Testimonials
how much does grey goose cost uk Parajumpers Gobi canada goose sverige Office 2013 Product Key Oracle exams canada goose limited edition ovo discount authentic canada goose expedition parka canada goose jackets where to buy in canada

October 8, 2014

Thoughts on Being a Great Trader Part II

About a month ago we talked about option traders really being committed to reaching their trading goals. This time we’ll go over why an option trader needs a trading plan and a few general guidelines to follow. If you really want to improve your trading heading into this fall trading season, you should absolutely have and follow a trading plan. But be forewarned; this is the part nobody wants to do. Most option traders think that their trading plan is in their head and that all they need is a proper options education. “I know what I need to do and when I need to do it” most beginning and some veteran options traders will exclaim. If it was just that easy, everyone would be a great options trader. Unfortunately it is simple not the case. That is specifically why you need a written options trading plan. Just because you know what to do doesn’t mean you will do it. And that is the key!

Before you even begin to write your options trading plan, you must take an inventory of yourself. What are your strengths and weaknesses? You must take the time to truly examine yourself and be honest about whom you are. Your options trading plan must match your personality. You will probably discover more about yourself that you were bargaining for.

The first thing you need to do to start your options trading plan is to write down your goals like we talked about in the previous blog. Once you do this, it brings everything into perspective. The same reason you need to write down your goals is the same reason you need to write down your options trading plan-so your thoughts are transformed from the subconscious to the conscious. It does not matter if you write the plan on a nice piece of paper or a cocktail napkin. It just needs to be written down in your own words.

The next section of your options trading plan will be money management. This is one of the most crucial and often overlooked components of successful options trading. How much are you going to risk per trade? What are your weekly or monthly profit targets? What are the maximum losses you are comfortable with on a daily, weekly or monthly basis? All of these questions need to be answered right in this section. A great tip for this money management section is to not worry about monetary goals at first. Concentrate on taking and managing the best possible trades and then after some consistency has been established goals can be set.

Strategies will be the next component of your options trading plan. This will be the meat and potatoes of the plan so to speak. A thing to consider is to start with relatively a few simple strategies (long calls and puts) and master them before you write in more complex option strategies into your plan. You need to describe in as much detail as possible the strategy you intend to use. You will probably be making constant changes to this part until you get exactly what you want.

The last section will be the follow up and review. This is when an option trader needs to print out the charts and the option chains and review them. Did I follow my written options trading plan like I said I would? This needs to be done when the market is closed so all your attention can be on the review. You must keep a trading journal and must always acknowledge your winners and more importantly learn from your losing trades. Understanding and watching how the option prices change in regards to time and the underlying is a big bonus that can be also gained by observing past trades. This in my opinion is invaluable for progressing as an option trader.

Feel free to use this as a general outline of an options trading plan to get you started. If you need more help or more direction, feel free to contact me.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

October 1, 2014

Long Calls and Bull Call Spreads

With the Dow and S&P 500 falling just off their all-time highs recently and yet refusing to move much lower at this point, it probably makes sense to keep at least a few bullish trade ideas in your trading stable. The market is due for some type of bigger correction, but who knows when that will happen. Even if it does pullback sooner than later, there will be another bullish opportunity at some point rest assured. Traders often ask me is there a way that you can take advantage of this bullish investing scenario while limiting risk? Certainly, there are a few option strategies that can accomplish this goal. One that may be a better option compared to the rest is a debit call spread which is sometimes referred to as a bull call spread.

Definition

When implementing a bull call spread, an option trader purchases a call option at one strike and sells the same number of calls on the same stock at a higher strike with the same expiration date. Here is a trade idea we looked at in Group Coaching just about a month ago. In late August, Tesla Motors (TSLA) moved up to a resistance area right around $260, formed a bullish base and then closed above resistance at around $263. With implied volatility (IV) generally being low at the time, which is advantageous for purchasing options as with a bull call spread, and a directional bias, a bull call spread was considered.

The Math

The trader’s maximum profit in the bull call spread is limited; he can make as much as the difference between the strike prices less the net debit paid. For simplicity, let’s assume that at the time one September 265 call was purchased for 8.00 and one September 270 call was sold for 6.00 resulting in a net debit of $2 (8 – 6). The difference in the strike prices is $5 (270 – 265). He would subtract $2 from $5 to end up with a maximum profit of $3 per contract. So if he traded 10 contracts, he could make $3,000 (10 X 300).

