Learn Options

Whether you know a lot or a little about options, they evoke a lot of emotion and opinions. Why?

Options are similar to stocks at 8x leverage. Meaning $1 in an option is loosely comparable $8 in stocks. So dollar amounts change quickly. Traders love to speculate on future price movements using options because you can get rich using them IF you are correct in timing and direction of movements in share price. 

Buying options is great for experienced traders who are utilizing a portion of their trading accounts (not all of it, because there’s no coming back from a $0 account balance!). Buying options also works well when traders want to jump on board major momentum up or down in share price. 

My approach to building consistent trading routines, lifelong income and growing assets does not involve buying options. Instead, I’ll teach you to take the SELL side of this transaction which lets time and speculation make you money. 

Don’t gamble in the casino, be the casino. 

Selling options, in my opinion, is the most sure way to build the market value of your positions while adding cash to your account weekly. Also you can withdraw/spend some of your profit from selling options because it doesn’t take away from your asset in the market - your shares. You milk the cow instead of killing the cow. 

My strategy’s foundation is the well established approach called Selling Covered Calls. Look it up as there is a tremendous amount of information and volumes of ideas, approaches, and algorithms that use this technique. 

I’ve refined this general approach with rules and some allowance for discretion to gain an edge in the market; ultimately this strategy creates profitable, consistent traders. We’ll go over this in further detail.

Trading Option Contracts

Options are contracts with expiration dates.

These contracts have a dollar value that changes when the market is open. Their price movements will resemble the corresponding stock, but they’re more volatile than an equal position size of shares.

Option contracts are for 100 shares of a company’s stock at a specified price (known as strike price).

Options contracts have an expiration date where the value is calculated mathematically according to share price at market close on the expiration date.

There are two types of option contracts: Calls and Puts

Calls speculate that share prices will go up.

Puts speculate that share prices will go down.

There are two types of transactions in Options: Buy and Sell

Therefore Traders can perform the following actions:

  • Buy Calls

  • Sell Calls

  • Buy Puts

  • Sell Puts

Option Contract Equity is the current market value in dollars of your contracts. 

It is calculated by multiplying the option contract market value x 100 x number of contracts you hold.

This can be confusing at first! 1 contract applies to 100 shares. So an option contract listed for $3.25 is actually $325.00.

Accelerate your learning - explore the pricing of options with your broker. Without submitting any orders, take a look at the contracts and the cost to buy/sell these contracts.

Intrinsic Value and Premium

There is only one dollar value for each option contract. For comprehension and strategy, you can break down the dollar values into two different components. 1) intrinsic value 2) premium.

Intrinsic value is the value that an option contract value would have at the current share price at expiration.

Premium is the value that buyers pay to speculate on the contract.

Strike Price is the share price that an option contract can be exercised at. 

Understand Option Contract Pricing

  • AAPL share price is $122.12 on December 5th

  • $125 Call with December 11th expiration is listed at $0.84

  • This Call contract can be bought or sold for $84.00 

  • $120 Call with December 11th expiration is listed at $3.20

  • This Call contract can be bought or sold for $320.00 

Consider AAPL’s current share price of $122.12 and calculate both the intrinsic and premium values.

  • The $120 Call has an intrinsic value of $212 and a premium of $108

  • The $125 Call has an intrinsic value of $0.00 and a premium of $84

Contracts with strike prices above the current share price all have an intrinsic value of zero dollars. 


Selling Puts

Consistent, profitable traders use Fundamental Analysis, Technical Analysis, and Market Sentiment to identify key price levels and sell puts at those prices. 

If you’re looking for a place to begin, selling puts could help you get comfortable with the process and collect profit this Friday. And every Friday for the rest of your life, for that matter. This is powerful knowledge.

Selling Calls

Selling calls against your shares does not require additional cash. Your shares are held as collateral until your option contract is ‘bought to close’ or the contract expires.

When you sell calls, the equity is a negative value and you will see this in your account.

An option contract with equity value of $-125 with a strike price abover current share price is 100% premium and this premium will add into your account value as expiration approaches.

Our strategy never lets options completely expire or shares get assigned to you. You’ll ‘buy to close’ your contracts during your trading window.

Selling Puts vs Selling Calls

Selling puts is more conservative than selling calls. There is more downside protection and less upside exposure. 

Buying shares and selling covered calls has more upside exposure and less downside protection than selling puts.

Both Call and Put premiums are higher for stocks that are more volatile. 

Premiums for calls are generally higher.

Since we’ve been living in a bull market for some time now, I choose to enter positions by buying shares and immediately selling calls against every one of my shares. I enjoy the downside protection while capping my upside gains. If things go very well, you will increase your equity with shares value increases and generate cash because your sold option contracts expire worthless.