Ultimate Options Guide OPS New

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WHAT’S IN THIS GUIDE?

Winning. That’s what this guide is all about. We’ll expose the secrets, tips, and techniques used by
some of the BEST options traders in the game to help put the odds in your favor and create a
profitable trading system.
We’ll reveal:
Secret formulas and systems to make consistent returns
The habits needed to achieve options trading success
Major mistakes made by rookie options traders and how to avoid them
Some of the most powerful options trading strategies on earth
What separates the winners from the losers
And much more…
READY TO STEP UP YOUR TRADING GAME? REGISTER FOR OUR NEXT POWER SESSION
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ABOUT THE AUTHORS
Scott Bauer
Chief Executive Ofﬁcer, Options Volatility Coach
A respected market commentator seen on CNBC,

Bloomberg, and Fox Business, Scott Bauer has
more than 25 years of professional equity and
index options experience, including over 15 years
as a Chicago Board of Options Exchange (CBOE)
market maker. During his time on the floor of the
CBOE, he served on many committees, including
Arbitration and Market Performance. Scott has
also previously served as Vice-President, Equities
Division for Goldman Sachs.
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ABOUT THE AUTHORS
Michael Shorr
Options Coach, Prosper Trading Academy
Michael Shorr is a veteran derivatives trader of

the Chicago Mercantile Exchange (CME), Chicago
Board of Trade (CBOT), and Chicago Board of
Options Exchange (CBOE). He has broad market
knowledge ranging from agricultural to treasury
markets. Michael has taught options theory
classes for a number of years and possesses an
entertaining and relatable teaching style.
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TABLE OF CONTENTS
Introduction 5
Mechanics of Options Trading 6
Top Secrets from Legendary Traders That Will Transform Your Options Trading 10
The “Magic” 3-Step Formula that Rookie Traders Are Using to Beat Wall Street 14
The Key to Turning Your Portfolio into an Income Generating Machine 19
Seven Habits of Highly Successful Options Traders 23
The Three Deadly Sins of Options Trading 27
A Go-To Strategy for the Next Market Crash 31
The K.I.S.S. Strategy 34
Next Steps 37
Glossary of Terms 38
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INTRODUCTION
Welcome to the world of options By utilizing the power of options, you can
trading... potentially:
You have decided to embark on a journey that Trade market direction with less
can potentially provide enormous financial exposure and significantly lower margin
rewards for the educated and disciplined. requirements
While many investors are afraid to use options Generate income from stocks or
and think they’re risky, options can be an instruments you already own
extremely powerful tool in your trading
arsenal. In fact, options are the most versatile Hedge your existing market exposure
financial instrument at your disposal. and/or tail risk
Options may appear complicated and difficult Potentially profit from changes in
to master to the novice, but they are an implied volatility
indispensable tool for the professional traders
Potentially profit from nothing more
that must generate positive income to pay
than the passage of time
their bills.
So how do you become a profiting options

trader? First, let’s take a look at the
mechanics of options trading.
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THE MECHANICS OF OPTIONS TRADING

Before we dive into the secrets, tips, and There are two types of Options: CALLS and
techniques, we should first cover some PUTS. Call options give the owner the right to
basic terminology and concepts to make buy the underlying asset; put options give the
sure we’re all on the same page. owner the right to sell the underlying asset.
An option is a contract to buy or sell an

underlying instrument or underlying
interest. Owning stock options is not the
same as owning shares of stock.
If you own an option, you have the right,

but not the obligation to control your stock
at a specified price, (STRIKE PRICE), until a
specified time, (EXPIRATION DATE). If an
option is not exercised before the
expiration date, it will expire, or cease to
exist.
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The STRIKE PRICE, or EXERCISE PRICE, is Some stocks and indices have options that
the price at which the underlying asset may be trade as far out in the future as two years
purchased or sold. Equity (stock) option strike (LEAPS).
prices are listed in increments of 0.50, 1, 2.5,
5, or 10 points, depending on the price level There are two definitions of options
of the stock. PREMIUM. The first refers to the price of the
option. The second definition and the one we
The EXPIRATION DATE is the date the option will generally use is the extrinsic (time) value
expires. The last trading day of an equity of the option above and beyond any intrinsic
option is the third Friday of the month unless value of an option. In either definition, an
that Friday is a market holiday, in which case option's PREMIUM is determined by many
the expiration is on Thursday right before factors, including the current price of the
Friday. The actual expiration of the option asset, the strike price of the option, the time
contract is always the Saturday that follows remaining until expiration, interest rates,
the third Friday of the month. dividends, and volatility.
All listed options can be traded with at least

four expiration dates, and usually more.
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An option's premium is on a per-share basis How do options offer an investor LEVERAGE?

