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Blueprint for Options Success

May 1 2019

Simple Strategies for Big Gains

What Are Options?
Options-Trading Strategies: Selling Puts
Options-Trading Strategies: Selling Covered Calls
At the Money, In the Money, Out of the Money
Strike Price
Options Symbols
3 Factors That Affect the Option Price
Bid/Ask Prices
Options Quotes
Understanding Risk
Position Sizing
Time is on Your Side
How to Determine Your Profit or Loss in a Trade
Choosing a Broker
Option Approval
Glossary of Options Terms

Dear Investor,

A lot of investors think buying options is a quick way to make big profits.

Sure, if you get really lucky, you might make money for a while. But really, buying options is one of the fastest ways to
deplete the value of your trading account.

That’s because options are a “wasting” asset. More on that in a minute…

The truth is, if you really want to maximize your money — while taking little to no risk —

selling
options is for you.

By selling options, we can collect steady income on a regular basis. And if a trade turns against us, we can use it to our
advantage by picking up shares of stock at a discount to their current value.

From there, we can sell more options to work that stock position back to profitability.

But let’s back up for a moment… To introduce you to options, we’ve created Strategic Trader’s Blueprint for Options Success:
Simple Strategies for Big Gains.

With this report, you have everything you need to quickly learn the basics of options. And if you are already familiar with
options, it’s a great refresher course.
In no time, you’ll be ready to get into Strategic Trader’s options trades and begin making some great profits. So let’s get
started right now.

What Are Options?

You’ve already seen how options strategies work every day without realizing it. In fact, you have probably already purchased
the right to protect yourself against risk in some area of your life, such as home, health or car insurance.

Those same principles can be applied to the options market.

Let’s use car insurance as an example. You purchase a new car after taking time to decide which model you want and how
well it will accommodate your needs.

But you can’t drive off the dealer’s lot without taking precautions in the form of insurance in the event that something
happens to your investment.

When you buy an insurance policy — be it automobile, health, life or homeowner’s insurance — you pay a premium for the
protection it provides.

This is the role that the option buyer plays in the markets.

But most of the time, you don’t end up needing that insurance, and the insurance company simply pockets the money you
paid them.

This is the role of the option seller.

This is why we only sell options at Strategic Trader… It’s far more likely that we will get to keep the premium that is paid to us,
which is why insurance companies are so profitable.

The option premium is simply the price to enter into an options contract. If you are buying an option, you will pay the
premium. If you are selling an option, the buyer pays you the premium.

We’ll go into more details on the price of options later on, but right now let’s talk about the call and put option strategies we
use in Strategic Trader.

Options-Trading Strategies: Selling Puts

In Strategic Trader, we want to collect income on stocks that are making bullish moves. Selling put options is a great way to
do it. Often times, we’ll sell puts on stocks we wouldn’t mind adding to our portfolio.

A put option gives the buyer of the option the right to sell 100 shares of stock to the seller of the option for the strike price
for a certain amount of time before the option contract expires.

Selling puts can be incorrectly perceived as “risky” because the seller can get the stock “put” to them and be required to buy
the shares. However, from our perspective, selling puts can present a very good opportunity.

There are two potential outcomes when selling a put:

1. The stock falls below the strike price of the put. That means the put seller is obligated to buy the stock from the put
buyer at the strike price.
2. The stock does not fall below the strike price and the put loses value before expiring worthless. Most of the time, we
will buy back a put write that is out of the money and has lost most of its value.

Let’s take a look at a sample trade selling a put.

The trade was the Microsoft (MSFT) September 21st $111 Put Write (MSFT180921P00111000). We earned $145 when we
sold the put, and 20 days later bought it back for just $17.

That’s resulted in a 5.59% return on margin, or 169.94% annualized.

Below are the details of the trade broken down step-by-step. The trade was a put write in Microsoft with an expiration date
of Sept. 21, 2019. We expected the stock stay above $111 through expiration.

