Options Boot Camp

Basic Training: It's that time of the year again. The kids are back to school, so let's go back to school as well, and refresh our listeners on the options basics.

• What is an option? How do options work? What is a multiplier?
• What are the greeks: Delta, Gamma, Theta, Vega.
• Long premium vs short premium.

Option Drills: A review of the basic positions:

Long call - Short call - Covered call - Long put - Basic vertical spread - Collars. Others can be found in previous episodes.

Mail Call: Question from Dave S. - In the Options Boot Camp podcast #28 and #20 you discussed buying deep in the money LEAPS and selling shorter term calls against them. If the calls you sold expire worthless everything is great. What happens if the underlying goes up and the calls you sold are in the money at expiration? Is it better to just buy back the calls or let them get exercised? Can you discuss the process if they are exercised? Do I need to sell the LEAP to cover the call that was exercised?

Basic Training: It's that time of the year again. The kids are back to school, so let's go back to school as well, and refresh our listeners on the options basics.

• What is an option? How do options work? What is a multiplier?
• What are the greeks: Delta, Gamma, Theta, Vega.
• Long premium vs short premium.

Option Drills: A review of the basic positions:

Long call - Short call - Covered call - Long put - Basic vertical spread - Collars. Others can be found in previous episodes.

Mail Call: Question from Dave S. - In the Options Boot Camp podcast #28 and #20 you discussed buying deep in the money LEAPS and selling shorter term calls against them. If the calls you sold expire worthless everything is great. What happens if the underlying goes up and the calls you sold are in the money at expiration? Is it better to just buy back the calls or let them get exercised? Can you discuss the process if they are exercised? Do I need to sell the LEAP to cover the call that was exercised?

Basic Training: Trading Diagonals

• What is a diagonal?
• Why would you put it on?
• What adjustments need to be made?
• How is it performed?
• How does it differ from a typical horizontal calendar spread?
• Why would you use a calendar vs. a horizontal spread?
• How do the greeks differ?
• How do you choose the strikes?

Mail Call: Fall in, recruits!

• Question from Richard D: I think a whole boot camp show on skew could be very helpful! Thanks!
• Question from Hawkeye6: Love the pair of calendar spread shows. Can you make it a hat trick and have a show on double diagonals and double calendars? I am especially interested in hearing about selection criteria -- what makes a good candidate, criteria for strike selection, when to pick DD/DC vs. Condor/Iron Condor, etc.

Basic Training: Trading Diagonals

• What is a diagonal?
• Why would you put it on?
• What adjustments need to be made?
• How is it performed?
• How does it differ from a typical horizontal calendar spread?
• Why would you use a calendar vs. a horizontal spread?
• How do the greeks differ?
• How do you choose the strikes?

Mail Call: Fall in, recruits!

• Question from Richard D: I think a whole boot camp show on skew could be very helpful! Thanks!
• Question from Hawkeye6: Love the pair of calendar spread shows. Can you make it a hat trick and have a show on double diagonals and double calendars? I am especially interested in hearing about selection criteria -- what makes a good candidate, criteria for strike selection, when to pick DD/DC vs. Condor/Iron Condor, etc.

Basic Training: Pro Tips

• Swap LEAPS for stock when writing covered calls.
• Everyone, even pros, have losing trades.
• Never ever ever enter a market order in the options market place pre-market.
• Swap in-the-money calls for stock whenever possible to utilize trading capital more efficiently.
• Use implied volatility on all your option trades.
• Don't base a sale or purchase of an option based purely on the implied volatility levels without understanding the context on the implied.
• When looking at implied volatility, be very careful around expiration.
• Don't be a lemming and blindly follow "unusual activity". Often it's better to sell the strike where the unusual buying activity took place.
• Swap in-the-money calls for stock whenever possible to utilize trading capital more efficiently.
• Fit the strategy to the situation.
• When reverse skew flips, it's usual a big buy signal.

Mail Call:

• Question from Ron Yuravich - I listened to the podcast on calendar spreads and would like to know what book do you recommend that is compressive on spread trading? I have never had much luck with spreads. I have done a few iron condors for credit and few credit spreads - I just let them expire. The concept of trading the spread and not the underline is new to me. I see that I still have a lot to learn, but I am determined to be a well-seasoned, successful option trader in the end. Keep up the good work - I respect your group for knowledge on options. Thanks, Ron
• Question from Tom Simmons - Just to clarify -- If I write a time iron butterfly in DNDN ahead of earnings with Sogo - sell the Sep 5 straddle and buy the Aug 4/6 strangle - Sogo will margin me as if I sold the Sep 5 straddle naked because the Aug will expire before the Sep. Do I have that correct?
• Question from Alan Dickerson, Provo, UT - Options are a derivative of stocks. Yet there are far more options exchanges than stock exchanges in the U.S. How is that possible? Why are there so many options exchanges? Do they all trade different products or serve different purposes?