and represents 100 shares of the underlying
asset. If the premium of an option is $6, the Option buyers can pay a small premium for
total premium for that option is $600 ($6 x market exposure as compared to the actual
100). price of the asset to which it is attached.
Investors can see large returns from even
Purchasing an option creates a debit to your small, favorable percentage moves in the
trading account in the amount of the premium underlying equity. Option buyers also know
paid. There are no margin requirements when their RISK. The maximum loss would be the
you purchase options because your risk is premium amount paid for that option.
limited to the premium, the price of the However, an option seller potentially has
option. unlimited risk.
Selling an option creates a credit to your

trading account in the amount of the premium
collected. However, because option sellers
have an obligation to either buy or sell the
underlying equity if their option is exercised
by an option owner, selling an option requires
a substantial margin.
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Trading stock options, especially in today's

volatile market, can offer an investor the
following advantages:
Protection from a decline in the overall

market or in the price of a long underlying
security.
The ability to purchase stock at a lower

price or sell stock at a higher price.
The ability to create additional income

against a long OR a short position.
Profit potential from a move in the price of

a stock, regardless of direction.
Now that we’ve got the basics covered, let’s

look at top secrets from legendary traders and
how you can begin to deploy these secrets
today to catapult your own options trading.
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TOP SECRETS FROM LEGENDARY TRADERS

THAT WILL TRANSFORM YOUR OPTIONS TRADING
Throughout history, certain men and women Top Secret #1

have achieved great success in financial
markets. These successes were not due to luck Find your own style. No two traders are
and were certainly not a fluke. Many of the exactly the same. Traders may have
most legendary traders achieved such status completely different goals and objectives and
due to the consistency with which they were may trade all different kinds of markets. While
able to beat the market. some traders may utilize a very technical
approach, others may be more reliant on
While traders tend to have their own styles, market fundamentals. Some may trade options
habits, and methodologies, the most as a stand-alone instrument while others may
successful traders share a number of traits and use options in conjunction with stocks,
secrets that have helped them reach the top futures, or other instruments.
of an extremely competitive field.
Whatever the case may be – find your own
So, what are the top secrets of these trading way.
superstars?
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Top Secret #2 Top Secret #3
Be properly capitalized for your objectives. Learn to accept losing. The ability to lose like
All too often, many traders that have a professional is key to your trading success.
tremendous potential are out of the game too
fast because they are not properly capitalized. No one has a crystal ball – NO ONE.
It is imperative to determine your trading
The difference between a novice trader that
goals and objectives.
loses money consistently and a professional
For example, a trader looking to make a trader that makes money consistently is how
full-time living from trading is going to need a they take losses.
substantially larger account than a trader who
Novice traders tend to hold onto losing
is simply looking to build wealth over a period
positions and find themselves hoping and
of time. The products traded will also have a
praying for the market to reverse course.
significant impact on the amount of capital
required. For someone looking to day-trade,
Professional traders, on the other hand,
stocks will require more capital than futures or
understand that taking losses is part of the
forex.
game, and do so with acceptance and
objectivity.
Whichever path you choose, make sure you
are working with adequate capital to endure
the inevitable draw-downs that are part of
trading.
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Top Secret #4 Top Secret #5
Conquer your own human nature. Trading is Treat trading like a business. Trading for a
a psychological game. While methodology and living or for wealth building is a business and
strategy are important, without the right must be treated accordingly. You wouldn’t
psychological mindset you are destined for open a restaurant, for example, hoping to
failure. The emotions of fear and greed must earn a living working only part-time. To be
be overcome to be successful in this endeavor. successful, one must deal with many issues
Top traders not only take losses like such as hiring, inventory, insurance, location
professionals, but they are happy to do so. and more. Trading is no different.
They understand that by taking a loss, they
are protecting their capital from further losses To be a successful trader, you MUST view your
that can take them out of the game. trading as a business – a business that can
potentially provide a very good livelihood for
On the other hand, professional traders know you and your family.
when to take profits. They have an uncanny
ability to let their profits run but do not get This means putting in the time to perform
overly greedy in the process, allowing a big market research, doing technical analysis, and
winner to turn into a small winner, or worse structuring positions with care and attention
yet, a loser. Top traders remain objective at all to detail.
times and do not allow emotion to dictate
trading decisions.
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Top Secret #6 While there is no “Holy Grail” when it comes

to trading, these simple guidelines from some
Always strive to be better. Top traders are of the world’s best traders can get you a step
always, ALWAYS looking for ways to improve. ahead.
Markets can and do change, and as traders,
one must be able to adapt strategies By putting in the time and effort, and with a
accordingly. willingness to be a life-long learner, you can
catapult your trading into a business that can
Trading is a life-long journey, a journey with no potentially provide enormous financial
end. In trading, just as in any other field or benefits while allowing you to live life on your
occupation, the best are always looking for own terms.
ways to get better. The best never sit on their
heels, and never allow themselves to become
content and complacent.
By always looking for ways to sharpen your

skills, you can help ensure you stay at the top
of your trading game.
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THE “MAGIC” 3-STEP FORMULA ROOKIE

