Options Trading Cheat-Sheet
Summarized Tipps for Option Traders with recommended conditions for Short Puts or Short Calls, the Underlying Stock, Legs and Exits.
| 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 |
- Options prices move more than their underlying share prices, therefor:
- Options are leveraged by nature.
- You dont need to exercise a bought option, you make more money by just selling it.
- Buying Put Options is usually safer than shorting the underlying shares (same is for Call Options, just vice versa):
- You can only loose the option price, while shorting a share has theoretical no limits on loosing, if the share price rises and rises even more.
- This is especially true for short-term trades lasting only a few weeks.
- When shorting shares for several months or even years, you have to calculate the costs and maybe its better to short the underlying shares itselfs.
Recommended Conditions for Short Puts or Short Calls
Underlying
Medium Volatility Stocks: Short Puts: 30d annualized profit ~6%
High Volatility Stocks: Short Puts 30d annualized profit: ~8%
- 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)
Medium Volatility Stocks: Short Puts: 30d annualized profit ~6%
High Volatility Stocks: Short Puts 30d annualized profit: ~8%
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)
- Time Value left < 2% (annualized profit) and
- 85% of profit reached
- Premium 2.5x of premium collected
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."
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."
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.