The option symbol was: MSFT180921P00111000

To open the trade, you “sell to open.”
To close the trade, you “buy to close.”
This was a put write in Microsoft.
This trade obligated you to buy 100 shares of Microsoft stock for each option contract you open for $111 per share
even if the price goes below that.
This option was a depreciating asset because it was set to expire in September and then become worthless.
In just 20 days, we closed the trade, capturing a 5.59% return on margin. That’s an annualized return of 169.94%!

But what about trades that expire in-the-money? We mentioned above that we sometimes accept stock that is put to us.

Let’s look at another example. (Remember, we don’t mind owning shares of Microsoft, as it’s a very strong, blue-chip
company with great prospects for long-term appreciation.)

Trade Example #2

The trade was the Microsoft (MSFT) December 21st $110 Put Write (MSFT181221P00110000). We earned $139 when we
sold the put and, at expiration, the option was in the money. The buyer put the stock to us on Dec. 21, 2018, but we still got
to keep the $139 in premium we received for selling the option.

Below are the details of the trade broken down step-by-step.

The option symbol was: MSFT181221P00110000

To open the trade, you “sell to open.”
To close the trade, you “buy to close.”
This was another put write in Microsoft.
This trade obligated you to buy 100 shares of Microsoft stock for each option contract you open for $110 per share
even if the price goes below that.
This option was a depreciating asset because it was set to expire in December and then become worthless.
We held this trade for 18 days. On expiration day, MSFT closed below the strike price at $98.23, meaning the option
expired in the money. We accepted 100 shares of MSFT stock for each contract we sold, but we also got to keep the
premium we earned when we opened the trade. So, we earned a return on margin of 6.40%. That’s an annualized return
of 251.83%.

At the start of this section, we mentioned we typically sell puts on stocks we wouldn’t mind owning, but what do we do once
we own those stocks? We don’t like to just wait for their value to recover, instead we use them to collect more income, which
leads us to the other options strategy we use in Strategic Trader: Covered Calls.

Note: For more on put writes, check out our Special Report,

Everything You Need to Know about Short Puts (https://strategictrader.investorplace.com/report/everything-you-need-to-know-about-short-puts/)

.

Options-Trading Strategies: Selling Covered Calls

Just like a put write, a covered call involves selling an option to collect premium as income.

A call option is a contract that gives the buyer of the option the right, but not the obligation, to buy 100 shares of the
underlying stock from the seller of the option at the agreed upon strike price any time before expiration.

Selling a call obligates you to sell 100 shares of a stock, which would be a bad idea if you don’t already own the stock. After
all, you’d have to go out and buy 100 shares on the open market and then sell them back to the option buyer.

But if you already own shares of the underlying stock, you wouldn’t have to buy shares to sell to the call buyer. The shares
you already own would “cover” the call you sold, hence the term “covered call.”

When we are put shares of a stock in Strategic Trader, we can sell covered calls on those stocks to generate more income.

Just like with a put write, there are two potential outcomes when selling a call option:

1. The stock rises past the strike price and the call seller is obligated to sell 100 shares of the stock for the strike
price.
2. The stock does not rise past the strike price and the call expires worthless, allowing the seller to keep the entire
premium. Just like with put writes, we might sometimes buy back a covered call that is out of the money and
has lost most of its value.

Let’s take a look at a sample trade selling a covered call.

The trade was the Microsoft (MSFT) January 18th (2019) $100 Covered Call (MSFT190118C00100000). We earned $290
when we sold the covered call and, 18 trading days later, we bought the call back for just $262.

That resulted in a 0.25% return on invested capital, or 5.29% annualized. Not bad for 18 days in the position!

Below are the details of the trade broken down step-by-step. The trade was a covered call trade in Microsoft with
an expiration date of Jan. 18, 2019. We expected the stock stay below $100 through expiration.

