Beginner Options Guide For Those With No Time Report | Investors Alley (2024)

Welcome to my beginner’s guide to trading options!

I can honestly say that your decision to get this little guide may turn out to be one of the smartest things you’ve ever done. I mean that very sincerely.

The reason why is this: Trading options, particularly the way professionals do it, is one of the easiest, safest, and most reliable ways there are to generate extra income on a regular basis.

You’ve probably heard that 90% of options expire worthless – and that’s absolutely true. But you may not know the implications of this for experienced option traders.

Experienced options traders know how to take advantage of this fact and thereby put the odds in their favor – that is, how to make the kinds of trades that let them win 90% of the time.

One of the most well-known techniques for doing this is with covered calls.

That’s when owners of stocks sell options against long stock positions. It’s because 90% of the time the options expire worthless – that is, the underlying stock price doesn’t reach the level at which the options buyer wants to exercise the option – that means the option seller just keeps the cash. It’s literally free money! And then he or she does this strategy, selling options on stocks already owned, over and over and over again.

So, there’s a good reason why so many people today are interested in options! It’s not gambling, which many people believe. For many people, investing in options the way I will show you in this booklet is a way to make extra cash. It’s not about making 10,000% gains on a fluke. That is very important to understand.

The other thing you have to know before we get started is this: Options seem very complicated. And they can be complicated, too. However, if you learn a few simple but proven trading techniques, you can skip 99% of the fancy mathematical analysis and just make the trades. The actual implementation of option trades only takes a few minutes – either online or over the phone with your broker. Once you know-how, it’s as easy as buying a stock online with E*Trade or Charles Schwab.

What’s more, if you are getting trade recommendations from an experienced professional, the complexity isn’t an issue at all. You just make the trades and wait for the cash to hit your account. Eventually, you do get curious and want to learn more about the mechanics and the analysis that goes into the option trades… and then you begin to take courses and study a little.

However, the great thing about that is that you can definitely “earn while

you learn.” You can be making a good second income trading options while you’re learning about the details of options trading and how you can spot option opportunities on your own.

This booklet, therefore, is designed to be short and sweet. It’s a “quick start” guide for anyone interested in options as a way to generate consistent income. This includes investors who have traded options in the past but want to know how to do so more successfully… as well as those investors who know very little about options trading but are intrigued by the possibility that they could generate extra income from options if they knew the secrets of the pros.

Finally, a brief word about me, your author. My name is Jay Soloff. I have been trading options on a professional level and writing about different options strategies for nearly 20 years. I am currently the lead options analyst at Investors Alley and the editor of Options Profits Engine, an investment advisory service that features

professional options trading strategies – with all the bells and whistles of Wall Street – but simplified so all you have to do is enter the trades with your broker.

Previously, I was a professional options market maker on the floor of the CBOE (Chicago Board Options Exchange). I also worked with Wall Street firms to help design options market making software for trading on electronic exchanges when those exchanges first came to the U.S. I was a senior analyst at a hedge fund, where I worked closely with multiple options trading funds employing some of the most cutting edge strategies in the field. Over two decades ago I got my start at the Kansas City Board of Trade in the Wheat Futures pit.

I currently live in Arizona where I have focused on options trading advisories and teaching individual investors how to successfully trade options for the past seven years. I have a degree in economics from the University of Illinois, Champaign, and two Masters degrees from Arizona State University: an MBA and Master of Science in Information Management. With 20 years of experience in options, my focus is on making professional options strategies available to anyone who wants to learn. I specialize in teaching traders how to use volatility to trade options like a pro.

Now let’s get started…

1. The Basics of Trading Options

Now, let’s get started with a few quick definitions. You don’t need to get bogged down with the details but there are a few terms we need to clarify.

First, what exactly is an option? An option is simply a mini-contract: It is a binding agreement that gives one person the right, but not the obligation, to buy an underlying stock or other investment at a specified price at a specified date in the future. That’s all there is to it. The specified price is usually called the strike price. The amount an investor pays for the option is called the premium. The specified date in the future is typically known as the expiration date.

Let’s look at an example. An investor might think that shares of Starbucks (SBUX), selling for around $60 a share, will likely increase in value over the coming months to, say, $70 a share. As a result, this investor might purchase an option to buy 100 shares of Starbucks two months in the future with a strike price of $65 for a premium of $2 – or $200 for 100 shares. When the expiration date comes around in two months, and if Starbucks has, in fact, risen in value to $70, then this investor would likely “exercise” the option and buy the shares of Starbucks, then selling for $70, for only $65 per share. The investor in this way acquires Starbuck shares at a substantial discount. Upon acquiring the shares, he or she can then immediately sell them for a $500 profit ($7,000 minus $6,500).

