Trading options is where I originally started seeing respectable gain from the market. It helped me learn fast and learn to research the market everyday. While I don’t think I will be able to ever say I know everything about the market, trading options added knowledge, and money, quickly. When I first started, every morning at 9:30 am felt like I was walking barefoot into the jungle, and I loved every second of it. After seeing greater gains from holding crypto and finding sound companies, I have taken less frequent trips to the jungle. However, I have been using 1 solid strategy the past few months to make consistent gains from trading options.
The Basics For the Strategy
This strategy is extremely simple, but there are still areas of options I must clarify beforehand. For this strategy you must understand how option prices work, and how the strike price correlates. The strike price is what you predict the stock will be worth by your chosen expiration date. In the case of a stock like Penn ($PENN), there is a call option which has a strike of $91 ending Friday, 5/7/21 and it costs $305. Penn is currently at $90.47, so we are bullish on the stock for the week since we are buying a call. I use Penn as an example, for this strategy I most likely would not use an option costing this much.
The figure shows that the $91 Penn strike for Friday is 3.05, to get the cost of $295, just multiply the 3.05 by 100. By paying this $305, you agree to buy a contract, believing the price of Penn will be over $91 by the end of the day Friday. We will always sell the option before it expires for this strategy, holding through is not a part of the plan at all.
Most stocks have a lot of different options they can pick from, with differing strike prices. As you can see in the figure, to buy a strike price of $90 for Penn would cost you $355. This costs more money than the $91 strike because it is much more likely to happen. If Penn didn’t move for the next 4 days it would still be over $90. Vice versa, the $91.50 strike costs less than the $91 strike, because Penn would have to move a lot higher to reach the strike.
The key to the strategy is looking at how the option prices change as the strike prices change. As you can see, the price of the options from the $90 strike to the $91 changes by $50. Theoretically, if the stock moves $1, you will make around $50, it is important to note that options do not have a strict movement.
Sometimes the change may vary, depending on how far away you are from the expiration. Since we are going to sell days before the expiration, the price variation won’t really affect us. In addition, I look to buy expirations with 2-3 weeks left so there is plenty of time for the stock to move before the last week.
The reason why I don’t use stocks like Penn for this strategy is because you would be risking $305 with the $91 strike hoping to make $50. This is too much money to risk for just a $50 gain. Even though the dollar is very likely, the risk is too much. In general, a rule of thumb for options is too only spend 5-10% of your account value. I won’t be a hypocrite, I often go over this but it is my own established risk. Once the option is at a 25% loss, I sell it as anymore could be too much too handle for my account. Sometimes waiting it out can payoff, but often times it just leads to a 100% loss. We are in no business of 100% losses, especially when trying to make consistent gains from options.
Solid Stocks for The Strategy
Ideally I like to use stocks that are under $60 for this strategy because they usually have cheaper option prices that move in higher percentage jumps. Spending $30 on an option and making $25 on a $1 move has a low risk for a still decent sized gain. Stocks I look at a lot for this are Gap ($GPS), Norwegian Cruise Lines ($NCLH), and Canaan ($CAN). Their sectors and recent news do not play into these choices more than they usually would, I simply pick them for their cheap option prices. Gap often has options right above the current price for $50-$70, and if you go just a little higher you can get options for $30.
It is important to remember that all options are risky. Just because they don’t cost you much doesn’t guarantee you more of a gain. This strategy just allows you to risk little for high percentage gains. Repeating the strategy with proper loss management allows you to make consistent gains from options. Options can get confusing, if you are confused about any facet of them, DM us or leave a comment about all your questions!