My Favorite Option Trades
John F. Carter
TradeTheMarkets.com
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Options
There are hundreds of books written about
options.
There are hundreds of strategies a trader can do
with options.
For my style of trading, theses are the strategies
that I like to follow.
Lets Dive In . . .
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Strategy #1
Directional Swings
Trades That Last a Few Weeks
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Buying Options
Main thing is to have a setup on the
underlying stock.
Squeeze on the daily chart works really well.
Think of it this way you are just using the
option as a CHEAPER WAY to buy the stock.
$16 for an option is a lot cheaper than $160
for the stock.
1 option = 100 shares of stock. $16 option =
$1600 out of pocket cost.
Key is buying IN THE MONEY strike prices
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Buying Options
Squeeze fires off long on MA at $170
July options at this point only have 1 week
left.
TWO OPTIONS:
Buy DITM July Options like $155
And if trade is still valid at expiration sell
these options and then buy the Aug 155s.
Or just start off with the Aug 155s.
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Buying Options
Exit strategy same as stock Im looking
to scale out.
Stop on option is 50% of the value.
$16 option, then $8 stop.
First target is 50%, for 1/3. So $24.
Second target is 100% for 1/3, $32.
Last hold on for squeeze loss of
momentum, TTM Trend change etc.
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Buying Options
1 option at $17 = $1700 cost
1 option at $55 = $5500 in proceeds
Proceeds $3800 per contract
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Strategy #2
Directional Swings
Trades That Last a Few Days
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GS Call Option Trade Setup
This is one of my favorite trade setups.
It generally lasts 1 to 2 days.
The signal is taken off the hourly chart
but it has to be in alignment with the daily
chart.
BONUS if its also in alignment with the
weekly chart.
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GS Call Option Trade Setup
I want to go in the money on the calls with
an option delta of at least (or very close to)
70.
In this case, the Nov 155 calls had a delta
of 68, which is close enough to 70.
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Stop & Target?
Stop is just below support at 156.00.
Target Squeezes on average last about
6 bars.
If the stock moves 1.75%, I look to start
scaling out of the position.
GS at $161. 1.75% move = $2.82
On $2.82 stock move, Delta 70 option
move = $1.97
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Strategy #3
Directional Day Trades
Trades That Last a Few Hours
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Criteria for Directional Day Trades
There is an established swing high or low
on the stock that has been established.
We are approaching that swing high or
low.
There is a squeeze setting up on a 15
minute chart.
Target is a 1.272% extension of that swing
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Mastercard (MA) Example
SETUP:
Stock jumped up after earnings and
then pulled back.
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Strategy #4
Selling Credit Spreads
on Weekly Options
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Criteria for Selling
Weekly Credit Spreads
Actively traded stock that, of course,
trades weekly options. AMZN is the
example we will use today.
Stock is at a key extended support or
resistance level.
Reversion Bands are good levels for this.
No squeeze setting up.
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Criteria for Selling
Weekly Credit Spreads
Looking to sell the at the money strike,
and but the next one out for protection.
This generates a credit
Ideally able to sell for half the strike. So
on a stock with $5.00 strikes, then sell for
$2.50.
More likely it will be lower than that. $1.50
and above is ok
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Criteria for Selling
Weekly Credit Spreads
Exit? In a perfect world the spread expires
worthless and you collect the whole premium.
In the real world, once you make about 70% of
your profit target, its a good idea to just get out.
So if you sell a spread for $2.00 (so your max
profit is $2.00), and it gets to the point where the
value is $0.60 cents its a good idea to take the
money and run.
At $0.60, there isnt much more upside to your
profit but there is $4.40 worth of downside!
GET OUT!
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Strategy #5
Implied Volatility (IV) Crush
On Bad News
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Criteria for BNIVC
(Bad News Implied Volatility Crush)
Looking for stocks that are gapping down
on bad news. Earnings or some other sort
of bad news.
Typically the bulk of this down move is
already priced in pre-market before the
cash session opens.
Panic at the open Implied Volatility
explodes for the first 5 to 10 minutes of
trading.
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