Option Trading Course Module 1
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Option Trading Course Module 1 - Marcador
Option Trading Course Module 1 - Detalles
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| 🇬🇧 | 🇬🇧 |
| What is the 4 advantage of Options | Flexibility for profit in any type of market Increase rate of return on your portfolio Minimize capital requirements Generate income on stock you own |
| What is the 3 disadvantage of Options | Limited by Time High risk of losses Complicated |
| What are the 3 Reasons for Rule #1 people to use Option trading | To enter a long term investment of a wonderful company = ROP To exit a long term investment of a wonderful company = ROC To generate cash on a monthly basis = credit spread |
| What are Options? | Options are contracts between 2 parties that are bought or sold at a price agreed by both parties (the premium) |
| If Options are contract, what does this contract define? | The right or the obligation to buy or sell shares at a specific price for a specific time |
| Can the buyer or the seller get out of the contract at any time and if Yes, How? | Yes, by closing the trade when paying or collecting the premium price at the time of the action |
| How many types of Options there is? | Only 2 The Puts Options The Calls Options |
| How many things can we do with Put and Call Options? | Only 2 We can buy a Put or a Call Option We can sell a Put or a Call Option |
| The Seller of an Option receive money (he is the Seller), but for what ? | The Seller receives money / is GETTING PAID for an obligation to Buy (PUT) OR Sell (Call) |
| The Buyer of an Options pays money (he is buying), but for what? | The Buyer of an option pays money for a right to Buy or Sell |
| What does Short means in Investing? | It means Sell or Selling - people are selling |
| What does Long means in Investing? | It means Buy / Buying - people are buying |
| What are the 3 characteristics of a Market Order? | Guaranteed to get filled No guarantee on the price, just market price Therefore limited control |
| What are the 3 characteristic of a Limit Order | Guaranteed to get our desired price or better Not guaranteed to be filled But full control on the price |
| With a Market order the Seller get the Bid or the Ask? | The Seller gets the Bid price The Buyer gets the Ask price |
| What is the Mark? | It is the half way point between the Bid and the Ask |
| How to calculate the Premium? | Intrinsic Value + Extrinsic Value = Premium |
| Intrinsic Value is the part of the premium, which concern whom the most? | It concern the buyer the most |
| How to calculate the intrinsic value on the PUT side? | Strike price - Stock price = Intrinsic Value on PUT side |
| How to calculate the intrinsic value on the CALL side? | Stock price - Strike price = Intrinsic Value on CALL side |
| Extrinsic Value account for 2 things, which are NOT intrinsic. What are they? | Implied Volatility (emotion / fear going on in the market) + Time Decay = Extrinsic Volatility |
| Extrinsic Value are which type of premium? | 100% OTM premiums |
| What is time decay in option contract? | Time decay is a measure of the rate of decline in the value of an options contract due to the passage of time. Time decay accelerates as an option's time to expiration draws closer since there's less time to realize a profit from the trade and therefore the premium is getting lower and lower |
| What is RC in Option Trading and how to calculate it? | RC - Risk Capital = Strike Price - Premium |
| What is RORC in Option Trading and how to calculate it? | RORC - Return on Risk Capital = Premium / RC (Risk Capital) |
| What is Multiplier in Option Trading and how to calculate it? | Multiplier = 365 / DTE - Number of time we could theoraticaly repeat the trade in a year |
| What is ARORC in Option Trading and how to calculate it? | ARORC - Annualized Return on Risk Capital = RORC x Multiplier |
| What is the minimum about of money you need to make an Option trade? | Your RC (Risk Capital) x number of contract x 100 |
| What is the Spread? | It is the difference between the Bid and the Ask |
| How often is there a market correction? | Every 7 - 10 years |
| What are the fundamentals of a company? | The Meaning, The Moat, The management & know the overall economy globaly |
| Technical analysis help us see what? | Technical analysis help us see the emotion and psychology of the market through the company price movment |
| What are the 2 different type of investing mindset? | Long-term mindset & Short term mindset |
| Long Term Mindset is about....? | Certainty |
| Market change from a rational price to a irrational every how many years? | 6 - 7 in general (as of 2020 it is 10) |
| What is the main difference between long term investing and short term trading? | In short term trading we are not interested to own the shares |
| Technical analysis really help us to do what? | To see the emotion and psychology of the market as the underline security moves up or down |
| What are Technical Indicators? | They are tools to help us predict which way the market may go in the near future |
| Why is charting helping us? | It helps to see on a graph the price movement so that certain tendencies of human actions can be seen visually and use to our advantage |
| Why the Name Credit Spread (2)? | It is a Credit because you end up with a net credit It is a Spread because it uses 2 different Options |
| What is a Support Line? | Where the Bearish trend changed (reversed) to Bullish |
| What is a Resistance Line? | Where the Bullish trend changed (reversed) to Bearish |
| How many categories of trend is there and what are they? | 3 trends Uptrend - series of higher high Downtrend - series of lower low Channeling - trading horizontally BETWEEN floors and ceiling |
| How many point of contacts do we need when drawing trend lines? | Three or more points PROMINENT of contacts |
| Trend lines 3 points of contact is for Support line or Resistance line? | It is 3 points of contact for both |
| What is a Macro trend (line)? | A trend line over 1 - 2 years minimum with 3 points of contact (inside can be other smaller trend) |
| How do we call a long term trend? | A Macro trend |
| How long is a Intermediate trend | Few months to a year |
| How long is a short term trend? | A few weeks |