TRADERS ARE USING TO BEAT WALL STREET
You don’t have to trade on Wall Street to win Today’s financial markets have become more
like a Wall Street trader. More and more of complex, more efficient, and more
today’s investors are putting their money into competitive. The market is still, at its core, an
their own hands. These investors, having auction. It is a market of buyers and sellers –
chosen to take control of their own destiny, nothing more and nothing less.
could now also be referred to as traders. In
fact, there are traders out there right now that Acknowledging this fact, and removing a lot
are beating Wall Street as we speak. Many of of the common “noise” surrounding trading, is
these traders come from non-financial a great start.
backgrounds, and some have had very limited
There are three key steps that even
experience in trading altogether.
novice traders are taking right now to
So how are they beating Wall Street? beat Wall Street.
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Step #1
Know thy market. Successful traders do not Today’s financial markets can lead to
generally go out and trade multiple financial information overload. Most successful traders
instruments. Have you ever seen a successful focus on a single product or area to work in.
S&P pit trader who was also a pro stock For example, a treasury trader may trade
trader? Not likely. How about a successful bonds, 10-year notes, and five-year notes. Or
stock trader that also killed it in the grain an energy trader may focus on crude oil and
markets? Again, not likely. natural gas futures.
The point is this: When you begin to spread

yourself out, you may dilute your trading
abilities.
Focus on one market or one area. Become

intimately familiar with it. Feel like you know
what it’s going to do before it does. Study
your craft and put all of your efforts into
mastery of this single product or space.
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Step #2
Understand risk. When it comes to trading They have risk management protocols in
and investing, the name of the game is risk. place, and they adhere to these protocols
One way to think of trading is simply a under even the most difficult of
transfer of risk from one party to another. For circumstances. For the layperson, it’s
example, if you sell a cash-secured put on sometimes referred to as discipline.
stock XYZ, you have just assumed the risk of
that stock falling below the strike price, in Risk is a part of trading and investing, any way
which case you will have to take delivery of you slice it. Most people lose money trading
the shares. On the other hand, the person that because they have no concept of proper risk
purchased the put from you has effectively management.
just transferred his risk of the stock moving
The ﬁrst step on the road to making money
lower to you.
is not losing money!
Risk Mitigation and Risk Acceptance
Traders who are out there right now beating

Wall Street and other professionals have a
deep understanding of risk.
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Step #3
Know the costs of doing business. If you are trading futures, go to a discount
Unfortunately for the public, Wall Street and broker or even directly to a Futures
other financial markets are set up in a way Commission Merchant, or FCM, to get the
that makes it extremely difficult for the lowest rates possible.
average trader or investor to turn a profit.
Markets and exchanges are in the game for Track your expenses, and always strive for
the same reason that you are; to make money. ways to lower them.
Commissions, data feeds, memberships – all Commissions and fees can turn a winner into
of these costs of trading can add up quickly. In a loser.
fact, many traders are able to make money in
Make sure that any potential market
the market, but end up net losers overall after
opportunities are large enough to cover the
factoring in all of these costs.
costs of doing business. Do not turn into a
Traders currently beating Wall Street “commission generator” for your brokerage or
understand this, and take whatever steps are clearing firm.
necessary to gain an edge.
If you are trading stocks, find a reliable

discount broker and negotiate your
commissions and fees.
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By following these three simple steps, you will gain

an advantage over the majority of market participants.
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THE KEY TO TURNING YOUR PORTFOLIO INTO AN

INCOME GENERATING MACHINE
Many traders and investors do not know how How does this relate to trading options? Let
to utilize the power of their portfolios. When me dig deeper…
you think of your portfolio, you may think of a
basket of stocks you have held for years, or You see, when you own stocks, for example,
perhaps mutual funds you may have owned you own an asset that fluctuates in price. The
since the Reagan Administration was still in stock may also pay you dividends. Many
office. stocks, however, also have listed options
contracts.
You may have been told that “buy and hold” is
the way to invest for the future… In reality, These options contracts can be purchased to
your portfolio can be used for so much more. hedge your position, to play earnings, or to
When used with proper risk management and try to generate additional income.
sound investment strategies, your portfolio
Markets may trend higher, they may trend
can give you the ammunition you need to
lower, or they may simply stay in a sideways
potentially generate returns in any market
trading range. Many stocks spend a great deal
condition. Up, down, sideways – it doesn’t
of time within a certain range. Why not take
matter.
advantage of that?
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The covered call write strategy is a widely (net $200 since each option has a multiplier of
used and simple strategy to learn. Using this 100), not including any transaction costs.
strategy, you will write (sell) one
If the stock price drops, the calls will lose
out-of-the-money (OTM) call option for every
value and, in the process, partially offset your
100 shares of stock you are long. An OTM
losses on the share price. In this case, each
option has no intrinsic value, but only
call for 100 shares was sold for $0.40, so the
possesses extrinsic or time value. When we
breakeven on the position would be $39.60
are talking about call options, an OTM has a
per share.
strike price that is higher than the market
price of an underlying asset. If the stock goes sideways, the calls may lose
value through the power of time decay. In this
Selling these calls may accomplish two things:
case, you are neither making nor losing money
First, the sale of out-of-the-money calls may on the stock itself, but now you are potentially
provide a hedge against your position. Let’s profiting as the short calls lose value as they
look at an example: Suppose that you are long approach expiration. Assuming the short calls
500 shares of stock XYZ which is currently expire worthless, you would then keep the
trading at $40 per share. The stock has stalled entire $200 premium collected as profit.
out a bit, and you believe it may remain
If the stock price rises, you may still
around $40 for the next few months.
potentially make money. Your long stock
You decide to sell five of the front month position would gain in value as the share price
$42.5 call options on the stock for $0.40 each, goes up; however, your short calls may also be
therefore collecting a total premium of $2.00 increasing in value.
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The key is where the stock is at expiration. If The first way is through time decay. The
the stock price is below the strike price of second way is through a drop in implied
$42.50 at expiration, the calls will still expire volatility.
worthless. In this case, you have now
potentially made money on the stock itself Let’s look at a simple example:
and the short calls.
You own 1000 shares of stock WWW. You have
Range-bound = Opportunity owned the shares for years, and the company
pays a decent dividend.
In addition to covered call writing, there are

