Option Trading Secrets

Option Trading Secrets A quality of vital importance for sophisticated investors

Preparing to play

Preparing “the will to win is important, but the will to prepare is vital” Joe Paterno

• Options trading and stock trading, which trades are more dangerous game? • Education, education, education • Play it on paper • Do your home work

The prediction game

Secret prediction methods • It is impossible to forecast the future or stock price • However there are some methods that will improve your ability to predict the futures; workable crystal ball – – – –

Using technical analysis Using psychological moment analysis Regression back to the mean Remember Murphy’s law • If the possibility exists of several things going wrong, the one that will go wrong is the one that will do the most damage • Phúc bất trùng lai, Họa Vô đơn chí

Vix CBOE Chart

Tracking the charts Very powerful tool

Use the law of supply and demand Option is a heavy leveraging tool

The option’s buyers secret weapon Shock and Awe • • • •

Murphy’s law again When you’re buying option – the only thing you bet against is “Surprise Volatility” The Bell curve theory V.S The Chaos Theory Stock is the only instrument offering the greatest potential for surprise movements

The secret advantages of option writing • You can enter the trades where you have a very high probability of winning no matter what the market does • You are able to have quick profits all the time • Two factors you must pay attention to: – Time – Distance

• Remember : get out of the hot seat!

Strategic Defense 36th stratagem “If everything else fails, Retreat” Sun Tzu, The art of War • Use stop loss • Cover the options when they lose most of the value

• Never be afraid to take a loss • Exit when you feel uncomfortable • Exit when the underlying scenario or the trend changes

Naked put Writing can create a win-win Strategy The 12th Stratagem “Take the opportunity to pilfer a goat”

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You want to make money? You want to buy at the low? You want to own the fundamental stocks? You want to catch the falling knife?

Option Analysis • Here are the factors when entering the trades – What is the fair value of the option? Make sure you buy undervalued and sell overvalued. True cost of hedging is the true value – What is the probability of profit if you hold the position until expiration? – What is the probability of hitting loss or profit goal during the life? – What is the delta?

Option analysis

Spread advantages The seventh stratagem “create something from nothing” • •

A spread is best defined as a combination of buying selling two or more options at the same time usually on the same underlying asset The most difficult part of spreading is learning to design a spread and understanding the risk-reward picture for the spread.

Avoid repair strategies • When you design the spread – Avoid repair strategies – Avoid delta neutral strategies –

The top secret war room

Tell No one what you are doing, if not you are putting pressure on yourself not to take a loss WHEN YOU SHOULD

Don’t try to catch on the falling knife

Don’t write a put in the face of a major downtrend

The ultimate power play “The secret surrogate” • One of the most powerful strategies is used to create a powerful payoff picture – Long term option debit spread

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The power of Time The power of Knowing the unknowns The temptation of being right The excellence of Leverage – A powerful weapon in your arsenal

A gold surrogate

A Chaotic Scenario • Buy 1 year gold call option at 2000 costs 105$ • Sell 1 year gold call option at 2400 gains 50$ • If gold moves beyond 2400 within 12 months, how much $ you earn for one ounce? 400$ over 55$ cost, or over 700% return a year