Basic Training: Futures Options vs. Equity Options

We've talked about how to use options to mitigate your portfolio risk, but many traders also rely on commodities diversification as a way to mitigate portfolio risk.

Futures options strategies: All of the options strategies we've discussed on this program in the past are applicable to futures options as well with a few exceptions

Covered call & protective puts both require underlying futures positions - something most traders prefer to avoid.

Most traders looking for diversification typically want bullish exposure to the underlying. Some great options strategies for this include:

• Stock/futures replacement strategy
• Vertical call spread
• Spreads with wings

Futures are useful for traders who want to establish sizable positions with a minimum of outlay

Options on futures can be useful for traders and asset managers who want exposure to alternative asset classes but can't or won't trade futures. You'll need a futures account to trade futures options - but if you use risk mitigated strategies such as spreads and don't get net short units and close out positions near expiration you don’t have to worry about dealing with the underlying.

Mail Call: Listener questions and comments

• Question from Jim Horn: Hey boot campers! I keep hearing about a spread called a onebytwo. What the heck is that? Am I even saying it right? Great show. Thanks for educating poor slobs like me.
• Question from Tom Evans, St. Louis, MO: What does more volume futures or options? Also does one do more electronically than the other? If I'm looking to dive into one am I better off going with the futures or the options? Lastly can you clarify the difference between CBOE and CME and CBOT? They all sound the same to me.
• Question from Anon: On several of your programs you mention that it is important to understand the VIX cash level at a given SPX level. Can you please explain this further? As an example, what are the implications of a 12 VIX at 1800 vs. a 9 VIX at 1800? Likewise, how does a 15 VIX at 1800 compare?

Mail Call: This episode is dedicated to our listeners.

• Question from Neil Filasco - What sets do you recommend to hedge my retirement accounts, in clouding my defined contribution plans? The pickings in these accounts are relatively slim and there are no options to speak of. As one of the newly enlightened options masses, I thank you for bringing me into the fold.
• Question from Chandra Bajpai - Hey Mark, I love the Radio show...I find myself wanting the next show because I something new every episode. My question is: How should a trader handle stop losses on a naked call/put and/or a vertical spread. When should you call it quits? IBD mentions 8% for stocks, but what is the level for options. Thanks.
• Question from Hedger - I am a bit flummoxed when it comes to spreads. I listen to a show like this, that tells me to use spreads. I read a few articles about spreads, and I think I have the gist of it. Lets say ABB is trading for $50, if its going to $55, I can buy the 50-55 spread for $1, if the underlying moves to $55, that spread should be worth the maximum profit of $5. However, in the real world, my experience has been much different. In the real world, that spread would be trading around $2.50 or $3 forever! If I hold the spread, to expiration and all other things hold constant, I "may" get my five bucks, but thats hardly a given. I goes I am asking - What give with spreads?
• Question from ToothFish - Hey Mark and the Black Hat One. Loving the Boot Camp show. Why is it back to once a month? Should be daily! Anyway I have hear you guys bicker back and forth on dark side vs light side trading, but I don't think you have ever actually committed to one or the other. So gun to your head. Which way are you going - premium selling or premium buying?
• Question from Ing86 - Cool show. Learning a lot from all the options talk about XYZ and Apple. But what are some of the crazier things I can trade with options? Can I trade options on a big hollywood premiere for instance? I would have loved to be long calls on the Ninja Turtles or Guardians of the Galaxy. What about sporting events or elections? I would think this would be fertile trading ground for these products. Can I do something like this or is this too outlandish?
• Question from Chilly Palmer - Hey Drill Squad. Lets say I bought calls on Firm A, and then Firm B buts them out (something I am dealing with now). What happens to my calls on Firm A? That firm is doing away and the stock will no longer trade. Will my calls be automatically exercised for me on the day the merger is put through? Should I just sell them now rather than wait for the issue to be settled
• Question from Civas - What is the best way to handle a ratio vertical spread that has moved to my short strike? Close it out as soon as it hits the short strike, even though that means buying back two options on the short strike for every one I sell?Play the wait and see game to see if the underlying retreats and those short options go out worthless? Or add a long premium third leg to my trade to cap my risk - essentially legging into a short iron butterfly? I know Mark is partial to those. Enjoying the app. Thanks for all the shows and the mad knowledge.

Mail Call: This episode is dedicated to our listeners.

