22 Nov

How To Stop Picking The Wrong Option Strikes

by | 0 comments

As we’re closing in towards the end of 2019, I sit back and reflect. 

Who would have thought a year ago that I would be eating vegan, and using options to help put together my best year ever as a trader?

My Weekly Windfalls strategy is completely different than anything you’ll see from a stock trading strategy. 


Because my strategy allows you to become the casino. What I mean by that, is that you can structure trades that stack the odds in your favor. 

Heading into this morning, I had already booked $40K in trading profits— with potentially more on the way if I can get through today’s session.


Not a paid-up member of Weekly Windfalls? Click here to join.


So how do you exactly stack the odds in your favor?

It all starts out with your option strike selection. If you select the optimal strikes then you begin with a heavy advantage… chose the wrong strikes and you could be in a world of hurt. 

How do you know you which option strikes to select or even go about the process?


First, let’s start from the beginning.


A call or put option is always one of three things: in, at, or out of the money.

Most call and put buyers want their contract to be in the money — that typically means the stock moved in their predicted direction.

In the simplest terms, buyers of call options are bullish — they expect the stock to move above the strike price by the time the option expires.

On the other hand, put buyers are bearish — they expect the stock to move below the strike price by options expiration.

Therefore, a call is in the money when the stock is above the strike price, and a put is in the money when the stock is below the strike price.

So, for instance, let’s say you bought the Procter & Gamble (PG) weekly 12/6 120-strike calls. Your option would be in the money if P&G shares traded north of $120 by the close on Friday, Dec. 6.

If you purchased the PG weekly 12/6 120-strike put, your option would be in the money if P&G stock traded south of $120 by expiration.



Meanwhile, both calls and puts are considered at the money when the stock is trading at or near the option’s strike. 

The P&G options above would both be at the money if the stock was hovering around $120.

And if you haven’t figured it out yet, a call option is out of the money when the stock is trading below the strike price. A put is out of the money when the stock is above the strike.

Sticking with our P&G example, the 120-strike call would be out of the money if PG shares were trading at, say, $118. The put would be out of the money if PG was at $122.

Both of these situations would be bad for the buyers at expiration.



May the Odds Be Ever in Your Favor


So, now that you know the difference between in, at, and out of the money, let’s dive into how I put this trading jargon to use to maximize profits for premium Weekly Windfalls subscribers.

You see, only about 30% of options end up finishing in the money. That means option buyers don’t win very much.

It also means about 70% of options finish out of the money.

Now those are odds I can get behind.

By playing vertical spreads, I’m taking the other side — the seller’s side — of the trade. And because the odds are on my side, my Weekly Windfalls strategy is like being “the casino” in Vegas.

The goal of the spreads I recommend is for the options to expire worthless. That means out of the money.

When this happens, I as the seller can pocket the entire premium I received out of the gate. The buyers are S.O.L., as they say.


Don’t Fly Too Close to the Sun


So, how do I choose which options to sell?

In theory, selling options that are already in the money can generate big bucks — buyers are willing to pay up for these kinds of options.

That’s because in-the-money options are the only kind that have intrinsic value (calculated by the difference between the stock price and the strike price).

Using our P&G example, the 120-strike call would have $5 worth of intrinsic value if PG stock was trading at $125.

BUT, if you sell in-the-money options, you better be darn sure the stock is going to move in your predicted direction, and fast. 

Thankfully I’m a good momentum trader, so I don’t always shy away from selling in the money.

Heck, I was on track to become a principal and risked everything to start trading stocks!

However, one could argue that selling options too deep in the money is like being Icarus and flying too close to the sun.


But Don’t Fly Too Low, Either


The further out of the money the options are, the higher the odds of a winning trade for sellers, especially with weekly options. This is largely due to time decay and no intrinsic value.

However, while deep out-of-the-money options have a higher winning percentage, they also command much lower premiums — so there’s less money to be made by sellers there.

And just like our boy Icarus, I know my Weekly Windfalls subscribers don’t want to fly too low, either.



Finding the Sweet Spot


The “sweet spot” for my vertical spreads is typically selling an at- or near-the-money option.

These contracts contain no intrinsic value, but pay out the maximum possible amount of extrinsic value you can receive.

In simpler terms, the risk/reward ratio is very attractive.

Selling at-the-money options works really well when you see a stock at reversal points, such as testing key support or bumping up against resistance.

Take my recent trade on Google parent Alphabet (GOOG), which made me $8,500 in less than a week.

On Friday, Nov. 15, GOOG stock was trading around $1,332. Antitrust news had knocked the FAANG stock lower the night before, but U.S.-China trade hopes triggered a rebound.

My thesis was GOOG was a few days into a breakout, and I often like to sell ahead of shareholders taking profits, which could turn into consolidation or a retreat for the stock.

I also liked that the QQQ was at overbought levels, and with trade war hopes diminishing, the odds of a stock market dip were on my side.



As such, I sold the Google at-the-money weekly 11/22 1,332.50-strike call, and paired it by buying the 1,335-strike call in the same series.

The purchased call limited my risk on the trade, should GOOG move higher.



The goal was for GOOG to stay beneath the $1,332.50 level in the short term.

And whaddya know, by the afternoon of Tuesday, Nov. 19, the shares were trading around $1,313.

As a result, I booked a cool $8,500 in profits! 

So, while the vertical spread is considered a conservative strategy, had I been less aggressive with my strikes, the earnings on my trade wouldn’t have been as impressive.

What could you do with a few extra thousand in your bank account over the holidays? Sign up for my premium service and find out.