The option symbol was: MSFT190118C00100000

To open the trade, you “sell to open.”
To close the trade, you “buy to close.”
This was a covered call option in Microsoft, meaning we already owned 100 shares of the stock.
This trade obligated you to sell 100 shares of Microsoft stock for each option contract you open for $100 per share
even if the price goes above that.
This option was a depreciating asset because it was set to expire in January and then become worthless.
In just 18 days, we closed the trade for $262, capturing a 0.25% return on invested capital. That’s an annualized return
of 5.29%!

But what happens when a covered call expires in the money? For that, we’ll look at another Microsoft example.

The trade was the Microsoft (MSFT) March 1st (2019) $110 Covered Call (MSFT190301C00110000). We earned $59 when
we sold the covered call and, at expiration, the option was in the money. The buyer called away our Microsoft stock on
March 1, 2019. Below are the details of the trade broken down step-by-step.

The option symbol was: MSFT190301C00110000

To open the trade, you “sell to open.”
To close the trade, you “buy to close.”
This was a covered call option in Microsoft.
This trade obligated you to sell 100 shares of Microsoft stock for each option contract you open for $110 even if the
price goes above that.
 We held this trade for 23 days. On expiration day, MSFT closed above our strike price at $112.53, so the option expired
in the money. 100 shares of MSFT stock we called away from us at $110 per share for each contract we sold. If you
recall, that was the same price we bought MSFT for in the put write example above. So, in this case, we broke even on
the stock we sold.
But, we got to keep the premium we earned when we opened the MSFT March 1st $110 Covered Call. So, we also
earned a return on invested capital of 0.54%. That’s an annualized return of 8.86%!

With a covered call, we get to earn income on the stocks we receive when a put write expires in the money. That lets us
collect steady gains regardless of how our trades turn out.

Note: For more on covered calls, check out our Special Report,

A Comprehensive Guide to Covered Calls (https://strategictrader.investorplace.com/report/a-comprehensive-guide-to-covered-calls/)

.

At the Money, In the Money, Out of the Money

Options are classified as either “in the money,” “at the money” or “out of the money.” Each of these phrases has a distinct
meaning, and each option strike price will fall into one of the three categories.

If you keep in mind that options convey rights to the buyer, then the differences between the three types will be easier to
understand. Let’s quickly review the rights.

Calls — A call gives the buyer the

 right to buy
 the stock for the strike price any time before expiration. The call seller is

obligated to sell
the stock for the strike price any time before expiration.

Puts — Buying a put gives the buyer the 

right to sell
 the stock for the strike price any time before expiration. The put seller is

obligated to buy
the stock for the strike price any time before expiration.

At the Money

Let’s assume that we’re evaluating a stock that is priced at roughly $100 per share for this explanation.

There is typically only one strike price that is considered “at the money.” That strike price is the one closest to the current
stock price.

The at-the-money strike price is $100. That is because the current price of the stock is roughly $100 per share. There is no
other strike price closer to current price of the stock.

In the Money

The in-the-money strike prices are those with “intrinsic value.” Intrinsic value means that the right conveyed by the option is
worth something. For example, if you own the $90 strike call, you have the right to buy the stock for $90 per share. If the
current price of the stock is $100, the option has intrinsic value of $10 per share.
Similarly, the $110 strike put has intrinsic value of $10 per share because that strike price is $10 above the current stock
price.

Out of the Money

An option with a strike price that is out of the money is an option that has no intrinsic value. For example, if a put with a
strike price of $90 gives you the right to sell the stock for $90 before expiration, that right has no value. That is because the
stock is currently worth $100. Therefore, you could sell the stock on the open market for more than you have right to sell it
through the option.

Take a look at the chart below for a quick review:

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2016/12/ITMOTMATM.png)

There are three things to remember that will help you keep these terms straight.

1. Puts with a strike price above the current stock price and calls with a strike price below the current stock price are “in
the money.” The further the strike price is in the money, the more expensive that option will be because it has more
intrinsic value. A short call or put that expires in the money will be exercised by the buyer. For calls, that means that the
seller will have the stock called away from them. For puts, that means that the seller will have the stock put to them.
2. Puts with a strike price below the current stock price and calls with a strike price above the current stock price are “out
of the money.” The further the strike price is out of the money, the less valuable it becomes because it is less likely that
the option will ever acquire intrinsic value. A short call or put that expires out of the money will not be exercised by the
buyer. For both calls and puts, that means that the option will expire worthless and the seller keeps the entire premium
they received for selling the option.
3 A h i b li l i f h Th ill h l b h ik i h i l
Now let’s take a look to see how an option’s price is determined.