Less the cost of the option, or $200, this investor would make a quick $300.

Now, if the Starbucks shares do not rise in value sufficiently – for example, only to $64 a share — then it’s likely that the investor will not exercise the option and it expires worthless. If this happens, then the $200 paid for the option is simply money under the bridge. The person who sold the option just keeps the cash! This is what happens 90% of the time: the option expires “unexercised” and the option seller keeps the cash.

There are two basic types of options: the call option and the put option. You can buy or sell either one – and sometimes investors get confused about the difference between, say, buying a call option and selling a put option.

If you buy a call option, you are expecting the price of the underlying stock to go up.

If you sell a call option, then you expect the price of the stock to either stay where it is or go down.

With a put option, the situation is reversed. If you buy a put option, then you expect the price of the underlying stock to go down. If you sell a put option, then you expect the price of the stock to either stay where it is or to go up.

A few more quick notes on options:

1. Options are quoted per share, but are sold in 100 share lots known as contracts. That means if an option is quoted at $1.00, the actual cost of purchasing the option will be $100 ($1 multiplied by 100 shares of stock in each contract).

2. The advantage of buying options is that you are able to control a large amount of stocks (typically 100 shares) for a fraction of the price of actually owning the stocks. This is what leverage is all about. For example, if the option premium of a $50 stock is $3, the total amount of the contract is $300 per option. If the investor is buying three contracts at $3 per option, since he or she is buying in 100 share lots, the total payment would be $900 (3 contracts x 100 shares per contract x $3 option premium). However, to buy the underlying shares themselves would cost $15,000 (300 x $50).

3. The buying and selling of options is now very easy to do and done automatically through online option trading brokerages. In other words, an individual investor does not deal directly with a buyer or seller of options. The transactions are all handled anonymously and electronically through the brokerages. For example, if you sell an option on 100 shares of stock you already own in your brokerage account, and the stock rises in value beyond the strike or target price, then the buyer of your option has the right to purchase your stocks. However, you do not deal directly with the buyer. Instead, your shares simply vanish from your brokerage account and any profit you may have made from the transaction (due to a rising value of your stocks) is deposited into your cash account.

Recently closed a 213% winner a month

If you could triple your money in a month, would you do it? I recently recommended a trade on VRTV that shot up 213%. I’ve got another trade open right now… here’s how to follow. Click here.

2. The Benefits of Options

In an era of near-zero interest rates, options are increasingly popular among investors as a way to generate extra income. According to Options Clearing Corporation (US clearing company focused on derivatives), over 4 billion options contracts have traded every year since 2011. This is compared to not even a billion contracts traded in 2003. That means we’ve seen the number of options trades more than TRIPLE in just the past few years. For the last four years, over 16 million options contracts are traded each day (on average).

So, why the huge surge in popularity? Well, as we noted before, one reason has been the historically unprecedented period of near-zero interest rates. Bonds and other forms of interest-bearing investments have historically been one of the pillars of a responsibly balanced portfolio. And when interest rates were above the rate of inflation – paying 4%, 5%, even 6% or 7% – then investing in bonds and other income securities made a lot of sense. But for nearly a decade, the Federal Reserve has kept interest rates low. As a result, investors have few alternatives for generating income from their money. Dividend stocks are one strategy for those seeking income… but the average dividend paid by stocks in the S&P 500 index is only around 2%. That’s better than the 1% investors can get in CDs or money market accounts but it also requires them to risk more of their savings in the stock market. This has been particularly trying for retirees who are understandably reluctant to put all of their life savings into a stock market that has, at least twice in the past 20 years, lost 40% to 50% of its value in crashes. While the market has always come back eventually, it takes many years to recover from big downturns like this and some retirees simply don’t have the time or risk tolerance to wait. 9

What are some of the other advantages and benefits of trading options?

Here are a few:

Leverage: As we saw earlier, one of the best advantages to using options is leverage. You’re able to control or take advantage of big moves in stocks or ETFs without having to shell out a lot of cash to buy the shares. For example, if an investor wanted to buy 100 shares of Apple (AAPL) selling at $120 per share, he or she would have to pay $12,000 plus commissions. However, the investor could just buy an option for the same strike price, with an expiration date of 6 months out, for only $500. The investor would then have an extra $11,500 to spend or invest on other trades.

Access: Another good reason to use options is access. That’s because options let you take positions on assets you may not be normally able to afford or to make directional bets that you may not have permission for in your account.