Basic Training: Pro Tips

• Swap LEAPS for stock when writing covered calls.
• Everyone, even pros, have losing trades.
• Never ever ever enter a market order in the options market place pre-market.
• Swap in-the-money calls for stock whenever possible to utilize trading capital more efficiently.
• Use implied volatility on all your option trades.
• Don't base a sale or purchase of an option based purely on the implied volatility levels without understanding the context on the implied.
• When looking at implied volatility, be very careful around expiration.
• Don't be a lemming and blindly follow "unusual activity". Often it's better to sell the strike where the unusual buying activity took place.
• Swap in-the-money calls for stock whenever possible to utilize trading capital more efficiently.
• Fit the strategy to the situation.
• When reverse skew flips, it's usual a big buy signal.

Mail Call:

• Question from Ron Yuravich - I listened to the podcast on calendar spreads and would like to know what book do you recommend that is compressive on spread trading? I have never had much luck with spreads. I have done a few iron condors for credit and few credit spreads - I just let them expire. The concept of trading the spread and not the underline is new to me. I see that I still have a lot to learn, but I am determined to be a well-seasoned, successful option trader in the end. Keep up the good work - I respect your group for knowledge on options. Thanks, Ron
• Question from Tom Simmons - Just to clarify -- If I write a time iron butterfly in DNDN ahead of earnings with Sogo - sell the Sep 5 straddle and buy the Aug 4/6 strangle - Sogo will margin me as if I sold the Sep 5 straddle naked because the Aug will expire before the Sep. Do I have that correct?
• Question from Alan Dickerson, Provo, UT - Options are a derivative of stocks. Yet there are far more options exchanges than stock exchanges in the U.S. How is that possible? Why are there so many options exchanges? Do they all trade different products or serve different purposes?

Options Bootcamp 27: Calendar Spreads, the Sequel

Mail Call: So many questions, so many answers.

• Question from Alpha_Dog - Let's say I buy the Ford August Week 1 17 call, and then sell the July Week 4 17 call for a $.07 debit. How does that position make money? I don't get it. Don't both calls make/lose money as the stock goes up and down?
• Question from Nevin Pierce - What is more important when trading time spreads - gamma or vega? Is vega the source of profit and gamma the source of risk, or vise-versa? How do I profit of vega without a corresponding large move that ends up costing me more with the gamma? Please help options drill instructors! I'm in over my head!
• Question from Tim Nettles - I am confused about time spreads. I don't really get how they work and how I'm supposed to view them. For example, in the XYZ July/Aug 50 call example cited my Mark Longo - what do I do after the July leg expires? Should I consider that or should I close out the whole position prior to July expiration? What if I was using the short leg to finance a longer term speculative play? Wouldn't it make sense then to leave the second leg on beyond the expiration of the first leg?
• Question from Ron Yueravich - On July 22, in FB, I will buy one Aug 23 put for $.32 and sell one weekly Week 1 July 26 call for $.16. I plan to sell the following after the short side expires - sell two Aug next week puts and then nine Aug 23 puts again. What do you think about this plan on Facebook? I feel there will be a little weakness in the stock before it climbs any higher. Thanks.
• Question from Mikos V - For John Critchley on Options Boot Camp - Does SOGO have any plans to alter the way they handle the margin for short time spread, to avoid the issue you cited where they are margined the same as naked short positions? This seems to waste a lot of capital and provide a disincentive to traders to take on these positions. Is there any way to provide better margin treatment, at least while the first leg of the trade is still active, or is that limited to portfolio margin clients only?
• Question from Emily Duncan, Fairfax, VA - So let me see if I have this straight - If I buy the Facebook Aug 26 call for $1.25, and I sell the July Week 4 26 call for $1.05. I've net paid a $.20 debit for a one month calendar spread. If Facebook rallies to 28 by expiration this week, I will have lost roughly $1 on my July calls and made about $.80 on my Aug calls. So I pretty much would have broken even, or am I completely off-base with my understanding of how this spread works?
• Question from Tim Anders - So if I have no bias and expect no movement, I should buy a time spread to profit from decay in the first month. Why not just short front month instead and save the hassle?

Options Bootcamp 27: Calendar Spreads, the Sequel

Mail Call: So many questions, so many answers.

Options Bootcamp 26: Calendar Spreads

Basic Training: Calendar Spreads

This builds on the knowledge from episode 13 "Basic Spreads" and episode 14 "Advanced Spreads" from December.

• What is a calendar spread?
• Why would you want to use a calendar?
• Calendars are much more complex that basic textbooks tell you.
• The delicate balance between gamma and volatility in a calendar trade.
• Can't use P&L diagrams
• How do you manage a calendar?

Options Bootcamp 26: Calendar Spreads

Basic Training: Calendar Spreads

This builds on the knowledge from episode 13 "Basic Spreads" and episode 14 "Advanced Spreads" from December.