The stock has, however, traded in a relatively
numerous other ways to potentially profit in
tight range for several years now, oscillating
markets that are consolidating or moving
between $35 and $40 per share.
sideways, and you don’t need to own the
stock or contract to take advantage. Let’s talk In addition to earning dividends on your
briefly about another popular strategy that shares, you decide to use iron condors on the
anyone can learn: The iron condor. stock to try to generate additional income.
With WWW currently trading at $37 per share,
Iron condors consist of a short call spread and
you initiate the following position:
a short put spread with the idea being that
the market will remain between the two Sell 10 of the front month $41/$45 call
spreads, allowing all options to expire spreads for a premium of $0.50 each. Sell 10
worthless. Iron condors can provide a very of the front month $34/$30 put spreads for a
wide potential profit zone, and can possibly premium of $0.50 each.
make money in two ways.
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You have collected a total of $10 (net $1,000) In this case, the call spreads sold would expire
in option premium. If WWW simply stays worthless, and you would still keep the total
between the short strike prices of $34 and option premium collected. However, you now
$41, all options will expire worthless, and you have a larger underlying position in the stock
keep the entire $1,000 credit collected (Not itself and therefore have more exposure.
including applicable transaction costs).
The point is this: By using cash and/or
On the other hand, if the share price rises and securities already in your portfolio, you have
is above the short call strike of $41 at the potential to generate some serious
expiration, you may lose your shares of the additional income.
stock upon assignment (you’d be assigned a
short position in the stock at $41, thus Of course, trade selection and potential stocks
offsetting your existing long stock position). In or contracts with which to utilize such
this case, you would have made another dollar strategies should be carefully considered.
on the stock price going higher, and you would
Your portfolio does not have to be treated as a
still keep the $1,000 of option premium
passive source of wealth building. Quite to the
collected.
contrary, by using various options strategies,
In another scenario, if the stock price falls, you you have the potential to turn your existing
will lose money on your long stock position portfolio into an income generating machine
and potentially lose money on the short put that can potentially build your wealth with
spreads. If WWW is below the short put strike greater speed or provide an additional source
of $34 at expiration, you will be assigned an of income.
additional long position from $34.
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SEVEN HABITS OF HIGHLY SUCCESSFUL

OPTIONS TRADERS
While options may seem perplexing to traders Here we will briefly discuss seven habits of
who are new to the game, once you have a highly successful options traders.
deep understanding of options and options
pricing, you will have a very powerful weapon Habit #1
in your trading arsenal. In fact, options are one
Highly successful options traders understand
of the most, if not the most, versatile financial
how options are priced, and consistently put
instruments at your disposal.
that knowledge to use. This allows successful
Like any other financial instrument, trading options traders to avoid paying too much for
and using options successfully requires an option or selling an option for too little. In
knowledge, perseverance, and good trading fact, option pricing theories are the basis for
habits. It is these solid trading habits that options trading, and without habitually putting
separate the novices from the professionals, these theories to work, you will be giving up a
and the winners from the losers. While some great deal of “edge.” Highly successful
of these habits apply specifically to options options traders understand the importance of
traders, many of the habits of highly successful having an edge and will seek out any and all
options traders can also be applied to trading opportunities to gain one.
in other instruments as well.
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Habit #2 Habit #3
Highly successful options traders focus on Highly successful options traders prioritize
volatility. Successful options traders risk management. If you do not have a solid
understand that volatility is the name of the understanding of risk management and
game. While options can be used to trade employ concrete risk management techniques
directionally or for premium collection in your trading, you are likely going to be out
strategies, pros understand that options of the game before long. Highly successful
derive a great deal of their value from options traders place an emphasis on risk and
volatility – both historical and implied. have parameters in place for trade risk and
Successful options traders understand how overall account management. These risk
implied volatility affects options, and structure management habits help pros cut losing
their trades and strategies accordingly. positions short while maximizing winning
positions. Highly successful options traders
To be successful in trading options, you must understand that the first step to making
always consider volatility and how it may money consistently is not losing money.
potentially affect your position. Successful
options traders always consider this key Habit #4
component and base trading decisions on
potential changes in implied volatility. Highly successful options traders think in
terms of odds and probabilities. These
traders will only put their capital at risk in
positions that they feel have a high probability
of success.
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They also have a thorough understanding of They understand that periods of losses can
percentages and other basic mathematics and do occur, and that even in the best of
involved in options trading. For example, times, profits can be fleeting.
successful options traders understand that if
an option or asset loses 25 percent of its Habit #6
value, it will have to see a gain of 33 percent
Highly successful options traders never stop
to break even. The most successful options
learning. Markets can and do change over
traders focus on putting the odds and
time, and successful options traders are
probabilities in their favor as much as possible.
constantly looking for ways to improve their
This is why you will not likely see a
trading skills. They are life-long students of
professional options trader buying extremely
the market, and they take complete
deep out-of-the-money options that have little
responsibility for their ability to learn and
statistical chance of making a profit.
grow as traders. They habitually read books,
Habit #5 confer with other traders, and stay in touch
with the markets in which they trade.
Highly successful options traders do not
allow the power of emotion to consume Habit #7
them. Highly successful options traders
The most successful traders realize and
understand and accept that losing is a part of
understand that trading is simply a means to
winning. These successful traders strive to
an end. Even the most successful traders
remain focused and objective at all times, and
require a break now and then to recharge
do not allow themselves to get attached to a
mentally and emotionally, and spending some
position or become greedy.
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time away from the trading screen allows them