Many popular stocks are also extremely expensive. For example, Alphabet (GOOGL) has recently traded for a staggering $820 per share. That means you have to put up $82,000 to control those shares. But with a front-month option, you can do the same thing for only $8– or $800 per contact. This lets you trade moves in the stock even if you don’t have enough money to buy the shares outright. In addition, trading options lets you trade directional moves that you normally wouldn’t be able to do – for example, shorting stocks. With options, all you need to do is buy a put option to get the same effect.

Defined Limited Risk: Another reason to trade options is the defined limited risk. Unlike futures, in most option trades your risk is clearly defined in that you can never lose more than a specified amount, which you almost always know in advance. For example, if you purchase a call option on a stock for $200 and the stock does not perform in the manner you expected, you can lose all of your $200 but not a penny more. The same is true with credit spreads: the risk is clearly defined. With “naked” puts, however, when you sell put options on stocks you don’t actually own, the risk is potentially unlimited. That’s why selling naked options is considered a highly dangerous strategy that most options traders avoid.

Unlimited Profit Potential: At the same time, however, some options trades have virtually unlimited profit potential. The odds of these trades succeeding are usually low but some investors make them none the less. For example, if you expect a low-cost biotech stock to announce a cure for cancer any day now, you can usually purchase call options on the stock for literally pennies – controlling vast amounts of the stock. If the small biotech does, in fact, announce a cure for cancer, these inexpensive call options could theoretically soar in value to hundreds of thousands of dollars. This is why some investors like to buy call options even though they know that 90% of options expire worthless. They are betting that one day they’ll stumble upon a stock that makes huge profits.

Flexibility: Another reason why investors like options is flexibility. That’s because options allow you to define very precisely such factors as your upfront costs, the risks, and your profit goals. That is simply not possible when you purchase outright shares of stocks or ETFs. For example, if you want to make a low-cost, low-risk trade with a low probability of success but with enormous profit potential, you can purchase a long call option on a stock. On the other hand, if you’d prefer regular, consistent income with low risk, you would probably do a trade known as an iron condor. This is when you buy and sell both puts and calls on the same stock or ETF, creating a “zone” that the stock must stay within for you to make money. Since most of the time stocks and ETFs don’t move up or down that much in a specified time period, iron condor trades are consistently profitable. You don’t make as much money as with other trades but the money you do make is consistent.

3. Options Trading Risks

Like most forms of investment, trading options does come with risks.

However, as we saw above, this risk is usually limited and strictly defined. The essence of options trading is to control a certain asset within a certain period of time at a fraction of the asset’s actual price. As a result, if you bought an asset that has an expiration date three months away and within those months the stock remains at a certain price lower than what is profitable, then you could really lose all the money you paid for the option very fast. Losses compound as the expiration date approaches. Options risks come in a variety of forms:

Time risk: Options are very time sensitive investments. Time is not your friend when you are holding long options. The closer an option gets to expiration, the faster the premium in the option deteriorates. An options contract is often for a short period – generally a few months. The buyer of an option could lose his or her entire investment even with a correct prediction about the direction and magnitude of a particular price change if the price change does not occur in the relevant time period (i.e., before the option expires).

Dividend risk: Let’s say you prefer to trade options instead of stock. Sure, there are plenty of reasons why this is a good idea, as we detailed above. However, one thing you cannot get with options is a dividend payment. Owning calls to get long a stock does not give you the right to collect dividends from the company.

So, if you goal is collect dividends (like in a retirement account) then you should own stocks in that instance. However, you can still write covered calls on dividend stocks in your retirement account… double the yield!

Unlimited risk: Most options trades have strictly defined risks, as we saw earlier. However, there are some types of trades – most obviously selling “naked” puts and calls – where that is not the case. In the case of naked selling of call options, the risk is theoretically unlimited. Let’s say an investor sells naked calls on a company that is trading for $10. He believes the upside is limited for the company and sells 100 calls at a strike price of $15 for $1. From this sale, he collects $10,000 (100 contracts x $1 x 100 shares per contract). However, it turns out that the investor’s prediction is incorrect and a competitor buys out the stock for $50. All of a sudden, the call options that the trader is short climb in value to

$35 each, even though he sold them for $1. This means his $10,000 profit from selling the option premium could theoretically turn into a $350,000 loss. While this is rare, it illustrates the dangers of naked selling call and put options.

Introduction to Time Decay: Time decay refers to the ratio of the change in an option’s price to the decrease in time to expiration. Because options are what are called wasting assets, their value declines over time as they near the expiration date. The time decay is known in trading terminology as Theta. It a mathematical measure of the rate of decline of an option as it nears the expiration date. It’s not important at this stage but becomes more important as you learn more about options. Understanding theta will help you make better trading decisions down the line.

