In this options trading guide for 2021, you're going to learn about options trading.
This options trading guide is going to teach you how to profit consistently.
Remember that profitable trading is not about knowledge; it requires discipline and patience.
March 2020 was one of the most violent selloffs that the market has ever experienced.
The VIX has been elevated for almost all of 2020 (trading mostly between 20 and 40).
If you’ve been following my blog and YouTube channel, you know that the best way to earn consistent profits in the stock market (with high statistical probability) is to sell option premium.
By selling option premium, you act like an insurance salesman or a casino. You are taking high probability bets that have an 80% - 90% chance of earning you a profit.
But, are you guaranteed to make a profit on every single trade? Of course not.
You'll need to mitigate your risk and not trade too aggressively when the market behaves irrationally.
I am going to teach you some of the best options trading methods for 2021 that should help you earn a substantial profit.
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Options Trading Guide: What You Need to Do to Succeed
In order to be able to sell option premium, you need to set up your account. I personally use E*Trade, but any legitimate broker can be used for options trading.
I discuss the best online brokerages in a blog post here: Best Online Brokerages
Remember that you can negotiate commissions with your brokers by calling them. Sometimes, they will offer you free signup bonuses.
You should also ask them for the ability to sell naked puts and calls.
If they don’t allow you to sell naked options, that’s completely fine. We sometimes use verticals & spreads, and every naked option trade that I make can be converted into a spread.
It’s imperative to focus only on the most important things.
I try to limit information and I only focus on a few tickers.
My watch list contains: Amazon, JP Morgan, McDonald’s, and Mastercard and a few other stocks. For the most part, these stocks are recession-proof.
There are two types of options: puts and calls that we have at our disposal.
We are put sellers, not buyers because the probability of profit is significantly higher when selling premium.
Amazon is currently trading around $3100 (as of November 23, 2020), so we can sell a $2700 put option with an expiration of December 11 and collect about $500 per contract.
The VIX is trading around 22, so we will take advantage of this volatility by selling a naked put option.
As another example, Mastercard is currently trading around $332 - we can choose to sell the $290 strike with a December 11 expiration and collect around $72 for every put option.
However, you'll be able to collect MORE premium by being patient and disciplined and waiting for the underlying stock to fall.
Since Amazon is currently trading at around $3100, you may be better off by waiting to until Amazon falls to around $3000, and you can then sell $2600 put.
An example of my options trading activity can be found in the video below.
Option Trading Tips: How Good Traders Earn Money
We Close Out Our Trades Early
We Only Trade the Most Stable Underlyings
We Patiently Wait for Great Opportunities
"This is how we earn our money. We close out our trades early, we only trade the most stable underlyings, and we patiently wait for great opportunities to arise." - David Jaffee, BestStockStrategy.com
Options Trading Guide: Why I Chose These Stocks?
Amazon is a market-leading stock and one of the largest companies in the world.
Lockheed Martin is a defense contractor, which has a lot of benefits to it. One of the benefits is a predictable revenue stream because it has a lot of government contracts.
When I worked in investment banking, we always loved seeing predictable revenue streams because it removes uncertainty from the equation. When there’s uncertainty, there’s volatility, which can oftentimes lead to losses for options sellers.
Dollar General is great because around 40% of people in the US purchase their food at dollar stores. They are small, convenient, and cheap, which is why the customers love them.
McDonald’s also offers cheap food and their branding is outstanding, making them another predictable revenue stream.
Visa and Mastercard are the gold standards in the payment processing industry.
If we were to have a recession, these are the stocks that you would ideally target.
You would also want to sell the call side. What that means is, if the S&P 500 goes up ~50 points, you would then want to start selling calls to fade the rallies.
So, if we were in a recession and if Amazon is currently trading at about $3100, you would wait for it to trade to ~$3250 and you would sell a call option with a strike price of around $3500.
Should You Trade Naked Options?
Personally, I like trading naked options because it maximizes the premium received. It decreases your buying power; hence it inherently protects you from greed.
Naked options are very easy to manage and roll, and they also reduce your commission.
While many people believe that naked options are riskier, I believe that naked options can actually be safer.
People often worry that they'll sell a naked option and then the stock will go bankrupt.
This doesn't make sense to me because people who buy stocks aren't concerned about their stocks going bankrupt.
Let’s apply this analogy to the stocks we have previously talked about. What’s the probability that a company like Amazon, that’s currently worth over a trillion dollars, will actually go bankrupt and reach zero?
Or that a company like Lockheed Martin, which has government contracts, will go bankrupt?
The probability is very low.
The people who are concerned about Amazon going bankrupt are not profitable traders.
I definitely believe that individuals with accounts below $20,000 should trade vertical credit spreads.
Additionally, I believe that when the VIX is trading below 20, everyone should trade vertical credit spreads to protect against a rapid volatility expansion.
Spreads helps protect traders during periods of extreme volatility.
Let’s observe the prior trades from a spread perspective:
If Amazon is currently trading at $3100, trades down to $3000, we would then sell a $2600 put and buy the $2400 put.
You can apply the same logic to all the rest - McDonald’s, JP Morgan, and Mastercard.
Remember: if there’s an opportunity for you to sell puts, that means that it’s not a good time to sell calls.
In the situation above, we’re only selling a $2600 put. So, if Amazon drops down to around $3000, we’re not going to sell the $3400 call because we’re not going to collect enough premium.
In this situation, we would opportunistically turn this position into a strangle only if Amazon appreciates in price.
If Amazon is currently at $3100 and then it trades up to $3150, we would then sell the $3400 call while also buying the $3500 call.
Therefore, we’re creating a vertical credit spread on the call side.
If you combine that with our vertical put credit spread, then we would have an iron condor.
In this particular example, we are opportunistically entering into an iron condor because we would be short both a call credit spread, as well as a put credit spread.
These trades will allow you to be profitable on 90% - 95% of your trades. You will also earn anywhere from 30% - 60% in profits every single year.
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Options Trading Guide: What Should You Do as A Beginner?
The goal from this options trading guide is to be consistently profitable.
If you’re a beginner, you probably want to excel in trading options and be profitable.
How much money do you need to sell options? Click that link and find out.
When entering new positions, I would highly recommend immediately entering a buy to close order.
In our previous example with Amazon, we would wait for it to trade down from $3100 to $3000. Then, we would sell a $2600 put and buy a $2400 put (we would be short a $2600 by $2400 put spread).
Let’s say we’re able to, for example, collect $20 per share for a $2600 / $2400 put spread.
In that case, once the order fills, we would immediately enter a buy-to-close order with a limit price of $10.
Once we have this position open in our accounts, we would submit a buy-to-close limit order.
The time in force is GTC, which is a good-to-cancel so that we can avoid resubmitting the same order all the time.
Once the order fills, you collect $20 of premium, that’s $2000 for every vertical credit spread that you would sell.
You would immediately enter a buy-to-close limit order with the time in force of good to cancel for $10.
As a result, on a net basis, you would keep $1000 for every spread contract that you sell and which closed at 50% profit (less a small commission).
In conclusion, this is how to earn money by trading options.
We close out our trades early, we only trade the most stable underlyings, and we patiently wait for great opportunities to arise.
If you have want to read some great articles on trading and the markets, you can also visit Merry Markets.
Thank you for reading this comprehensive options trading guide. If you have any questions, please leave a comment below.
You can also read what is the best strategy for option trading.