• Question from Neil Filasco - What sets do you recommend to hedge my retirement accounts, in clouding my defined contribution plans? The pickings in these accounts are relatively slim and there are no options to speak of. As one of the newly enlightened options masses, I thank you for bringing me into the fold.
• Question from Chandra Bajpai - Hey Mark, I love the Radio show...I find myself wanting the next show because I something new every episode. My question is: How should a trader handle stop losses on a naked call/put and/or a vertical spread. When should you call it quits? IBD mentions 8% for stocks, but what is the level for options. Thanks.
• Question from Hedger - I am a bit flummoxed when it comes to spreads. I listen to a show like this, that tells me to use spreads. I read a few articles about spreads, and I think I have the gist of it. Lets say ABB is trading for $50, if its going to $55, I can buy the 50-55 spread for $1, if the underlying moves to $55, that spread should be worth the maximum profit of $5. However, in the real world, my experience has been much different. In the real world, that spread would be trading around $2.50 or $3 forever! If I hold the spread, to expiration and all other things hold constant, I "may" get my five bucks, but thats hardly a given. I goes I am asking - What give with spreads?
• Question from ToothFish - Hey Mark and the Black Hat One. Loving the Boot Camp show. Why is it back to once a month? Should be daily! Anyway I have hear you guys bicker back and forth on dark side vs light side trading, but I don't think you have ever actually committed to one or the other. So gun to your head. Which way are you going - premium selling or premium buying?
• Question from Ing86 - Cool show. Learning a lot from all the options talk about XYZ and Apple. But what are some of the crazier things I can trade with options? Can I trade options on a big hollywood premiere for instance? I would have loved to be long calls on the Ninja Turtles or Guardians of the Galaxy. What about sporting events or elections? I would think this would be fertile trading ground for these products. Can I do something like this or is this too outlandish?
• Question from Chilly Palmer - Hey Drill Squad. Lets say I bought calls on Firm A, and then Firm B buts them out (something I am dealing with now). What happens to my calls on Firm A? That firm is doing away and the stock will no longer trade. Will my calls be automatically exercised for me on the day the merger is put through? Should I just sell them now rather than wait for the issue to be settled
• Question from Civas - What is the best way to handle a ratio vertical spread that has moved to my short strike? Close it out as soon as it hits the short strike, even though that means buying back two options on the short strike for every one I sell?Play the wait and see game to see if the underlying retreats and those short options go out worthless? Or add a long premium third leg to my trade to cap my risk - essentially legging into a short iron butterfly? I know Mark is partial to those. Enjoying the app. Thanks for all the shows and the mad knowledge.

Basic Training: Covered Strangles/Covered Combo

• What is it? Long stock, covered call, short put. Why do it? Collect more income than a standard covered call or short put. Why not to do it? Increased margin requirement, you will increase your stock position to the downside.
• Example: XYZ trading at $50.

• Option 1 - Sell covered front month 55 strike call for $1 - collect 2% income.

• Option 2 - Sell both front month 55 call and 45 put for $1 each - collect $2 or 4% income. Rinse and repeat.

Note: Call and put should only be sold on strikes where you are comfortable buying/selling the stock.

Listener Mail: Listener questions and comments

• Question from Tony - Mark, love boot camp. I was lucky enough to have a fairly significant weekly put spread position in DIA this week (long puts at 166-167 and short at 161-162.5). I was making good money on Wednesday and ran into a problem. The bid ask spread on my long puts were so wide, I could not close out, roll or adjust the trade. I thought about buying futures contracts to hedge my delta risk and suck out the theta. Is there any other strategy to adjust or hedge a successful trade without getting haircut on the executions? Should I just calculate the extrinsic value add a spread and put in a limit order for the long leg? Is it always harder to close out a spread trade in a volatile market… i.e. if I want to close a spread trade does one person have to want to enter the same trade? Or can the trade go to two counter parties?
• Question from Mukund Ambarge - Hi Team, I had question on theta decay. I understand that delta is in constant flux with every tick move in stock, the delta / gamma changes. IV is in constant flux with buying and selling of options and volume etc. So vega changes with option transactions. But theta decay is the only one which is always in a steady pace i.e. it’s not like it will decay quickly today and slowly tomorrow. The question is when the theta decay is really adjusted in the prices of options. Do the theta decay get adjusted at every tick move? Or every hour? If it is adjusted daily. Then when is the theta decay taken out of options. Early morning before start of trading? Or late in the day like last few minutes that whole days theta is taken out? Also I do not know when is weekend theta taken out of prices? Friday early morning or Friday ending or middle of the day? Basically when does market maker run the prices with the model and set the prices? Only once before trading starts or does he keep adjusting every minute/hour/tick based on demand/supply?