Although he limited his upside, the trader also limited the downside to the net debit of $2 per contract. To simply breakeven, the stock would have to trade at $267 (the strike price of the purchased call (265) plus the net debit ($2)) at expiration.

Advantage Versus Purchasing a Call

When trading the long call, a trader’s downside is limited to the net premium paid. If he simply purchased the out-of-the-money September 265 call, he would have paid $8. The potential loss is, therefore, greater when implementing a call-buying strategy. If he had moved to a call with a longer time frame to expiration, he would have even paid more for the option. This would also increase his potential loss per option.

Conclusion

By implementing a bull call spread, traders can hedge their bets; limiting the potential loss. This is the advantage when comparing to purchasing a call outright. Remember that there are no sure-fire ways to make money by using options. However, knowing and understanding the strategy is a good way to limit losses.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 25, 2014

The World Series and Exits for an Options Trader

The World Series playoffs are about to begin and it is the most exciting time of the year if you are a fan of baseball. But did you ever stop and think for a minute how these fantastic athletes got to be where they are? It took a lot of dedication, courage and a well thought out plan to make it to their elite level. If that sounds familiar it should because those same attributes are what it takes to learn to trade and become a successful options trader.

Need a Plan

You might be dedicated and have the courage to be an options trader, but do you have a trading plan that you follow? I talk to a lot of option traders and sadly it is true. Option traders spend a lot of time looking for solid trades that they often neglect probably the most important part: the management of the trade. If that is you take a little solace because you are not alone.

A simple way to combat this problem is by having a plan in place before even entering the trade. This is the psychological part of trading. Having a plan in place will remove emotions from getting in the way of decision making and possibly producing unwanted results. Should I stay in the trade or should I exit? Decisions like that should not be made after the trade is executed because many option traders can become too emotional when the trade is in progress especially when they are losing money on the trade. Here are a few things to consider about trade management.

Plan Should Include Determining Exits

Option traders should think about how they are determining their exits for profit and loss. Don’t forget to consider how the greeks and the implied volatility may be affected if the outlook or environment changes. In a volatile market like this, an options trader may need to make some adjustments especially about taking early profits or exiting for a loss.

I generally determine my exits two ways; a certain percentage or based on the chart. When using a certain percentage, I determine how much percentage-wise I am winning to risk on the trade and what percentage I am looking to take profits. When using the chart, I determine at what levels I will exit my position for a loss if that area is violated and I always look to take some profit off if the stock comes into an area I deem a target area (maybe a support or resistance level).

Option traders should also think about how they will exit if their targets are not met. How will the exit or stop be determined? Once again, don’t forget to use the greeks and implied volatility in your methods because it could make the difference between profiting or losing.

Finally

All trading including option trading can be very difficult at times just like training to be a professional athlete and appear in the World Series. Not having plan in place can make it exponentially more difficult and determining exits is just one part of that plan. It helps to have courage and be dedicated to reaching your goals but a solid trading plan can go a long way towards potential success. Athletes that train without a plan are similar to option traders letting their emotions make decisions for them. Once there is well thought out plan in place and most importantly the plan is followed, an option trader removes unwanted emotions which can hinder his or her chances of being successful.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 17, 2014

Long Calls and Bull Call Spreads

With the Dow and S&P 500 falling just off their all-time highs recently and yet refusing to move much lower at this point, it probably makes sense to keep at least a moderately bullish bias towards many stocks. The market is due for some type of pullback, but who knows when that will happen. Even if it does pullback sooner than later, there will be another bullish opportunity at some point rest assured. Traders often ask me is there a way that you can take advantage of this bullish investing scenario while limiting risk? Certainly, there are a few option strategies that can accomplish this goal. One that may be a better option compared to the rest is a debit call spread which is sometimes referred to as a bull call spread.

Definition

When implementing a bull call spread, an option trader purchases a call option at one strike and sells the same number of calls on the same stock at a higher strike with the same expiration date. Here is a trade idea we looked at in Group Coaching just a couple of weeks ago. Tesla Motors (TSLA) moved up to a resistance area right around $260, formed a bullish base and then closed above resistance at around $263. With implied volatility (IV) generally being low, which is advantageous for purchasing options as with a bull call spread, and a directional bias, a bull call spread can be considered.

