5 Favorite Options Setups

My Five Favorite Option Trades
John F. Carter
TradeTheMarkets.com
SimplerOptions.com
www.TradeTheMarkets.com 1
Options
• There are hundreds of books written about
options.
• There are hundreds of strategies a trader can do
with options.
• For my style of trading, there are 5 basic
strategies that I like to follow.
• Let’s Dive In . . .
Strategy #1
Directional Swings
Trades That Last a Few Weeks
Buying Options
• Main thing is to have a setup on the
underlying stock.
• Squeeze on the daily chart works really well.
• Think of it this way – you are just using the
option as a CHEAPER WAY to buy the stock.
• $16 for an option is a lot cheaper than $160
for the stock.
• 1 option = 100 shares of stock. $16 option =
$1600 out of pocket cost.
• Key is buying IN THE MONEY strike prices
Buying Options
• Squeeze fires off long on MA at $170
• July options at this point only have 1 week
left.
• TWO OPTIONS:
• Buy DITM July Options – like $155
• And if trade is still valid at expiration sell
these options and then buy the Aug 155s.
• Or just start off with the Aug 155s.
Buying Options
• Exit strategy same as stock – I’m looking
to scale out.
• Stop on option is 50% of the value.
• $16 option, then $8 stop.
• First target is 50%, for 1/3. So $24.
• Second target is 100% for 1/3, $32.
• Last hold on for squeeze loss of
momentum, TTM Trend change etc.
Buying Options
• 1 option at $17 = $1700 cost
• 1 option at $55 = $5500 in proceeds
• Proceeds $3800 per contract
Strategy #2
Directional Swings
Trades That Last a Few Days
GS Call Option Trade Setup
• This is one of my favorite trade setups.
• It generally lasts 1 to 2 days.
• The signal is taken off the hourly chart –
but it has to be in alignment with the daily
chart.
• BONUS – if its also in alignment with the
weekly chart.
GS Call Option Trade Setup
• I want to go in the money on the calls with
an option delta of at least (or very close to)
70.
• In this case, the Nov 155 calls had a delta
of 68, which is close enough to 70.
Stop & Target?
• Stop is just below support at 156.00.
• Target – Squeezes on average last about
6 bars.
• If the stock moves 1.75%, I look to start
scaling out of the position.
• GS at $161. 1.75% move = $2.82
• On $2.82 stock move, Delta 70 option
move = $1.97
Strategy #3
Directional Day Trades
Trades That Last a Few Hours
Criteria for Directional Day Trades
• There is an established swing high or low
on the stock that has been established.
• We are approaching that swing high or
low.
• There is a squeeze setting up on a 15
minute chart.
• Target is a 1.272% extension of that swing
Mastercard (MA) Example
SETUP:
Stock jumped up after earnings and
then pulled back.
Strategy #4
Selling Credit Spreads
on Weekly Options
Criteria for Selling
Weekly Credit Spreads
• Actively traded stock that, of course,
trades weekly options. AMZN is the
example we will use today.
• Stock is at a key extended support or
resistance level.
• Reversion Bands are good levels for this.
• No squeeze setting up.
• Looking to sell the at the money strike,
and but the next one out for protection.
• This generates a “credit”
• Ideally able to sell for half the strike. So
on a stock with $5.00 strikes, then sell for
$2.50.
• More likely it will be lower than that. $1.50
and above is “ok”
• Exit? In a perfect world the spread expires
worthless and you collect the whole premium.
• In the real world, once you make about 70% of
your profit target, it’s a good idea to just get out.
• So if you sell a spread for $2.00 (so your max
profit is $2.00), and it gets to the point where the
value is $0.60 cents – it’s a good idea to take the
money and run.
• At $0.60, there isn’t much more upside to your
profit – but there is $4.40 worth of downside!
• GET OUT!
Strategy #5
Implied Volatility (IV) Crush
On Bad News
Criteria for BNIVC
(Bad News Implied Volatility Crush)
• Looking for stocks that are gapping down
on bad news. Earnings or some other sort
of bad news.
• Typically the bulk of this down move is
already priced in “pre-market” before the
cash session opens.
• Panic at the open – Implied Volatility
explodes for the first 5 to 10 minutes of
trading.

5 Favorite Options Setups

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My Five Favorite Option Trades

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