Basic Training: Covered Strangles/Covered Combo

• What is it? Long stock, covered call, short put. Why do it? Collect more income than a standard covered call or short put. Why not to do it? Increased margin requirement, you will increase your stock position to the downside.
• Example: XYZ trading at $50.

• Option 1 - Sell covered front month 55 strike call for $1 - collect 2% income.

• Option 2 - Sell both front month 55 call and 45 put for $1 each - collect $2 or 4% income. Rinse and repeat.

Note: Call and put should only be sold on strikes where you are comfortable buying/selling the stock.

Listener Mail: Listener questions and comments

• Question from Tony - Mark, love boot camp. I was lucky enough to have a fairly significant weekly put spread position in DIA this week (long puts at 166-167 and short at 161-162.5). I was making good money on Wednesday and ran into a problem. The bid ask spread on my long puts were so wide, I could not close out, roll or adjust the trade. I thought about buying futures contracts to hedge my delta risk and suck out the theta. Is there any other strategy to adjust or hedge a successful trade without getting haircut on the executions? Should I just calculate the extrinsic value add a spread and put in a limit order for the long leg? Is it always harder to close out a spread trade in a volatile market… i.e. if I want to close a spread trade does one person have to want to enter the same trade? Or can the trade go to two counter parties?
• Question from Mukund Ambarge - Hi Team, I had question on theta decay. I understand that delta is in constant flux with every tick move in stock, the delta / gamma changes. IV is in constant flux with buying and selling of options and volume etc. So vega changes with option transactions. But theta decay is the only one which is always in a steady pace i.e. it’s not like it will decay quickly today and slowly tomorrow. The question is when the theta decay is really adjusted in the prices of options. Do the theta decay get adjusted at every tick move? Or every hour? If it is adjusted daily. Then when is the theta decay taken out of options. Early morning before start of trading? Or late in the day like last few minutes that whole days theta is taken out? Also I do not know when is weekend theta taken out of prices? Friday early morning or Friday ending or middle of the day? Basically when does market maker run the prices with the model and set the prices? Only once before trading starts or does he keep adjusting every minute/hour/tick based on demand/supply?

Mail Call: Your questions directed this episode.

Question from Jason Kruse: Is there a Bootcamp episode that discusses OI and how it can affect expiration moves? I hear people talk about max pain and pinning like it’s a conspiracy. Would love to hear real info about how it works.

Open Interest

• What is it?
• Why is it important?
• Why is it not important?

Pin Risk

• What is it?
• How prevalent is it?
• When should you be concerned?
• Is there really a conspiracy?

Question from Allen Manning:Hello everyone, I just started listening to the Options Bootcamp podcast, and I'm really enjoying it! I have a question about a strategy described in episode 20: Options in Lieu of Stocks. As a covered call alternative, I was interested in possibly buying a LEAPS with a 1 or 2 year expiration and selling monthly calls against it. When I looked up a few stocks and ran some preliminary numbers, I noticed that the cost to purchase a deep in the money LEAPS (about 80 Delta) option was usually higher than the total money I would make selling monthly calls for the duration of the LEAPS. What I did to get these rough numbers was to take the money earned from selling the initial 1-month call (after commission cost) and multiplying it by 12 or 24. I'm assuming one or more of these possibilities:

1. The method I used to get these figures is wrong, even as a rough estimate.
2. This strategy will only work with certain stocks/underlying that have optimal Greek numbers.
3. This method only works when assuming the underlying LEAP also appreciates in value to offset its own cost.
4. Commission costs make this strategy less successful (I have a TD Ameritrade account)

Any information you can provide about this strategy is greatly appreciated. Thank you, and keep up the good work on a great program!

Question from Ethan Kamen: My question may be a little basic for the esteemed Bootcamp drill instructors, but I would like to know about back spreads. It seems like the majority of the information online is devoted to ratio spreads. Is there a reason for this? Are back spreads not popular? Do you use them? If so, what scenarios are suitable for back spreads? Thanks for this show. I look forward to each new episode.

Back Spreads

• What are they?
• What is the use case for them?
• When shouldn't you use them?

Back spreads vs ratio spreads

• What is the difference?
• When should you use each?
• Are ratio spreads more common/popular than back spreads?

Question from Ilythian: What is the ideal time horizon for trading options? My typical stock trade lifespan is 3-6 months? I have heard many people describe options as short-term investments. Is my time horizon too long to be trading options?

Mail Call: Your questions directed this episode.

Question from Jason Kruse: Is there a Bootcamp episode that discusses OI and how it can affect expiration moves? I hear people talk about max pain and pinning like it’s a conspiracy. Would love to hear real info about how it works.