The Math

The trader’s maximum profit in the bull call spread is limited; he can make as much as the difference between the strike prices less the net debit paid. For simplicity, let’s assume that at the time one September 265 call was purchased for 8.00 and one September 270 call was sold for 6.00 resulting in a net debit of $2 (8 – 6). The difference in the strike prices is $5 (270 – 265). He would subtract $2 from $5 to end up with a maximum profit of $3 per contract. So if he traded 10 contracts, you could make $3,000 (10 X 300).

Although he limited his upside, the trader also limited the downside to the net debit of $2 per contract. To simply breakeven, the stock would have to trade at $267 (the strike price of the purchased call (265) plus the net debit ($2)) at expiration.

Advantage Versus Purchasing a Call

When trading the long call, a trader’s downside is limited to the net premium paid. If he simply purchased the out-of-the-money September 265 call, he would have paid $8. The potential loss is, therefore, greater when implementing a call-buying strategy. If he had moved to a call with a longer time frame to expiration, he would have even paid more for the option. This would also increase his potential loss per option.

Conclusion

By implementing a bull call spread, traders can hedge their bets; limiting the potential loss. This is the advantage when comparing to purchasing a call outright. Remember that there are no sure-fire ways to make money by using options. However, knowing and understanding the strategy is a good way to limit losses.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 11, 2014

Calendar Spreads

A calendar spread, or what it is sometimes referred to as a time spread or horizontal spread can be a simple and quite useful option strategy. The calendar spread is designed to work somewhat like a covered call but without the potentially huge outlay of cash that can accompany buying shares of stock. The spread profits from time decay (option theta) and can make money in any direction depending on the strikes that are chosen. The spread can be set-up with a bullish, bearish or neutral outlook on the underlying either using call options or put options.

How to Create a Calendar Spread

Creating a calendar spread involves buying and selling options on the same underlying with the same strikes but different expirations. The best case-scenario is for the stock to finish at the strike price allowing the short-term option to expire worthless and still have the long option retain much of its value.

For the sake of this example, close to at-the-money (ATM) options will be used but out-of-the-money (OTM) and in-the-money (ITM) options can also be used depending if there is a bullish or bearish bias. As a general guideline, if I have a bullish outlook on the underlying I use call options and put options for a bearish bias. The reasoning is that OTM options generally have tighter bid/ask spreads than options that are currently trading ITM. Initially being down less money entering any option trade due to a tighter bid/ask spread is always a good thing.

Simple to Follow Example

In late August, Marriot International (MAR) was trading just over $69. The stock has been slowly rising over the last year. The trader forecasts that the stock will still be about the same price or maybe a tad higher by September expiration. This scenario makes it worthwhile to look at a calendar spread. MAR has September and October expiration’s available. The trader can buy the October 70 call for 1.25 and sell the September 70 call for 0.55. The total cost of the calendar spread is 0.70 (1.25 – 0.55) and that also represents the most that can be lost.

If the stock remains relatively flat as September expiration approaches, the calendar spread’s value should increase. Hypothetically, with about a week left until September expiration the October 70 call might be worth 1.00 and the September 70 call might drop to 0.15. The spread now would be 0.85. A profit could now be made of $0.15 (1.25 – 0.55). That doesn’t sound like much but a $0.15 profit on a $0.70 investment in a couple of weeks is not a bad return in my opinion.

The whole key to the success of the calendar spread is the stock must not have huge price swings. If the stock falls more than anticipated, the spread’s value will decline along with the stock. If the stock rises well above $70, the short September 70 call will partially or fully offset the increase in the long October 70 call depending on how much the stock rises.

Conclusion

There are other factors that can affect a calendar spread like implied volatility skews that can both help and hurt the spread. It is advantageous for the implied volatility to be higher for the short option versus the long option. This way the more expensive premium is sold and the cheaper is purchased. This component will be discussed in greater detail at a later time.

