns predicted the market direction in the bear and the bull market. He got the first wrong and then the 11 he correctly predicted. In the right hands with options knowledge this is a goldmine. I want to research the options in the future. Again don't take my word for it and read read read the Ebb guys Ebbchart primer . A must read and I see you prefer SPy than TNA. Check his TNA too, you won't be sorry. Good luck in your investment. I used to read Ebb but he went premium and I am following again in full circle. Peace.

From what I've seen, Ebb Charts does pretty well. I read Ebb Chart's primer Friday, but will re-read it again today and post what I think. I have not yet found any historical performance data on his system besides the 2012 YTD info.

TSPnoob, you are correct. It is important to know which way the market is headed. The good thing is that the shorter the time period, the easier it is to predict price direction. You don't want to be in long, but at the same time you want to make a decent return.

Skie, appreciate the response but can you tell how do we best utilize Ebbs triples patterns in options trade. His TNA is great but I don't have margin account to be able to trade in out everyday.

[skiehawk11]

TSPNoob, if his system is calling for a positive uptick in TNA, I would buy an at the money call option on the day or week he says it will go up. If he says it will go down, buy an at the money put.

Th amount of put or calls depends on you. I personally wouldn't risk more than 30% of your entire balance on a single trade.

When to sell is completely up to you. I would strongly recommend a conservative target percentage. People tend to get hit hard by waiting for the option to appreciate even higher. Although it does happen, most times holding out ends in severe losses.