Options 101 - Life's Greatest Journeys Start with a Single Step

Happy Thursday!

Over the next few weeks, we will start weekly educational series on options w, covering their basic strategies and growth potential. This week, we’ll begin at square one: what an options contract is, how it works, and why it’s essential

At a foundational level, options are contracts that grant the owner the right to buy (calls) or sell (puts) 100 shares of a specific product or stock at a predetermined price of your choosing. you can individually buy or sell calls or puts, or combine them to form bullish, bearish, or neutral strategies.

The appeal of trading options lies in its flexibility. You have the freedom to decide what to buy, when to buy it, and where you expect it to go, and whether you’ll pay for it (debit), or get paid to take the position (credit, this is what we teach here).

There are various ways to combine buying and selling calls and puts to create overall strategies. At the most basic level, trades fall into the following categories, from least to most complex:

1. Naked call or put: typically involves selling at-the-money options (current stock price), offering high potential payouts but also high risk.

   

   Selling a Naked Put

2. Vertical Call or Put Spread: combines a naked call or put with the purchase of a lower-priced call or put, limiting downside risk but also reducing odds of profit. As one of my mentors, Dr. Jim Schultz, says “for every gimme, there’s a gotcha.” The decrease in odds of profit is the gotcha here.

   

   Selling a Vertical Spread - selling the same naked put, and buying a cheaper put

3. Selling 1 naked put, 1 naked call (Strangle): A neutral play where the goal is to keep the stock within a certain range, maximizing credit received but having undefined risk to both the upside and downside. Personally, I only use this strategy on diversification pieces like Gold, Silver, Currencies, and bonds.

   

   Strangle - Selling a naked put and a naked call

4. Iron condor - Selling a vertical call and a vertical put: similar to a strangle, with limited downside risk!

   

   Iron Condor - Selling a Put Vertical and a Call Vertical. This is the same as a Strangle, with less downside risk.

That’s it! Every trade you make will be based on some variation of the above, primarily the first two strategies. The duration and risk per position can vary, which we’ll cover in the upcoming weeks.

Using optoins provides an advantage because selling options often generates credits due to the market’s overpriced fear. Over an 18 year period, from 1986-2008, selling puts yielded a higher return with less risk than holding the exact same stock (source: https://seekingalpha.com/article/299368-buy-and-hold-spy-vs-selling-spy-put-options).

To recap, we’ve covered what options are in their most basic form (calls and puts), how we trade them and the 4 main strategies, and why to use them, with its higher return and lower standard deviation of return!

Stay tuned as we continue through this series - next we will cover the whats, whys, and hows of The Greeks - which are the nuts and bolts of how a trade makes money once we place it!

What do you think? Do you have any questions, want to see this in practice? I would love to hear from you!