Cheat Sheet for Options Trading

Summarized Information for Option Traders with recommended conditions for Short Puts or Short Calls divided into Underlying, Leg and Exit conditions.

Buyer
(long)
Call Option can (the right) to buy
pay premium for the right
buy when you expect price be above (strike) price
option price increases as the share price rises: bullish
Put Option can (the right) to sell
pay premium for the right
buy when you expect price be below (strike) price
option price increases as the share price falls: bearish
Seller
(short)
Call Option must (committed) to sell
collect premium for the commitment
sell when you expect price be below (strike) price
option price decreases as the share price falls: bearish
Put Option must (committed) to buy
collect premium for the commitment
sell when you expect price be above (strike) price
option price decreases as the share price rises: bullish

Recommended Conditions for Short Puts or Short Calls

Underlying
  • Market Cap > 2 Billion
  • Price of underlying > 15 USD
  • Average Options Volume per Day > 2,000 (enough market participants to trade options with)
  • Quarterly (13 week) Implied Volatility Percentile > 40%
  • Implied Volatility Ranking % > 30%
  • Premium of the 16 Delta SP should be > 15% monthly and > 35% weekly (as annualized profit)
Leg
  • Short Puts: Expiration day 4 weeks (regular monthly)
  • Short Calls: Expiration day 12 weeks (regular quarterly)
  • DTE 7d: annualized profit 7-13% (δ ~0.09, 1.5 Std.Dev OTM)
  • DTE 14d: annualized profit 5-8% (δ ~0.07, 1.8 Std.Dev OTM)
  • DTE 30d: annualized profit 4-7% (δ ~0.05, 2 Std.Dev OTM)
Exit
  • Time Value left < 2.5% (annualized profit) and
  • 85% of profit reached

Strategy: Selling Cash Secured Puts

Lets say you want to buy 100 shares of Matze Unlimited, because they are part of your long term Dividend Plan for your retirement. Instead of buying them with a regular order you may:

Sell one Put-Option (1 option contract = 100 shares in US)

Lets say the price for 1 share is currently 10$ and you are willing to pay up to 11$ per share. You then sell the Put Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):

"This Option guarantees that whose owner can (but doesnt must) sell 100 shares of this stock for each 11$ to me."

  • Who guarantees? You, because you are the seller
  • The fixed price of 11$ is called "strike price"
  • The option is valid until a defined "expiration day"
  • The buyer has to pay a premium of x% to the seller for the guarantee (the premium, similar to an insurance fee)
  • The seller collects the premium the moment the option is sold
  • The sellers broker reserves 100 * 11$ for the case you have to buy the shares (cash secured put)

Scenarios

  • If the price went sideways, the option will expire and the buyer will not "exercise" the option (you keep the premium and dont buy the shares).
  • If the price went above the strike price of 11$, the option will not be "exercised" by the buyer (you keep the premium and dont buy the shares).
  • If the price is under the strike price of 11$, you have to buy the shares for 11$ each (minus the collected premium).

Strategy: Selling Covered Calls

Lets say you want to sell 100 shares of Matze Unlimited when they reach or are over a certain price. Instead of placing a limit order you also may collecting additional premium on top:

Sell one Call-Option (1 option contract = 100 shares in US)

Lets say the price for 1 share is currently 10$ and you are willing to sell at 11$ per share. You then sell the Call Option for 11$. This is equal to the following contract between you (the seller) and someone else (the buyer):

"This Option guarantees that whose owner can (but doesnt must) buy 100 shares of this stock for 11$ from me."

  • Who guarantees? You, because you are the seller
  • The fixed price of 11$ is called "strike price"
  • The option is valid until a defined "expiration day"
  • The buyer has to pay a premium of x% to the seller for the guarantee (the premium, similar to an insurance fee)
  • The seller collects the premium the moment the option is sold
  • The sellers broker reserves 100 shares for the case you have to sell the shares (covered call)

Scenarios

  • If the price went sideways, the option will expire and the buyer will not "exercise" the option (you keep the premium).
  • If the price went above the strike price of 11$, the option will be "exercised" and you have to sell the shares at 11$ each (plus the collected premium).

How much is the Premium?

  • The market defines the premium, not the broker.
  • The higher the VIX, the higher the Premium.
  • The more the Expiration Date is in the future, the more expensive the Option (time/extrinsic value is higher, hence share price has more time to move).
  • The Black-Scholes Model estimates a fair value.