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FFO Options 16: Selling Stock Options PowerPoint PPT Presentation


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FFO Options 16: Selling Stock Options. Dr. Scott Brown Stock Options. Introduction to Option Selling. Selling options, when done correctly can give you an overwhelming advantage in the market place.

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FFO Options 16: Selling Stock Options

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Ffo options 16 selling stock options

FFO Options 16:

Selling Stock Options

Dr. Scott Brown

Stock Options


Introduction to option selling

Introduction to Option Selling

  • Selling options, when done correctly can give you an overwhelming advantage in the market place.

  • Selling instead of buying is one of the ways to put the probability of profit on your side.

  • The trade can still produce a winner even if you’re wrong on the direction.


Selling options pros

Selling Options Pros

  • Directional Assessment

    • Selling gives you a huge margin for error in your directional assessment.

  • Time Decay

    • Time Decay is a characteristic of options that describes erosion of its price, causing it to lose a little bit of its value day after day, regardless of whether the underlying stock or commodity moves at all.

      • It works in favor of the seller

      • Theta gives us the dollar amount of the daily time decay


Time decay

Time Decay

  • It’s like lettuce in a produce cooler. If something doesn’t happen fast (like the stock moving higher in price quickly), the lettuce will slowly rot away until it’s worthless.

  • The option will truly be worth something only if it gets above the breakeven price (if held to expiration).


Ffo options 16 selling stock options

  • In the options industry the last 30 days of an option’s life are the most time decay intensive.

  • Time marches on, and it strips away the time value portion of the option.


How to battle time decay when buying

How to battle Time Decay when buying

  • The advice is to buy in-the-money (ITM)

  • ITM options have intrinsic value already built into them and are the ones with the lowest amount of daily time decay.

  • It will cost more in total dollars, but you’ll still be paying less for them than you would if you buy the stock outright.


Obstacles to overcome

Obstacles to Overcome

You:

  • bought the option too far out-of-the money

  • didn’t give yourself a long enough option expiration period

  • picked the wrong direction

  • might have bought overpriced options based on implied volatility.


Probabilities

Probabilities

  • Options trading is a game of probabilities.

  • You can figure out ahead of time the exact probability that your option has of being profitable.

    • You will never buy cheap OTM options again.

    • For the options buyers, the stock or commodity has to move in the right direction in the time allotted for you to see a profit. There’s no other way!


Option seller strategies

Option Seller Strategies

  • The option seller can be profitable under three scenarios: if the market moves higher, moves lower, or stays flat.

  • The probabilities can also be seen with the help of a probability calculator.

  • http://www.volatilitytrading.net/monte_carlo_option_calculator.htm

    • Concentrate in the box that says “Ever touching highest target”.


Option calculator

Option Calculator


Option seller strategies1

Option Seller Strategies

  • Option selling strategies just happen to be the right strategies based on experience.

  • The advice for any option buyer, especially OTM ones is: Don’t hold the option to expiration.

    Sell the option when you have a profit!

    • Take the profits when you can.

    • Too Mmny people opt to hold the position to expiration only to see all their gains wiped out due to time decay.


Option selling pre requisite

Option Selling Pre-Requisite

  • You DO need to have an initial directional call.

  • Selling OTM options gives you the ultimate directional cushion.


The option seller

The Option Seller

  • The option seller is the person who collects the money straight from the option buyer.

  • The only profit an option seller can generate is the amount of money received up from the buyer. Can’t make any more than that.


The option seller1

The Option Seller

  • The ultimate goal of the seller is to have time pass so the option’s time value will melt away.

  • If the OTM option expires worthless, the option seller gets to keep the cash. Or can buy back at a cheaper price.


Disclaimer

Disclaimer

  • DISCLAIMER: THE DATA CONTAINED HEREIN IS BELIEVED TO BE RELIABLE BUT CANNOT BE GUARANTEED AS TO RELIABILITY, ACCURACY, OR COMPLETENESS; AND, AS SUCH ARE SUBJECT TO CHANGE WITHOUT NOTICE. WE WILL NOT BE RESPONSIBLE FOR ANYTHING, WHICH MAY RESULT FROM RELIANCE ON THIS DATA OR THE OPINIONS EXPRESSED HERE IN. DISCLOSURE OF RISK: THE RISK OF LOSS IN TRADING FUTURES, FOREX AND OPTIONS CAN BE SUBSTANTIAL; THEREFORE, ONLY GENUINE RISK FUNDS SHOULD BE USED. FUTURES, FOREX AND OPTIONS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INDIVIDUALS, AND INDIVIDUALS SHOULD CAREFULLY CONSIDER THEIR FINANCIAL CONDITION IN DECIDING WHETHER TO TRADE. OPTION TRADERS SHOULD BE AWARE THAT THE EXERCISE OF A LONG OPTION WOULD RESULT IN A FUTURES OR FOREX POSITION.HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL, OR IS LIKELY TO, ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM, IN SPITE OF TRADING LOSSES, ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS, IN GENERAL, OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. PS.  In our opinion, we believe, it may be possible, that heavy smoking and drinking may be hazardous to your health.  If you choose to smoke and drink while trading, The Delano Max Wealth Institute nor Dr. Scott Brown is liable for any damage it may cause.  If you slip and fall on the ice, we're not liable for that either.


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