Open Interest

• What is it?
• Why is it important?
• Why is it not important?

Pin Risk

• What is it?
• How prevalent is it?
• When should you be concerned?
• Is there really a conspiracy?

Question from Allen Manning:Hello everyone, I just started listening to the Options Bootcamp podcast, and I'm really enjoying it! I have a question about a strategy described in episode 20: Options in Lieu of Stocks. As a covered call alternative, I was interested in possibly buying a LEAPS with a 1 or 2 year expiration and selling monthly calls against it. When I looked up a few stocks and ran some preliminary numbers, I noticed that the cost to purchase a deep in the money LEAPS (about 80 Delta) option was usually higher than the total money I would make selling monthly calls for the duration of the LEAPS. What I did to get these rough numbers was to take the money earned from selling the initial 1-month call (after commission cost) and multiplying it by 12 or 24. I'm assuming one or more of these possibilities:

1. The method I used to get these figures is wrong, even as a rough estimate.
2. This strategy will only work with certain stocks/underlying that have optimal Greek numbers.
3. This method only works when assuming the underlying LEAP also appreciates in value to offset its own cost.
4. Commission costs make this strategy less successful (I have a TD Ameritrade account)

Any information you can provide about this strategy is greatly appreciated. Thank you, and keep up the good work on a great program!

Question from Ethan Kamen: My question may be a little basic for the esteemed Bootcamp drill instructors, but I would like to know about back spreads. It seems like the majority of the information online is devoted to ratio spreads. Is there a reason for this? Are back spreads not popular? Do you use them? If so, what scenarios are suitable for back spreads? Thanks for this show. I look forward to each new episode.

Back Spreads

• What are they?
• What is the use case for them?
• When shouldn't you use them?

Back spreads vs ratio spreads

• What is the difference?
• When should you use each?
• Are ratio spreads more common/popular than back spreads?

Question from Ilythian: What is the ideal time horizon for trading options? My typical stock trade lifespan is 3-6 months? I have heard many people describe options as short-term investments. Is my time horizon too long to be trading options?

Basic Training: How to protect your profits.

• Easiest method: 1st buy a 2-3- month put ATM or slightly OTM put.
• Purchase an ATM put spread with the short leg at your break-even point. Easiest to do in a single stock or underlying.
• What to do if you have a broad equity portfolio? Its a little more complicated. Determine the effective beta of your portfolio an how many effective shares of that index you own.
• Rule of thumb - Expect to spend about 2% of your portfolio for effective 3-6 month protectionHow to reduce the cost of protection. Buy a spread instead of an outright put. Set up a collar. Set up a collar with a kicker.

Mail Call: Listener Questions and Comments

• Question from Big Charlie - Hey guys. What is your take on the OH/Monster merger? What does this mean for the options landscape going forward?
• Question from Brian Collamer - Hi Mark, If I have a short call in $SPY on the ex-dividend date that is OTM, I will not owe the dividend correct? Thanks, Brian
• Comment from Justin - Hi Mark, Just heard my question on the podcast! Awesome! Thanks so much. Keep doing what you do. And I will keep listening. -Jay
• Question from Niles F. - How much of my portfolio should I allocate to defensive strategies such as protective puts? Thank you for answering my question and for producing this fine program.
• Story and Question from KAISERDOG76: Funny story- I was trading on my IPad. It is the Summer 2013. CNBC is on but I am not paying attention to it. I had some cash to play with and there was some electricity in the air that day. I settled in on Apple options. This was the first and last time I used mini options. In total I spent $2,800 in capitol for options. !,400 I spent on 3 or 4 regular Apple options. Then I spent equal amount on Apple "Mini" options. This was when Apple was trading below $400 if memory serves true. Well no sooner that 10 minutes after I had completed my order and was filled on those calls? Some guy named Carl Ichan came out and made his first "Famous Apple Tweet" LMAO. I got an instant $20 plus move on the stock. My Calls I had just bought? Exploded as they were now deep in the money. On the regular Apple options I instantly made several thousand dollars? You know what I made on those Mini's? After Commissions and such it was a few hundred bucks. I was so pissed and felt just ripped off. So I have never touched a "Mini" again. Why would I right? With that kind of move and you still cannot make any real money? Forget about it. Minis are Dead to me...The VIX flirting with $11? I wish I bought some calls today too. LOL...So If I do not have a futures account. What is best way for me to hedge using Volatility? Please help a hopeless Bull who wants to get into insurance.:) Thanks for all the insight and education!

Basic Training: How to protect your profits.