The beauty of the calendar spread is that it almost functions like a credit spread without the added risk. The risk with a credit spread is that it may suffer a substantially greater loss than a calendar spread if the stock moves in the opposite direction of the outlook due to high risk and low reward scenario that accompanies most out-of-the-money (OTM) credit spreads.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

September 4, 2014

Thoughts on Being a Great Trader Part I

With September already here and volatility and volume expected to rise, it might be a good time to give yourself a mental break and reflect on your trading before Fall. You might start by asking yourself are you the great options trader you thought you would be by now or have you ever wondered what truly makes a great options trader? I mean not a options trader that does pretty well, but one that you envy and want to be? Are great options traders just born that way? Does being smarter necessarily give you an advantage in options trading? Is studying charts until you are bleary-eyed from looking at them the secret; or is it just dumb luck on who succeeds and who fails? How does one learn to trade options?

Must-Have Qualities

The qualities that you will need to succeed in my opinion are a commitment to success, having an options trading plan and the most important, mastering your emotions—or the psychology of options trading. I believe that options trading is one of the hardest jobs in the world (quite possibly the best, but one of the hardest aside from motherhood). This is a good explanation why it will probably take you a lot longer than you think before you really get a solid grip on it.

Commitment to Success

So let’s first talk about your commitment to success. This essentially sounds like the easiest of the three qualities to master doesn’t it? Why does anyone want to become a options trader in the first place? Probably, because they want to become wealthy and very successful. Who isn’t committed to that, right? All you need is some money, charts, and a platform and you are on your way. Almost everyone says they are committed but most people are not because when they find out options trading is work—and it is. They tend to lose their focus and their original goals when the going gets though.

Reaching Your Goals

If you are committed to success then you must be committed to reaching your goals. The most important part of having goals is to write them down. If you never write them down they are simply just dreams. We don’t want to dream we are a great trader we want to realize that we are! Only about 2% of Americans write down their goals. Is it really shocking to know that most people never achieve what they want out of life? As “corny” as it may seem, when you write something down no matter what, your thoughts are transformed from the subconscious to the conscious and are now tangible. Your goals have become something you can see and say out loud. If you never write them down they never exist outside of your thoughts.

Last Thoughts for Now

Let me leave you with this before I end this introduction on how we are going to build a great options trader out of you. I think everyone can agree whether you are a beginning options trader or a more experienced options trader that there are several key components you will need to do to become a standout. Having said this I also know that most of you will not be committed to do this at first. I know I wasn’t. I thought to myself I am too smart and I know how to options trade. I knew it would not be easy but I was unprepared for the results that followed. I’ll give you a hint, they weren’t good. After I decided to fully commit myself and write down my goals did my results finally change.

Let’s face it; options trading is a realm like no other. Options trading looks easy and which in turn makes you lazy to work at it. Be committed to your success and write down your goals right from the start will only help you achieve the success you are after that much quicker.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 28, 2014

Short-Term Put Options

Last week we talked about short-term call options and this week I thought it would be appropriate to discuss short-term put options. The mentality behind short-term put options is probably different than the mentality behind short-term call options. Many times option traders consider short-term put options as a means of protection. With the market extended and the possibility of stocks moving lower in the near future, it might be a good time to talk about put options.

If a trader buys a put option, he or she has the right to sell the underlying at a particular price (strike price) before a certain time (expiration). If a trader owns 100 shares of stock and purchases a put option, the trader may be able to protect the position fully or to some degree because he or she will have the right to sell the stock at the strike price by expiration even if the shares lose value.

Some investors who are looking to protect an investment only consider buying short-term puts, or front-month puts for protection. The problem however, is that there is a flaw to the reasoning of purchasing short-term put options as protection. Similar to short-term call options, the contracts have a higher option theta (time decay) and relying on short-term puts to protect a straight stock purchase is not necessarily the best way to protect the stock.

Although short-term puts may be cheaper than longer expiration puts, if an option trader was to continually purchase short-term puts as protection, it could end up being a rather expensive way to insure the stock particularly if the stock never declines to the short-term puts strike price. If a put option with a longer expiration was purchased, it would certainly cost more initially, but time decay (premium eroding) would be less of a factor due to a smaller initial option theta. Here is an example using short-term put options.

Using a hypothetical trade, let’s say a stock is trading slightly above $13 and our hypothetical trader wants to by the stock because he or she thinks the stock will beat its earnings’ estimates in each of the next two quarters. This investment will take at least six months because the trader is counting on the earning reports to move the stock higher.