to do just that. This keeps them sharp and
focused during market hours and may
potentially allow them to achieve a higher
level of success.
Trading options for a living is a job, and like

any other job, one must distance oneself at
times to regain perspective.
While there is no “Holy Grail” to options

trading, by constantly adopting the habits of
highly successful options traders you can
greatly increase your odds of success.
The most successful options traders

understand the importance of employing these
habits each and every day. Fortunately,
numerous studies have shown that adopting
habits does not take long.
Start practicing the habits of highly successful

options traders today, and before long these
habits will become second nature.
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THE THREE DEADLY SINS OF OPTIONS TRADING
Trading options, just like trading any other When you purchase an option, whether it is to
type of financial instrument, involves a number hedge, play market direction, or get long
of potential pitfalls that can quickly drain your volatility, you should still draw a line in the
account. sand. Just because your risk is limited on an
options purchase to the premium paid, does
Knowing some of the possible traps traders not mean you have to sacrifice that entire
commonly fall into, and how to avoid them, premium! Many novice options traders make
can give you an edge in your trading and this simple, yet significant, mistake. Because
potentially give you more staying power in the of the defined-risk nature of long options,
markets. they consider it to be a “set and forget” type
of trade and willingly lose all the money they
Through our 40+ years of combined trading paid for the option in many cases.
experience, we’ve identified three deadly sins
of options trading and ways to keep your Let’s look at a quick example:
trading free from evil…
Investor Joe believes that the price of stock
Sin #1 ABC is about to rise. Stock ABC is currently
trading at $50 per share. Joe does not want to
Buying options and letting them expire buy the stock and decides to purchase the
worthless. front month at-the-money $50 call for a
premium of $3.50, or $350.
This one is really a no-brainer.
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Joe makes his purchase and watches as the Sin #2

days go by while ABC trades sideways right
around the $50 level. Joe’s option has four Buying deep out-of-the-money options.
weeks until expiration. Two weeks after his
purchase, with no real bullish market Let’s make this one easy to understand –
movement to speak of, Joe’s $50 call has lost trades are trades and lottery tickets are
half its value and is now only worth $1.75 or lottery tickets…
$175.
Many novice options traders believe they can
Obviously, Joe’s market forecast was possibly turn a profit by purchasing very
incorrect… cheap, deep out-of-the-money options. Do
people win the lottery? Yes… have you or I
Joe could take his loss at this point, and move ever won it? Probably not…
on to the next trade, or he can continue to
hold the call option. Many novice options And to be clear, out-of-the-money options
traders will hold the call until its value declines may be very useful for trading directional
to zero! moves or for volatility plays. You want to make
sure, however, that the options are not so far
Don’t be that trader… Decide how much room out-of-the-money as to make the probability
you are willing to give the trade and then stick of the trade working almost non-existent.
to it. A simple rule of thumb is to cut losses
once a long option has lost 50 percent of its
value.
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While deep out-of-the-money options may Sin #3

represent less monetary risk due to their
smaller premiums, these options also have a Selling options when implied volatility is
statistically significant low winning low.
percentage. The underlying instrument would,
often times, have to make extremely While option selling has the potential to
substantial moves in price for these options to provide an income stream, it also has the
pay off – not to mention the fact that the potential to drain your account with large
power of time decay is always working against losses, especially if you are selling naked
you as well. options with unlimited market exposure.
If you are going to trade, look for trades that Many new options traders get this one wrong
have an edge to them. Look for positions that too. Options consist of many moving parts,
can potentially profit without an absurd move and while market direction and time are
in the market. That $100 you might have spent important, implied volatility is a huge
on an S&P call that is 200 handles component of option values and pricing. Many
out-of-the-money, well that can buy a lot of professional options traders trade option
lottery tickets... volatility and nothing else…
Just as with a stock you want to buy low and

sell high, or sell high and buy low, the same
goes for options.
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When selling premium, you want to sell high