Strike Price
The strike price is an important and static part of the options contract. For every stock that’s optionable (an equity that
offers options), there are different expiration dates and strike prices.

To reduce confusion, the exchanges determine strike prices based on the current stock price. If a stock is trading between
$5 and $25, then typically the strike prices will be in increments of $1.00, such as $5, $6, $7, $8, $9, $10 and so on.

If a stock is trading between $25 and $100, then typically the strike prices will be in increments of $2.50, such as $50,
$52.50, $55, $57.50 and so on.

If the stock is trading above $100, then typically the strike price will be in increments of $5, such as $100, $105, $110, $115
and so on.

On occasion, you can find $10 intervals for stocks that are high-priced. These stocks usually are trading over $200.

Take a look at the three charts below to see how strike prices vary.

General Electric (GE) — $1.00 Strike Increments

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/04/GE_Options_Increments.png)

Target Corporation (TGT) — $2.50 Strike Increments

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/04/target-options-increments.png)

NVIDIA (NVDA) — $5.00 Strike Increments

 (https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/04/nvda-options-increments.png)

The option you choose to sell is largely based on the strike price of the option. For instance, if you think that Apple (AAPL) at
$205 will stay above that level for the next month, you might want to sell a $205 put with an expiration date one month in the
future.

Why is that? Because, if Apple’s stock stays above $205 or rises higher before expiration, the option will expire worthless,
allowing the seller to keep the full premium they received when they sold the option.

During the time that you’re in that options contract, Apple’s value might rise, which would push the value of the option lower
than the price you initially sold it for. If at any point you got worried Apple would fall below $205 or you just wanted to limit
your risk, you could buy back your option for a lower price and pocket a profit.

However, remember that you are obligated to buy that stock if the buyer exercises the put option. If the stock has dropped
below the $205 strike price, there is a good chance the price of the option will go up, making it more expensive to buy back.
But if you don’t mind buying 100 shares of Apple’s stock at $205 a share, you can let the put buyer exercise the option at or
before expiration. You still get to keep the full premium you earned by selling the option, and as we’ll discuss later on, you
now have the option to sell covered calls to earn more income.

This is why selling options is so lucrative…there are so many different ways to win. Unlike buying options, if a short option
trade goes against us, we can still continue to collect income with little to no risk.

Options Symbols
When options began trading in 1973, a limited number of securities traded on the market. But, as the number of optionable
stocks, index funds and LEAPs available grew, it became difficult to create unique symbols using the existing three- to five-
character system that was first put in place.

So, in 2010, all options tickers became 21 characters long. Although this seems like it would make it much more difficult to
understand, it actually created a uniform format that could be universally understood by everyone in the markets.

Going back to the Apple example — you think AAPL is going stay above $205 per share for the next month. You would look
to sell a put option (because you think the price stay the same or go up) and then you would give yourself time for the price
to go up. For the sake of this example, let’s assume you are looking at June options. So, you might want to look at the AAPL
June 21st $205 Put (AAPL190621P00205000).

Now, at first glance, AAPL190621P00205000 looks pretty confusing. But let’s take it apart:

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/05/AAPLExample_JWTT.png)

Options Root — Year — Month — Expiration Date — Type of Options — Strike Price

1. Options Root — AAPL — This is the options root that’s between one and six letters, indicating the ticker symbol of the
underlying security.
2. Year — 19 — These two characters tell you the year in which the option expires. In this case, it’s 2019.
3. Month — 06 — The next two characters tell you the month that the option expires. Our Apple option expires in June, the
sixth month of the year.
4. Expiration Date — 21 — These two characters are the day the option expires. Monthly options technically expire the
third Saturday of each month, but because the markets are closed on Saturdays, the options actually expire the day
before, on Friday. So in this case, our option technically expires Friday, June 21, 2019.
5. Type of Option — P — This letter tells you whether the option is a call or a put. “P” indicates a put option. A call option
would be designated by a “C”.
6. Strike Price — 00205000 — The strike price is composed of eight numbers. The first five are for the strike dollar, and the
last three are for the strike decimal. In our trade, this indicates the option has a $205 strike price.