Being a smart options trader, our trader wants some insurance against a potential drop in the stock just in case. The trader decides to buy a slightly out-of-the-money September 13 put, which carries an ask price of 0.50 (rounded for simplicity purposes). That $0.50 premium represents almost 4 percent of the current stock price. In fact, if the option trader rolled the short-term put option month after month, it would create a big dent in the initial outlay of cash. After about seven months (assuming the stock hangs around $13 and each monthly put option costs 0.50) the trader would lose more than 25 percent on the $13 investment.

If the stock drops in price, then the ultimate rationalization for the strategy is realized; protection. The put provides a hedge. The value of the option will increase as the stock drops, which can offset the loss suffered as the stock drops.

Buying a put option is a hedge and can be considered a decent insurance policy for a stock investment. Buying short-term put options as a hedge can make it an extra expensive hedge due to time decay (option theta). Option traders and investors can usually find better ways to protect a stock. To learn new and different approaches, please visit the Learn to Trade section of our website.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 21, 2014

Short-Term Call Options

With the market once again considering a move higher as earnings wind down, it might be a good time to talk about call options. When an option trader buys a call option, he or she has the right to buy the underlying at a particular price (strike price) before a certain time (expiration). Keep in mind that just because the option trader has the right to buy the stock, doesn’t mean that he or she has to necessarily do so. The call option just like a put option can be sold anytime up until expiration for a profit or loss.

A lot of traders especially those who are just learning to trade options can fall in love with call options and especially short-term call options because they are cheaper than call options with longer expirations. We can classify short-term call options as call options that expire in less than thirty days for the sake of this discussion. But there is a potential problem with purchasing short-term call options. The shorter the amount of time that is purchased, the higher the option theta (time decay) will be. The higher the time decay, the quicker the premium will erode away the call option’s premium. The call option may be cheaper due to a shorter time until expiration, but it may not be worth it overall. Let us take a look.

With Tesla Motors (TSLA) trading around $260 last week, an option trader might have considered call options to profit from an expected move higher. He could have purchased the August 260 calls for 3.30 that expired in 3 days. Yes, the options are cheap and yes they will profit if TSLA moves up vigorously in the next couple of days. But the option theta is 0.70 on the call options meaning they will lose $0.70 for everyday that passes with all other variables being held constant, In fact if the stock trades sideways, the option theta will increase the closer it gets to expiration since there is currently no intrinsic value (the in-the-money portion of the option’s premium) on the call options.

If an option trader purchased the September 260 calls for TSLA, it would have cost him 12.00 and it would have made the at-expiration breakeven point of the trade $272 (260 + 12) versus only $263.30 (263 + 3.30) with the August call options. But the major benefit to buying further out is option theta. The September 260 calls had an option theta of 0.15 meaning for every day that passes, the option premium would decrease $0.15 based on the option theta and all other variables being held constant. This is certainly a smaller percentage of a loss based on option theta for the September options (1.25%) versus the August options (21.21%) especially if the stock trades sideways or moves very little.

Fast forward to August expiration, TSLA closed basically at $262. The August 260 call would have expired with an intrinsic value of $2 (262 – 260). If the option trader did nothing up until expiration, the long August 260 call would have lost $1.30 (3.30 – 2) because there would be no time value (option theta) left and only the intrinsic value. The September 260 call would have lost approximately $0.45 (3 X 0.15) in theta but also gained $1 (2 X 0.50) from delta based on a delta of 0.50 and a $2 (262 – 260) move higher. The September 260 calls would now be worth $12.55 (12 + 0.55) and profited $0.55 (12.55 – 12).

Having enough time until expiration is a critical element when an option trader is considering buying options like the call options we talked about above. Keep in mind that as a general rule, options lose value over time and the option theta starts to accelerate even more with 30 days or less left until expiration. Buying a call option with more time until expiration will certainly cost more than one with less time but the benefits, including having a smaller option theta, might be worth the more expensive price especially if the underlying fails to move higher.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 14, 2014

AAPL and Option Gamma

Many option traders will refer to option delta as the most important option greek. It is debatable but in my opinion the next most important greek is option gamma. Option gamma is a one of the so-called second-order option greeks. It is, in theory, a derivative of a derivative. Specifically, it is the rate of change of an option’s delta relative to a change in the underlying security.