(high IV) and buy low (low IV). Many traders
get caught in the trap of selling options that
are currently low in IV, only to watch the
option’s value explode as IV increases. Implied
volatility has a tendency to revert to the
mean, so only look for opportunities to sell
options when IV is on the high side.
Conversely, if you are going to buy an option,
you will want to look for options that are
currently on the low side for IV.
Sell high and buy low…
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A GO-TO STRATEGY FOR THE NEXT

MARKET SELLOFF
The term “market selloff” can evoke a great In fact, stocks are nearing the tenth year of
deal of emotion in traders and investors. the current bull market (the average bull
Market declines are, however, nothing new market typically lasts five years) and may
and due to many reasons, human nature being finally be showing some signs of correcting.
one of them, such declines will likely happen
This period of extremely low volatility has
from time-to-time.
caused put option values to remain CHEAP…
While many associate a market correction with
A simple go-to strategy in such an
a significant loss of market value and wealth, a
environment is a basic Risk Reversal.
correction can also represent huge
opportunities… A risk reversal is a position designed to
imitate a position in the underlying asset. Risk
There are numerous ways to potentially profit
reversals can be both bullish and bearish in
from a correction in the market. In the world
nature, and there are many variations of such
of options trading, volatility is a key
positions.
ingredient in option pricing and behavior.
Now, you could simply look to purchase
Volatility in the S&P 500, as an example, has
relatively cheap puts in the current
been essentially non-existent in recent years
environment; however, there are two primary
as the market has continued its multi-year
issues with doing so.
ascent.
32
First, from an absolute dollar cost standpoint, A correction that could potentially see stocks
puts that are significantly out-of-the-money fall by 10, 20, even 30 percent or more.
may be cheap but the probability of these
puts “coming into play” is likely very low. Because implied volatility has been relatively
low for some time, put options on the E-Mini
Second, long puts would be exposed to time are cheap. You can purchase a put option with
decay, and if such a selloff does not six months until expiration and a strike price
materialize in the given time period, you could of 2000 for a premium of about $10, or
potentially watch your puts expire worthless. $1,000. To negate the time decay of your puts,
you then look for a call premium to sell. In this
What you are looking for, then, is a position
case, let’s assume that you sell a call option
constructed in such a way as to minimize time
with six months until expiration at a strike
decay while still providing large profit
price of 2900. Such a call can currently be sold
potential if a selloff does occur.
for about $11, or $1,100.
The risk reversal accomplishes both.
To get in-the-money, the long put will need a
While there are many potential ways such a move lower of about 24 percent. For the call
position could be initiated, here we will option to go in-the-money, the market will
discuss a simple example… Let’s assume for a need to move up by about 12 percent. If the
moment that the E-Mini S&P 500 futures market enters a correction, the long put will
contract is currently trading at the 2600 level. likely begin increasing in value as investors
The market begins to show serious signs of scramble for put protection. Volatility may
weakness, and you believe that a correction is potentially rise substantially, also causing the
imminent. put to potentially gain in value.
33
As the market falls, the short call sold will losing value while the short call may be
likely be losing significant value. In other gaining in value.
words, you may potentially be profiting on
If you sold a naked call to finance the long put
both sides of the trade.
position, that naked call carries with it
What if you are wrong? What if there is no unlimited market exposure to the upside.
crash?
As with any other type of trade, you will have
That’s the best part… If the market falls at a to have an “uncle” point, at which you take
gradual pace, or even just goes sideways, you your loss and move on to the next one. There
may still potentially profit. That is because are, however, ways that you can mitigate
both options will be subject to a loss of value upside risk, such as selling call spreads instead
through time decay. The loss of time value in of outright calls…
the call will likely offset the loss of time value
The simple risk reversal provides a means of
in the put.
potentially catching a large downside move in
And don’t forget, you collected a net credit of the market while negating time decay risk.
1 point or $100 when you initiated the This type of position can potentially profit in
position! This means that if all options simply several different scenarios and can have huge
expired worthless, you still made money on profit potential if the market does, in fact,
the position. crash.
That’s the good – here is the bad: If the There are trade-offs, however. The upside call
market begins to rise, the long put will be exposure should be carefully considered, and
risk must be managed.
34
THE KISS STRATEGY
When it comes to options trading, many While initiating a multi-leg spread that gives
traders fall into the trap of using overly you X amount of deltas may sound cool at a
complicated strategies in an attempt to make cocktail party, transaction costs on these
money. Some of these strategies may include: positions will eat you alive…
• The Christmas Tree Spread We teach a number of different strategies

here at Prosper Trading Academy, but one of
• 5:1 ratio spreads the most important strategies we teach is:
• 4:1 back spreads

