Basic Option Strategies for Income

1
Basic Option Strategies for Income

• Enhancing Profits for Building Wealth
• Walnut Creek December 16, 2009

2
Topics Covered so far

• This is the fourth and final discussion in this
  series of discussions on basic option strategies
• Session 1 Option Basics
• What options are and how they work (calls and
  puts)
• The option Greeks and what they mean
• Time Decay and its implications
• Basic Long strategies Their potential rewards
  and risks
• The advantages of being a seller of options

3
Topics Covered so far

• Session Two Basic Selling Strategies
• Naked Put Selling Get paid to buy stock at a
  discount
• Covered Calls Better than Dividends
• Session Three Vertical Credit Spreads
• Bull Put Spreads
• Bear Call Spreads

4
Tonights Topic

• Adjustment Strategies for Vertical Spreads gone
  bad
• The goal of the game is to make money
• Select high probability trades that can make
  money even if the trade doesnt do what you think
  it will Make money whether the underlying goes
  up, down or sidways

5
Credit Spreads Basic things to remember

• Keep time on our side
• Dont panic if the trade doesnt behave like you
  want it to from the beginning
• Select volatile stocks
• Higher premiums more potential for profit
• Easier to repair.
• Plan exit / repair strategies before entering the
  trade
• Dont be greedy Get out when profit target has
  been met

6
Critical Point about the Market

• I have a crystal ball so I know with certainty
  what the market will do tomorrow!!!!
• It will go up
• It will go down
• or
• It will go sideways

7
Critical Point about the Market

• The truth is, no one knows with certainty what
  the market will do tomorrow
• We use Technical Analysis to make a prediction
  about what the market or a stock is likely to do
• Its a little like forcasting weather - far from
  perfect
• It gives you an edge, but there will be times
  when youll be wrong We need to plan for those
  times!

8
FSLR Trade Management
9
FSLR Trade Management
10
FSLR Trade Management
11
FSLR Trade Management
12
FSLR Trade Management
13
FSLR Trade Management
14
FSLR Trade Management
15
FSLR Trade Management
16
FSLR Trade History
17
General Rules

• Identify Levels of support and resistance
• Look for a strong level of support (or
  resistance) above or below the short strike
• Check for next level of support or resistance
  (want the underlying to have a long way to move
  if it breaks with conviction (a break with much
  larger volume than normal)
• Dont adjust a trade until the trend is broken
  Wait for Confirmation

18
Example of support break
19
Actions you can take

• Buy back the short strike and let the long run
• Help offset the cost of buying back the short
  strike by selling vertical spreads (can be OTM or
  ITM) as the situation dictates
• Buy a put or call option (will gain value to
  offset the decrease in value of the short
  vertical spread
• Roll spread out and up or down
• Use your imagination But Dont Panic!!!!

20
Actions you can take

• Practice with paper money until you master the
  art
• Dont expect to be perfect You dont have to be
  to make money
• Get a trading buddy - It helps to discuss ideas
  with someone else
• Be persistent Dont give up You can do
  this!!!!

21
Notable Quotes

• You know youre a trader when youre wrong and
  still make money
• Tom Sosnoff Founder, Thinkorswim
• It is not necessary to try to get rid of fear in
  order to succeed
• T. Harv Eker Secrets of the Millionaire Mind