Using option gamma can quickly become very mathematical and tedious for novice option traders. But, for newbies to option trading, here’s what you need to learn to trade using option gamma:

When you buy options you get positive option gamma. That means your deltas always change in your favor. You get longer deltas as the market rises; and you get short deltas as the market falls. For a simple trade like an AAPL September 95 long call that has an option delta of 0.55 and option gamma of 0.0478 , a trader makes money at an increasing rate as the stock rises and loses money at a decreasing rate as the stock falls. Positive option gamma is a good thing.

When you sell options you get negative option gamma. That means your deltas always change to your detriment. You get shorter deltas as the market rises; and you get longer deltas as the market falls. Here again, for a simple trade like a short call, that means you lose money at an increasing rate as the stock rises and make money at a decreasing rate as the stock falls. Negative option gamma is a bad thing.

Start by understanding option gamma from this simple perspective. Then, later, worry about figuring out the math.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

August 7, 2014

An Option Strangle with AAPL Options

An option strangle is an option strategy that option traders can use when they think there is an imminent move in the underlying but the direction is uncertain. With an option strangle, the trader is betting on both sides of a trade by purchasing a put and a call generally just out-of-the-money (OTM), but with the same expiration. By buying a put and a call that are OTM, an option trader pays a lower initial price than with an option straddle where the call and put purchased share the same strike price. However, this comes with a price so-to-speak; the stock will have to make a much larger move than if the option straddle were implemented because the breakeven points of the trade will be further out due to buying both options OTM. The trader is, arguably, taking a larger risk (because a bigger move is needed than with an option straddle), but is paying a lower price. Like many trade strategies there are pros and cons to each. If this or any other option strategy sounds a little overwhelming to you, I would invite you to checkout the Options Education section on our website.

The Particulars

An option strangle has two breakeven points just like the option straddle. To calculate these points simply add the net premium (call premium + put premium) to the strike price of the call (for upside breakeven) and subtract the net premium from the put’s strike (to calculate downside breakeven). If at expiration, the stock has advanced or dropped past one of these breakeven points, the profit potential of the strategy is unlimited (for upside moves). The position will take a 100% loss if the stock is trading between the put and call strikes upon expiration. Remember that the maximum loss a trader can take on an option strangle is the net premium paid.

Implied Volatility

The implied volatility (IV) of the options plays a key role in an option strangle as well. With no short options in this spread, the IV exposure is concentrated. When IV is considered low compared to historical volatility (HV), it is a relatively “cheap” time to buy options. Since the option strangle involves buying a call and put, buying “cheaper” options is critical. If the IV is expected to increase after the option strangle is initiated, this could increase the option premiums with all other factors held constant which is certainly a bonus for long option strangle holders.

Example Trade

To create an option strangle, a trader will purchase one out-of-the-money (OTM) call and one OTM put. An option trader may think Apple Inc. (AAPL) looks good for a potential option strangle. At the time of this writing, Apple stock is trading at around $98. With IV lower than HV and the trader unsure in what direction the Apple stock may move, the option strangle could be the way to go. The trader would buy both an Aug-29 99 call and an Aug-29 97 put. For simplicity, we will assign a price of 1.65 for both – resulting in an initial investment of 3.30 (1.65 + 1.65) for our trader (which again is the maximum potential loss).

Apple Stock Rallies

Should the Apple stock rally past the call’s breakeven point which is $102.30 (99 + 3.30) at expiration, the 97 put expires worthless and the $99 call expires in-the-money (ITM) resulting in the strangle trader collecting on the position. If, for example at expiration the stock is trading at $104 which means the intrinsic value of the call $5 (104 – 99), the profit is $1.70 (5 – 3.30) which represents the intrinsic value less the premium paid.

Apple Stock Declines

The same holds true if the stock falls below the put’s breakeven point at expiration. The put is in ITM and the call expires worthless. At expiration, if Apple stock is trading below the put’s breakeven point of the trade which is $93.70 (97 – 3.30), a profit will be realized. The danger is that Apple stock finishes between $97 and $99 as expiration occurs. In this case, both legs of the position expire worthless and the initial 3.30, or $330 of actual cash, is lost.

Maximum Loss

Notice that the maximum loss is the initial premium paid, setting a nice limit to potential losses. Profits and losses can be realized way before expiration and it is up to the trader to decide how and when to close the position. Potential profits on the strangle are unlimited which can be very rewarding but as always, a traders needs to decide how he or she will manage the position.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

« Newer PostsOlder Posts »