K.I.S.S.
• Box spreads
For those of you not in the “know,” this
The list of various option spread combinations stands for Keep It Simple Stupid…
goes on and on. We’re not saying that such
Think about that for a moment… In your
spreads never have their place, but the reality
everyday, non-trading life, do you like to keep
is that for most options traders; the simpler,
things simple and to the point or do you
the better.
prefer to make them overly complicated?
Assuming you like to keep it simple, why

would you treat your trading any differently?
35
Trading options is a means to an end – To be clear, we are not talking about a bull call
nothing more. Options are a vehicle with spread or an iron condor. We are referring to
which to express a market opinion, collect more “creative” spreads, the kind that
premium or attempt to profit from changes in involves more than four legs.
implied volatility. They may also be used to
hedge a long or short stock position, and may Tip #2
even be used to hedge against tail risk. If looking to trade a potential market move,
look for ways to maximize leverage while
The point is this: When trading options, use
keeping margin or capital requirements to a
the easiest and simplest method of
minimum. While many novice traders will look
accomplishing your desired goal…
to buy straight calls or puts with fairly high
Here we will provide a few simple tips; tips deltas, often they don’t realize the effects that
that may potentially help keep you out of vega and theta may have on their purchase.
trouble and tips that may cost your broker
A much smarter use of capital, in our view,
tons of cash in lost commissions.
may be to utilize out-of-the-money call or put
Tip #1 spreads based on your market forecast. These
positions will put less capital at risk, while still
Stay away from multi-leg spreads. While some allowing for favorable profit potential. In
types of spreads can be quite useful in addition, they will not be as sensitive to
mitigating risk or gaining desired market changes in implied volatility or to the passage
exposure, others serve little purpose for the of time, giving the trader more breathing
retail trader. In fact, they may serve no one room to let the market and the trade run its
but your broker. course.
36
Tip #3 Options are one of the most versatile financial

instruments at your disposal. Like anything
Always keep in mind that if you are trading else in life, however, they should be used in
long options, time is your enemy! Conversely, moderation.
if you are trading short options, time is your
friend. Either way, understand the effects of Only trade options when you have a thorough
theta on an options position, and structure understanding of the trade and its profit and
your trade and risk management strategy loss potential. Use them to gain the long or
accordingly. short exposure that you are comfortable with,
and nothing more.
Tip #4
By keeping your options trading clean, crisp,
Always understand your P&L graph – how you and simple, you can potentially avoid
may make money and how you may lose over-trading and the potentially negative
money. Understand what you are looking for impacts of overly complicated positions.
in a market before putting a trade on.
Knowing where you profit and where you lose Focus on the underlying market, your forecast
can help you make decisions when it comes for that market, and your risk management
time to take profits and when it comes time to strategy.
take a loss.
And don’t forget to keep it simple stupid…
Options are not the complicated instrument
many would have you believe.
37
THERE YOU HAVE IT…
The very steps we have outlined in this brief, Now is the time to take the second step…
yet powerful options trading guide can help
Regardless of what you may be trading now
pave the way for your success…
(stocks, futures, currencies, etc.), mastering
Those that can master these versatile financial options could open up a whole new world of
instruments have a distinct and powerful trading and investment. They can potentially
edge! hedge against risk, profit from directional
market moves, and profit from nothing more
Forget the mystery, the fancy terms, and the than the passage of time.
mathematics involved for a moment. Options,
Don’t let the passage of time cost you another
if purchased, are nothing more than
opportunity…
instruments that are used to achieve a
precisely desired amount of exposure for a Discover the path to becoming a smarter
limited period of time. Options that are sold options trader at Prosper Trading Academy
are nothing more than an assumption of risk now.
for a specific period of time. Keep it simple…
Click here now to register for our next
By just reading this informative options Options Power Session.
trading guide, you have taken a significant
first step. Remember, Prosper Trading Academy is where
traders go to prosper!
38
GLOSSARY OF OPTIONS TERMS
ATM (at-the-money): An ATM option’s Exercise Price: The price at which the
exercise price is equal to or near the price of underlying asset may be purchased or sold.
the underlying asset.
Extrinsic Value: The price of an option minus
Beta: The correlation between stocks within its intrinsic value.
the same industry.
Expiration Date: The date the option expires.
Calendar (time) Spread: An options trade
that involves the simultaneous sale of an Far-Term Options: Options that expire in 7-12
option with a particular expiration date and months.
strike price, and purchase of an option with a
Gamma: Measures delta curvature. It is the
different expiration date but the same strike
rate at which an option gains or loses deltas
price.
over a $1.00 change in the price of an
Call Options: Call options give the owner the underlying security.
right to buy the underlying asset.
Historical Volatility: A measurement of how
Delta: Measures the behavior, characteristics, much a contract’s price has fluctuated over a
and value of an option in relation to the period of time in the past. It is a very strong
underlying asset. Delta is the rate of change in indicator of a stock’s future performance.
the theoretical value of an option for a $1.00
change in the underlying asset.
39
Implied Volatility: The implied volatility is Options: A security that represents the right,
what is implied by the current market prices. It but not the obligation, to buy or sell a stock at
is used with theoretical models. a specified price (STRIKE PRICE), until a
specified time (EXPIRATION DATE). If an
Intrinsic Value: The difference between an option is not exercised before the expiration
asset’s price and the option’s strike price or date, it will expire, or cease to exist.
zero, whichever is greatest.
OTM (out-of-the-money): Has no intrinsic
ITM (in-the-money): When a call option’s value. A call option is out-of-the-money when
exercise (strike) price is lower than the its exercise price is higher than the underlying
underlying asset price. Also, when a put asset’s price. A put option is out-of-the-money
option’s exercise (strike) price is higher than when its exercise price is lower than the
the underlying asset price. underlying asset’s price.
Leap Options: Options that expire more than Parity: When options are trading at their
one year away. intrinsic value.
Mid-Term Options: Options that expire in 4-6 Premium: The price of an option. It is
months. determined by many factors, including the
current price of the asset, the strike price of
Near-Term Options: Options that expire in the option, the time remaining until expiration,
the first three expiration months. interest rates, dividends, and volatility.
40
Put Options: Put options give the owner the Spread Trading: An options spread is a
right to sell an underlying asset. position that consists of two or more options
that are traded at the same time or as close in
Ratio Vertical Spread: A strategy in which a succession as possible.
trader either sells 1 lower strike call and buys
2 higher strike calls (call spread) or when a Strike Price: The price at which the underlying
trader sells 1 higher strike put and buys 2 asset may be purchased or sold.
lower strike puts (put spread).
Support: Occurs at a price level where buying
Resistance: Occurs at a price level where is strong enough to prevent a stock from
selling is strong enough to prevent a stock falling lower.
from rising higher.
Theta: The rate at which an option loses value
Rho: The change in option value that results as the amount of time to expiration changes.
from a change in interest rates. The Theta is also known as the time decay factor;
theoretical value changes in relation to a all options lose value as expiration
one-percentage-point movement in the approaches.
underlying interest rate.
Vega: The amount by which the price of an
Risk/Reward: The amount of risk a trader is option changes when the volatility changes.
willing to take in relation to the reward in the
particular trade.
41
Vertical Spread: A trade in which a call (put)