Time-Value Decay

45.00

38.90

40.00

35.00

25.70

25.00

20.00

11.00

10.00

5.00

68 days

33 days

5 days

0.00

Days Remaining Until Expiration

Time-Value Premium

The chart above shows how Theta increases as you near expiration of an option. If a stock were not to move over the course of 150 days, this is the impact time will have on your option premium – a situation known as time decay.

Intro to Risk Management: All options trading risks can be measured and managed. That’s why eventually an options investor will want to understand the “Greeks,” the various measurements of risk factors that are labeled with letters of the Greek alphabet. For example, Delta represents the rate of change between an option’s price and a $1 change in the underlying asset’s price. In other words,

Delta measures price sensitivity. As we’ve seen, Theta measures or represents the rate of change between an option and time. Gamma represents the rate of change between an option’s delta and the underlying asset’s price. Vega represents the rate of change between an option portfolio’s value and the underlying asset’s volatility – in other words, sensitivity to volatility. Rho represents the rate of change between

an option portfolio’s value and a 1% change in the interest rate. Ultimately, risk management will determine who wins and who loses in the long-run. That’s why the best options traders eventually become master risk managers.

The easiest side job to make money (2 hours per month)

Rather than picking up shifts down the street… I’m about to show you how to generate side income from your living room. I believe you could 5X your investment this year with just 2 hours per month. Click here for the details on this gig.

4. What You Need To Get Started

Brokerage account. To trade options – whether you want to go for home runs with call options or generate regular income with credit spreads – you first have to have a brokerage account. Of course, many regular online brokerages offer options trading, such as Charles Schwab, Fidelity, TD Ameritrade and E*Trade. You have to get permission from your brokerage to trade options but that usually only requires a phone call. There are different levels of permission depending upon the type of option trading you want to do. Selling covered calls is the easiest and safest type of option trading and, therefore, it represents the lowest level of permission.

In addition to standard brokerages, there are also brokerages that specialize in options trading. These typically offer a number of research tools and resources that the generic brokerages do not. Examples of the specialized options trading brokerages are optionsXpress (Schwab), TradeStation and TradeKing. It’s important that you are comfortable with the online interface and can find your way around. The different brokerages perform the same basic tasks but they often do so in different ways.

Risk Capital. Next to the brokerage itself, the next thing you need is… money. How much money should you start with? Well, that depends upon many factors including your overall financial situation, your goals for option trading and your risk tolerance. My rule of thumb is this:

• • $1,000 to trade 1-lots (1 contract trades only, buying options)
• • $5,000 to trade 5-lots (buying options only)
• • $10,000 to do any options selling

If you plan on trading options as a way to generate regular income, I recommend an account with at least $10,000. This allows you sufficient capital to generate exciting returns on a regular basis – say, $450 in instant cash income from a deposit of $3,000. It also allows you sufficient capital to recover from inevitable losses. Even with low-risk trades such as credit spreads, you will occasionally have a losing trade – and you have to be able to absorb that loss without getting discouraged. However, that said, you can realistically start option trading with as little as $1,000 and slowly build up your account.

Trading Plan. After money, what you need are a Trading Plan and a Risk Management Plan. A Trading Plan is just what it sounds like: a specific, step by step plan for making trades. You should know your entry AND exit points, how much you’re willing to risk per trade and what your realistic profit potential is. As part of the Trading Plan, you will know your position sizing and whether you will use stop-loss orders and/or alerts.

Risk Management Plan. After a Trading Plan, the next most important component of successful options trading is a Risk Management Plan. Each trade has risks but so does your entire portfolio. It’s very important, therefore, that you understand how your trades interact and what your overall portfolio risk is. Part of Risk Management is knowing how and whether you want to hedge your portfolio risk and when to make adjustments in your trades.

Just do it! Finally, if you have any interest in options trading – and youwouldn’t have read this far if you didn’t – my recommendation is that you go for it. Option trading is not as difficult or as risky as investors are led to believe. It does have risks like any form of investing. But you can usually manage these risks in a more precise manner than you can with ordinary stock investing. My recommendation is that you start small, open a brokerage account, or get permission for option trading, and then begin educating yourself.

There are many good option trading programs available. I offer a number of video training programs that walk the absolute beginner through all the various types of option trading. These courses are not expensive at all. In fact, you’ll be shocked at just how inexpensive they actually are.

If you’d like to know more about option trading, click on the links on the next page. You’ll be glad you did!

— Jay Soloff

$500 into $678,906?

If you had followed Jay Soloff’s trades, with a little luck, you could’ve turned $500 into as much as $678,906.

That sounds unbelievable. But you gotta see how it’s possible.

If you can scrounge together $500 in cash, it could’ve been worth a small fortune today.

Check out how it could’ve happened for you, click here.