Review this chart below for a few more examples:

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/04/Examples.jpg)

With all this said, regarding option symbols, a few brokers have chosen to use their own format; what is important is just to
know what format they are using. What we have described above reflects the industry standard for regular monthly options.
It’s also important to note that now there are also weekly and quarterly options; that is, options that expire each week and
options that expire each quarter. Weekly and quarterly options are typically only offered on bigger-name stocks that are very
liquid: Apple (AAPL), Google (GOOG), Amazon.com (AMZN), Microsoft (MSFT) and the like. Let’s look at how the exchanges
denote different tickers for weekly and monthly options.

(https://strategictrader.investorplace.com/wp-content/uploads/sites/2/2019/04/MSFTExamples.png)

This becomes important because, in Strategic Trader, we will recommend selling regular monthly options, weekly options
and quarterly options, so you’ll want to review our trades closely to make sure you are entering the correct trade.

In every alert we send you, we’ll be sure to tell you clearly which strike price and expiration we are choosing so there’s
absolutely no confusion.

3 Factors That Affect the Option Price

Much of the mystery behind options trading is that it seems difficult to make sense of all the components at first. But once
you realize that it’s a science and you master it accordingly, you can craft it into an art that works for you individually.

Although the price of an option is influenced by many factors, 90% of the price is based on:

1. Stock Price

As mentioned earlier, the market price of the underlying security (be it the stock, index or exchange-traded fund) is where
you start once you’ve identified the underlying asset on which you want to trade options. The stock price greatly — and
perhaps predominantly — affects the price of the options available.

2. Time

Options are a wasting asset (i.e., they expire), so time erodes the value of all options. The further away the option is from
expiration, the more value it likely could have. As the option approaches expiration, the time decay accelerates because
there’s less time for the option to become in-the-money and become profitable for the buyer.

For us, the options sellers, time decay works to our advantage, reducing the cost of an option and giving us the chance to
buy it back for a lower price and pocket the difference. That lets us lock in profits.

It’s useful to factor this into your options trading decisions because you need to balance the risk of selling an option with a
longer expiration with the reward of more premium from the initial sale of the option.

The chart below shows you how time erodes an option. If it’s July and you sell a December option, then you’re giving
yourself about five months for the option to move in your favor. If you sell an option that has a later expiration date, you are
allowing more time for the stock to move against you.

With this December option that’s sold in July, there will be very little time decay in July, August and September. But as you
get closer to December, the time decay speeds up, with the steepest decline occurring in the last 30 days before the option
expiration.
It’s for that reason that the majority of the short options we recommend will have about a month left before expiration.
Again, it’s during those last 30 days that the option loses the most value and provides the best risk/reward picture for us as
option sellers. Remember, as option sellers, we are looking for the price of the options we sell to go down.

(https://slingshot-trader.investorplace.com/wp-content/uploads/sites/2/2016/09/9.gif)

3. Volatility

After the market price of the stock and the time until expiration, volatility is the next-most important factor in the
determination of an option’s price. Options on stocks that have been stable for years will be more predictably priced and,
accordingly, priced lower than options on stocks whose charts are all over the place — up and down like a carousel horse
gone amok.

History isn’t the only determining factor. Implied volatility also affects an option’s price because it’s based on the amount of
volatility the market maker believes the stock is likely to experience in the future. A stock on the move will go up in price as
more and more people want to get in on the action.