option is bought (sold) at one strike price and
expiration date and another call (put) option
with the same expiration date but different
strike price is sold (bought).
Vertical Time Spread: A combination of the

vertical spread and the calendar (time) spread.
Volatility: A measure of the amount an asset

or security is expected to fluctuate over a
given period of time.
Volume: How much is being traded in the

market at a given time.
HOW TO POTENTIALLY
GENERATE HIGH RETURNS
USING OPTIONS LEVERAGE
Join 25-year trading veteran and former

Goldman Sachs floor trader, Scott Bauer,
and learn how to make more with less.
WE SAVED
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1

WHAT’S IN THIS GUIDE?

ABOUT THE AUTHORS

A respected market commentator seen on CNBC,

ABOUT THE AUTHORS

Michael Shorr is a veteran derivatives trader of

Mechanics of Options Trading 6

So how do you become a profiting options

THE MECHANICS OF OPTIONS TRADING

An option is a contract to buy or sell an

If you own an option, you have the right,

All listed options can be traded with at least

An option's premium is on a per-share basis How do options offer an investor LEVERAGE?

Selling an option creates a credit to your

Trading stock options, especially in today's

Protection from a decline in the overall

The ability to purchase stock at a lower

The ability to create additional income

Profit potential from a move in the price of

Now that we’ve got the basics covered, let’s

TOP SECRETS FROM LEGENDARY TRADERS

Throughout history, certain men and women Top Secret #1

Top Secret #2 Top Secret #3

Top Secret #4 Top Secret #5

Top Secret #6 While there is no “Holy Grail” when it comes

By always looking for ways to sharpen your

THE “MAGIC” 3-STEP FORMULA ROOKIE

The point is this: When you begin to spread

Focus on one market or one area. Become

Traders who are out there right now beating

If you are trading stocks, find a reliable

By following these three simple steps, you will gain

THE KEY TO TURNING YOUR PORTFOLIO INTO AN

In addition to covered call writing, there are

SEVEN HABITS OF HIGHLY SUCCESSFUL

time away from the trading screen allows them

Trading options for a living is a job, and like

While there is no “Holy Grail” to options

The most successful options traders

Start practicing the habits of highly successful

THE THREE DEADLY SINS OF OPTIONS TRADING

Joe makes his purchase and watches as the Sin #2

While deep out-of-the-money options may Sin #3

Just as with a stock you want to buy low and

When selling premium, you want to sell high

Sell high and buy low…

A GO-TO STRATEGY FOR THE NEXT

THE KISS STRATEGY

• The Christmas Tree Spread We teach a number of different strategies

• 4:1 back spreads

Assuming you like to keep it simple, why

Tip #3 Options are one of the most versatile financial

THERE YOU HAVE IT…

GLOSSARY OF OPTIONS TERMS

Vertical Spread: A trade in which a call (put)

Vertical Time Spread: A combination of the

Volatility: A measure of the amount an asset

Volume: How much is being traded in the

Join 25-year trading veteran and former

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