| When should we start to be careful with Trend Line? | When the price bisect (cut) the trend line it can signal major change |
| What are the 4 points that can break a trend? | 1) broad market news that change the entire trend of the market 2) Individual news about the company 3) Unexpected news surrounding earnings 4) News surrounding industry or sector |
| What happens at FIB Ceilings? | Significant Selling occurs Area where the price struggle to go higher Area where the price temporarily stop rising |
| What happens at FIB Floors? | Significant buying occurs Area where the price struggle to FALL below Area where the price temporarily stop FALLING |
| What is the time from to draw the Fibonacci on a chart? | It is drawn on a 9 months |
| Should we pick the lowest and highest points of the 9 months to draw the FIB? | No you should take a strong floor and and strong ceiling |
| What makes for a strong floor or ceiling? | The more contact there is (the floor or ceiling is TESTED several times) |
| What "creates: floors and ceilings? | Human Psychology, when human fells not good about their stock position |
| Who is the main influencer of what is happening with the price movement of the security? | Humana are creating it |
| Which Index do we use to have a broad view of the market and which period on the chart? | The Dow Jones 10Y : M |
| What is the Shiller PE? | Total stock price over (divided by) entire total stock earning |
| When is the Shiller starting to be considered over priced or good value? | Over priced starts at a PE of 23 Ok starts at a PE of15 |
| What does the The Wilshire GDP indicates? | It compares the total value of 5,000 listed company versus the US GDP It indicates an issue of the 5,000 are worth higher than the US GDP, then the economy is considered not good / healthy |
| What is the MACD? | It is a momentum indicators showing how fast or slow people are going in or going out of the market |
| What is Stochastic? | Stochastic indicates if a security it over bought or under bought. |
| How are Rulers setting up the Stochastic? | We set up at 80 / 20. So over 80 it is overbought and a selloff could be coming soon Under 20, it is underbought and could be an opportunity |
| What is the moving average line? | It is the average of the lat 9 period + the current period to date |
| Which Type / length of chart do we use to work with the 3 arrows? | 10 years monthly chart |
| What is volatility? | It is a representation of fear in the market |
| What does CBOE stands for | Chicago Board Options Exchange |
| What is the Mid? | It is the Mid point between the Bid and the Ask |
| What is the difference between an Option Spread and a Credit Spread? | An options spread is a strategy that involves the simultaneous buying and selling of options on the same underlying asset. A credit spread involves selling a high-premium option while purchasing a low-premium option in the same class or of the same security, resulting in a credit to the trader's account. |
| When would you do a BPS (Bull Put Spread) | A bull put spread is an options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. |
| Is there any shares traded on the RUT? | There is no shared traded on the RUT. Only cash is traded |
| On Which period do we draw the Fib? | On a 9 months period from where we are |
| What is RLS? | RUT settlement is based on an index that trades under the symbol RLS [CBOE]. The RLS is described as the RUT Flex Opening Exercise Settlement. |
| What is a System Trade | It is a Trade with clearly defined rules and no judgment |
| What is a vertical spread? | It is an option strategy making a trade with 2 contracts at the same time |
| What are we doing with the 2 (or more) contract of a vertical spread | One is bought and one is sold |
| When we Sell a vertical spread, what happens? | There is an inflow of money into our account, therefore is it a credit, hence the term Credit Spread |
| How do you create an income from the Credit Spread? | You sell an option contract closer to "the money" than the one you are buying |
| For how much are we at risk when doing a credit spread? | We are at risk for the difference of the strike price we sold and the strike price we bought. |
| When we Sell a Vertical Spread, what do we create? | We create a Credit Spread |
| Explain the hedge in the vertical spread? | The contract the we sell (short) is hedged by the contract that we bought (long) |
| What is the Spread? | It is the difference between the 2 Strike prices |
| How much capital do we need to do a Credit Spread? | We need to have the Spread amount x number of contract x 100 (AKA: risk capital or capital requirements) |
| What actions are we taking when we do a BULL Put spread (BPS) | Sell to Open the higher number / strike price Buy to Open the lover number / strike price |
| What actions are we taking when we do a BEAR Call spread (BCS)? | Sell to Open the lower number Buy to Open the higher number |
| What happens when you SELL a PUT? | You are OBLIGATED to BUY SHARES at the STRIKE PRICE you SOLD |
| What happens when you BUY a PUT? | You have the RIGHT to SELL SHARES at the STRIKE PRICE you BOUGHT (you force someone to buy your shares as this was the deal) |
| When do we do a BPS (Bull Put Spread)? | When the price is expected to rise (bullish trend) |
| What happens when you SELL a CALL? | You are OBLIGATED to SELL SHARES at the STRIKE PRICE you SOLD |
| What happens when you BUY a CALL? | You have the RIGHT to BUY the SHARES at the Strike Price you BOUGHT |
| When do we do a BCS? | When we expect the price to be bearish |
| What is the Net Credit? | It is the difference between the money I received from selling the Put (I got the credit / cash in my account) and the money I am spending to buy a Put (I use some of the credit money I just received for that) = Net Credit |
| What is the Risk Capital? | The difference between the 2 strike price x number of contract x 100 |
| What do the initials TIF stand for? | Time in Force (i.e for the day) |
| What are the 4 possible outcomes of a CS (credit spread) trade? | 1. The Short strike and the Long Strike expires OTM (out of the money) 2. We close the 2 positions before expiration date with a minimal loss (max 30%) 3. The Short strike expires ITM (in the money) and the Long Strike expires OTM 4. The Short strike and the Long Strike expire ITM |