• Easiest method: 1st buy a 2-3- month put ATM or slightly OTM put.
• Purchase an ATM put spread with the short leg at your break-even point. Easiest to do in a single stock or underlying.
• What to do if you have a broad equity portfolio? Its a little more complicated. Determine the effective beta of your portfolio an how many effective shares of that index you own.
• Rule of thumb - Expect to spend about 2% of your portfolio for effective 3-6 month protectionHow to reduce the cost of protection. Buy a spread instead of an outright put. Set up a collar. Set up a collar with a kicker.

Mail Call: Listener Questions and Comments

• Question from Big Charlie - Hey guys. What is your take on the OH/Monster merger? What does this mean for the options landscape going forward?
• Question from Brian Collamer - Hi Mark, If I have a short call in $SPY on the ex-dividend date that is OTM, I will not owe the dividend correct? Thanks, Brian
• Comment from Justin - Hi Mark, Just heard my question on the podcast! Awesome! Thanks so much. Keep doing what you do. And I will keep listening. -Jay
• Question from Niles F. - How much of my portfolio should I allocate to defensive strategies such as protective puts? Thank you for answering my question and for producing this fine program.
• Story and Question from KAISERDOG76: Funny story- I was trading on my IPad. It is the Summer 2013. CNBC is on but I am not paying attention to it. I had some cash to play with and there was some electricity in the air that day. I settled in on Apple options. This was the first and last time I used mini options. In total I spent $2,800 in capitol for options. !,400 I spent on 3 or 4 regular Apple options. Then I spent equal amount on Apple "Mini" options. This was when Apple was trading below $400 if memory serves true. Well no sooner that 10 minutes after I had completed my order and was filled on those calls? Some guy named Carl Ichan came out and made his first "Famous Apple Tweet" LMAO. I got an instant $20 plus move on the stock. My Calls I had just bought? Exploded as they were now deep in the money. On the regular Apple options I instantly made several thousand dollars? You know what I made on those Mini's? After Commissions and such it was a few hundred bucks. I was so pissed and felt just ripped off. So I have never touched a "Mini" again. Why would I right? With that kind of move and you still cannot make any real money? Forget about it. Minis are Dead to me...The VIX flirting with $11? I wish I bought some calls today too. LOL...So If I do not have a futures account. What is best way for me to hedge using Volatility? Please help a hopeless Bull who wants to get into insurance.:) Thanks for all the insight and education!

Roll Call: Bringing in the Big Guns

Our guest today is Jim Bittman, Senior Instructor at The Options Institute.

He discusses:

• What sort of content/classes our listeners can access at The Options Institute
• What the number one options question is that he receives from students
• What is the number one options mistake and/or misperception students may have about the options market?
• What changes did he make in your recent renovation at The Options Institute, and what can our listeners expect from your new facilities?

Mail Call: Listener questions and comments

• Question from Kevin Duggan - Hi Mark, Great show! I have been listening to episodes for months but it was only recently that I saw Dan’s picture- shocking! In my mind I have always pictured Walter White, as they sound exactly alike and, you always refer to his black hat. You can imagine my surprise when I saw Dan’s pretty face and those curly brown locks. Shave that bean, Heisenberg! Re: short puts (I'm already long calls) If I am certain the stock will move higher fairly quickly, wouldn't it be best to sell the big, meaty, long term puts? If I sell a weekly for .45 and then close it at .20, where's the fun? How do you balance term and premium in naked shorts? Thanks, Kev
• Question from Josh Norell - Hello everyone, enjoy the show, I am trying to work out the details with a diagonal collar, and its adjustments. I want to buy a stock, buy an OTM put several months out, and sell weekly OTM calls against it. If the stock rises, I get called away, all is well and good, and I can just buy the stock back next week and do it again. Where I am confused is when the stock drops below my put strike. What do I do? Because of the puts lower delta, for every dollar I lose on the stock, I am gaining less than 1 dollar on the put. So do I exercise the put and lose all its extrinsic value? Do I roll it down and hope for a retracement? Do I just blast out more calls? A little help, please. Josh
• Question from INC429 - VXX or VIX options? Which is the better hedge for a broad based equity portfolio?
• Question from Buckeye -I enjoyed the discussion about the percentage of a portfolio one should devote to hedging on the last episode. I do have a question about the 1.5%-2% figure discussed on the program. If that was for a three-month put, then you are talking about 6-8% on an annualized basis. Given that most funds only return about 7% a year, will that not eat up all of the profits in your portfolio? Or am I missing something? Thanks again for this excellent program. It truly is a unique source of options education. It makes my long train ride much more bearable.