As the stock starts to move, the options market maker usually adjusts the implied volatility upward, which means the
options premium will rise, all else being equal. The options will be worth more to investors who want to lock in a certain
price at which they’d be willing to buy the stock.

Let’s take Apple again. Suppose it’s trading at $200. Then the company introduces a product that’s even hotter than its iPad
or iPhones, and the shares take off into the $210 range with no signs of looking back. You’d better believe that folks will
want to secure their right to buy shares at $205 or any other strike price below the current stock price.

For us, we want to sell options when volatility is high and the premium is elevated. After all, the higher the option premium,
the more money we can collect per option sold. When volatility is low and the value of the option has decreased, that’s when
we will look to potentially buy the option back for a lower price and pocket the difference.

Bid/Ask Prices
Every option (whether it’s a call or a put, expiring in a month or a year) always will have a “bid” and an “ask” price. Said
simply, you buy at the ask price and sell on the bid.

For example, at the time of this writing, the Apple (AAPL) June 21st expiration $205 strike puts have a bid/ask spread of
$15.30/$15.50.
If we were to sell to open this option, we would be doing so at the bid price (the lower number). That’s the price that traders
are willing to pay us for the option.

For the option buyer, they would have to pay the ask price (the higher number). That’s the price that the option seller is
demanding to sell the option.

The difference between the bid and ask prices is the “spread.” As the spread narrows, the amount of liquidity is usually
higher (liquidity is the ability to move in and out of a position easily).

Options Quotes
Your broker will have all the quotes you’ll need to trade listed online. If you’re an active trader, you’ll have all the free, real-
time quotes you need through that online service.

The Chicago Board Options Exchange (CBOE) is another source for option quotes. At CBOE.com, you’ll find a free 20-minute
delayed screen (http://www.cboe.com/delayedquote/quote-table). For different fee levels, you can get real-time quotes and even real-
time streaming quotes.

Delayed option quotes also are available a Yahoo Finance (https://finance.yahoo.com/).

Understanding Risk
Many investors get excited about selling options because earning consistent income with their trades. While stock investors
might make 10%-20% returns on a stock after several months of waiting, options sellers get paid upfront for their trades and,
often times, the options they write expire worthless.

Traders that sell short puts and covered calls are taking on specific risks. In the case of a put write, you risk being put stock,
which we mentioned above. Let’s look at the Microsoft (MSFT) December 21st $110 Put Write, which expired in-the-money,
again.

If we sold one contract, we would be required to purchase 100 shares for $110 per share at expiration. That would cost
$11,000. Every put write carries the risk of exercise, however unlikely, which means selling too many options that expire in
the money can be costly.

That risk also means your broker will require you to provide “margin,” which is a cash deposit in your account to cover the
potential losses.

The margin requirement is determined by a simple formula. First take 20% of the underlying stock price, then subtract the
amount the put is out of the money, and add the option premium. However different brokers may have different
requirements.

In the case of a covered call, the risk is the buyer will call our stock away from us. Lets look at the Microsoft (MSFT) January
18th (2019) $100 Covered Call, which we sold after accepting the stock from the Microsoft (MSFT) December 21st $110 Put
Write.

Assuming we had bought 100 shares of Microsoft for $110 per share, our invested capital is $11,000. If our covered call had
expired in-the-money, we would have been required to sell our 100 shares for $100. The buyer would have paid us $10,000,
and we would have lost money on our trade.

When selling covered calls, you sometimes risk losing money from your stock position.

Position Sizing
It’s very important to stay consistent in your trading. One of the main reasons many traders aren’t successful is simply
because they are not consistent in their position sizing. This means investing approximately the same percentage of your
portfolio to each position.

As a rule of thumb, the benefits of diversification start to fade once an investor takes on between 10-15 positions. Therefore,
we recommend that you put 8%-10% of your total available trading capital in any given trade. Investors who are more risk
tolerant may wish to use more capital and some traders may want to use less, but what’s important is to be consistent from
one trade to the next.

Determining the amount to risk per trade would be easy if you are just buying stocks. For example, if you have a $15,000
account and you want to risk 10% on each trade, you would put $1,500 in a single stock investment. However, the calculation
is a little trickier when using options.

When we sell put options, there is a small possibility that the put will be exercised and we will buy the stock. Therefore,
although the risk of exercise is usually low, it makes sense to use the value of the stock to calculate your position sizing.
Let’s run through an example with a put option with a $100 strike price.

You want to write or “sell to open” the put option to collect option income. The puts have a strike price of $100. If the you are
put the stock, you will pay $100 per share. Since each put contract controls 100 shares, the theoretical investment after
exercise is $10,000 per contract.

We recommend assuming some leverage for the position sizing calculation because exercise is not very common. In most
cases, we suggest that investors assume a 4-to-1 ratio. With leverage, you can enter trades that are larger than your account
funds can cover. In other words, if the theoretical investment after exercise is $10,000, then an investor would keep $2,500 —
per put contract that is sold — in cash available in their account as the “investment” in the trade.

Your broker will require a minimum deposit to be reserved for each put that is sold. That required amount is less than what
we have suggested here, but we feel that our more conservative approach helps traders remain consistent even in choppy
market conditions.

Assume that you had $50,000 available for a put selling strategy and you are willing to risk 10% in any single position or
$5,000. The previous calculation required an “investment” of $2,500 per put contract sold, so your position size would be 2
put contracts.

Using the steps outlined above, you can run some practice calculations to get the hang of consistent position sizing. For
example, assume you planned to sell puts on a stock, and the puts have a $48 strike price. If you had $60,000 available for
your put selling strategy and were willing to risk 8% per trade, how many contracts would you sell to open? [Hint: The correct
answer is 4-contracts].

Position sizing is important because it’s very easy to fall into the trap where you become a “Seesaw investor.” This is where
you have very large positions when you’re confident and on a winning streak and then you take only tiny investments when
you’re nervous.

The problem with this is that you can end up taking some huge losses that you can’t come back from because the market
turns against you when you have the largest positions and have become overconfident. You also miss some of the best
opportunities when the market is choppy and it’s natural to be a little more nervous.

Time is on Your Side

All options expire — most at zero value. When selling options, we can use this to our advantage to generate extra income
over and over again with little to no risk. The closer an option gets to expiration, the faster the premium in the option
deteriorates.

This deterioration is very rapid and accelerates in the final days before expiration. As an options investor, you should invest
only a dollar amount that you’re comfortable losing, because you could lose it all.
 1. Sell options at the money (or near the money). At the money options typically carry high premiums, which results in the
option seller pocketing more money.
2. Sell options with expiration dates that comfortably encompass the investment opportunity.
3. Sell options when volatility is high for greater premium, and buy them back to close the position when volatility is low
and the premium has evaporated.

How to Determine Your Profit or Loss in a Trade

Knowing how to calculate your profit or loss is an important way to help you manage your portfolio. The options market is
very volatile and has big swings up and down. It’s not unusual for the price of an option to be up 50% or more one day and
down 30% or more the next.

That’s why it’s important to take your winners off the table and not let your entire trade ride in the hopes of trying to capture
a huge home run.

In our example trades, you’ll notice we described our profits for put writes as “return on margin” and our covered calls as
“return on invested capital.”

Return on margin for a put write is calculated using this formula:

((Open Price – Close Price) * 100) / Margin

We think it’s useful to calculate profits based on margin because it gives us a better sense of how much income we are
receiving versus how much money we have allocated for a particular trade.

In the case of the Microsoft (MSFT) September 21st $111 Put Write, we were required to put up $2,289.00 in margin. We
received $145 when we sold the contract, and we bought it back for $17.

Calculating our profit would look like this:

(($1.45 – $0.17) * 100) / $2289.00

The end percentage is 5.59%.

For a covered call, we use “invested capital” to calculate our profits, which refers to the total amount invested in the stock
we sell covered calls against. If you buy 100 shares of Microsoft at $110, your invested capital is $11,000.

As we mentioned earlier, the risk in a covered call position is that the call buyer will call away our shares of a stock.
Therefore, in the same way that margin is at risk in a put write, the invested capital is at risk in a covered call trade. To
calculate your return on invested capital for a covered call trade, we use the following formula:

((Open Price – Close Price ) * 100) / Invested Capital

In the case of the Microsoft (MSFT) January 18th (2019) $100 Covered Call, we previously purchased 100 shares of
Microsoft at $110, making our invested capital $11,000. We received $290 when we sold the contract, and we bought it back
for $262.

Calculating our profit would look like this:

(($2.90 – $2.62) * 100) / $11,000

As you can see, calculating your profits in a trade isn’t too difficult. And we believe it’s important to understand the value of
your trades relative to the amount of money you’re risking because it helps you better understand your risk/reward picture.
Now that you have all of the ins and outs of options trading, one of the most important tools you have is your broker. Even
though most of the leading online brokerage firms are well-versed in trading options, all brokers are not created equally.
There are also a number of options-specific brokerages that have tools to assist options traders.

Keep in mind, though, that, in general, the lower the commission, the less support you can expect. Full-service brokers can
charge $2-$5 per options contract, while discounters might charge a low flat commission per trade, regardless of the
number of contracts traded.

Applying is easy — and it often can be all done online. Expect to pay anywhere from $5.00 to $19.95 commission per
transaction for an option trade. Some option brokerage firms have a $1.50 per contract commission schedule, with a
minimum of, say, $14.95 per trade. (Meaning, even if you only do one contract, they will get you for the $14.95.)

Option Approval
Each broker has different rates and requirements (and may assign a different number to each level), but in general there are
four different levels of option trading you can be approved for. Most brokers will approve you for level 0 or 1 when starting
out. Make sure you’re approved for level 1 or higher so you can buy calls and puts.

Level 0 — This is the first level of approval and where you would need to have the most stocks or money to cover your
positions. At this level, you would be able to sell calls and puts on the underlying stocks you own in your account.

You would also be able to sell covered calls. The covered call is one of the most conservative and least risky option
strategies available. Before you sell the calls, you have to own the stock (i.e., you’re “covered”) in the event the stock gets
called away from you. It’s simple, and there’s virtually no risk to the brokerage firm.

Buying calls and puts like we do in Strategic Trader involves having cash in your account (which is how all options settle).
You buy a call or a put, and you are limited to losing the amount of your investment and nothing more. Again, the brokerage
firm is not assuming too much risk here because you have the money/stocks in your account, and they place a freeze on
them to make sure they are covered in case the trade does not go your way.

Depending on your account size, the brokerage firm and your past experience, you might not be approved (initially) for the
higher levels.

Level 1 — Here you would also be able to buy puts and calls without owning the underlying securities. You could also do
straddles that involve buying equal numbers of calls or puts on the same stock and at the same strike price. You would do
this if you thought the stock were going to make a big move, but were not sure which direction it would be.

Another strategy you would be able to do is the strangle trade. This involves the same number of calls and puts on the same
underlying security at different strike prices but with the same expiration date. Here you are hoping that the stock makes a
big move, but you’re not sure at what price.

Level 2 — At level two, not only are you approved to do everything in the other two levels, but you can now begin to do credit
and debit spread trades if you so desire.

While we don’t recommend credit and debit spreads, they can be useful strategies for Strategic Trader subscribers that are
trading with retirement accounts. To learn more about adjusting our strategies for use in a retirement account, read our
Special Report, How to Mimic Our Strategic Trades in a Retirement Account (https://strategictrader.investorplace.com/report/how-to-mimic-
our-strategic-trades-in-a-retirement-account/).

At this level, you will also be required to have less up-front cash or securities tied up for the trades.

Level 3 — This is the highest level at which you can be approved by your broker. This level allows you to sell “naked puts” or
“naked calls” and do more complex strategies. Because selling put writes is such a major part of the Strategic Trader
strategy, you’ll want to be at least level three to participate in our trades.