Trading Stock Options

Have you ever thought about trading stocks? If so trading options may be a better way to make your money go further. One of the best places I have found to do some quick research and chart analisys is StockCharts.com.

When trading options there are some basic rules that every trader needs to know. Some believe it is the same as regular stocks but there are some very important differences.

  1. Stock options are not liquidable the same as normal stocks
  2. There is a time limit that needs to be considered
  3. You can loose your entire investment
  4. You can make much more with less funds

Buying and Selling Options

Options are financial derivatives that give the buyer the right (but not the obligation) to buy or sell an underlying asset at a specified price (strike price) before or at the expiration date. There are two main types of options:

  1. Call Option: This gives the holder the right to buy the underlying asset at the strike price.
  2. Put Option: This gives the holder the right to sell the underlying asset at the strike price.

Example 1: Stock goes from $10 to $20 in a month

Let’s say there’s a stock currently trading at $10 per share. You decide to purchase a call option on this stock with a strike price of $10, expiring in one month. The cost of the option (premium) might be, for instance, $1 per share (so $100 for one contract, which typically covers 100 shares).

  • Scenario A – Call Option: If the stock price rises to $20 within the month:
  • As the holder of the call option with a strike price of $10, you can exercise your option to buy the stock at $10 per share.
  • Even though the market price is $20, you effectively bought it at $10 (plus the $1 premium), so your net cost is $11 per share.
  • You can then sell the stock at $20, making a profit of $9 per share ($20 – $11).
  • Profit Calculation: For one contract (100 shares), your profit would be $900 ($9 profit per share × 100 shares).

Example 2: Stock drops from $10 to $5 in a month

Now, let’s consider a put option on the same stock, also initially priced at $10 per share with a strike price of $10, expiring in one month.

  • Scenario B – Put Option: If the stock price drops to $5 within the month:
  • As the holder of the put option, you have the right to sell the stock at $10 per share, even though the market price is only $5.
  • Your profit per share would be $5 ($10 strike price – $5 market price).
  • Considering you paid $1 per share premium for the put option, your net profit per share is $4.
  • Profit Calculation: For one contract (100 shares), your profit would be $400 ($4 profit per share × 100 shares).

To Summarize,

Options trading allows investors to leverage movements in the price of the underlying asset (in this case, the stock) without owning the asset itself. By buying call options, investors can benefit from price increases, while buying put options can protect against price decreases or even profit from them. The key is understanding the relationship between the strike price, the current market price, and the premium paid for the option. Options trading involves risks, including the potential loss of the entire premium paid for the option if the market doesn’t move as anticipated.

Technical analysis Bible

If you are considering trading stock options I would recommend you to follow the following rules….
These are some tenets of technical analysis that increase the probability of success

RULE 1.  ALWAYS……..
“Buy (CALLS) support, buy (PUTS) resistance”
If stock is NOT at either, don’t trade, you are chasing. Period. If you are trading momentum, do so at your own risk.

“Just because the price is moving.. doesn’t mean there was ever a good entry. Perfect-good entries are a huge part of a successful trade”

Rule 2 (Increased probability)
“The more we test a resistance, the more likely we are to break it,
each test of resistance lowers probability of resistance holding”
“The more we test a support, the more likely we are to break it, each test of support lowers probability of support holding”

Rule 3 (a)  (Increased probability)
“The bigger the time frame on the charts, the MORE RESPECTED/RELIABLE support and resistance, SUPPLY AND DEMAND, SMA’s,  and patterns are”
“The smaller/lower the time frame on the chart, LESS RESPECTED/RELIABLE support and resistance or Supply and Demand is…..ESPECIALLY in choppy environment” (look for confluence)


Rule 3 (b)  (Increased probability)
Choppy, low-volume, and high/low VIX environments WEAKEN the time frame you are looking at SUBSTANTIALLY. In Chop, low-volume, and high VIX environments, it is HIGHLY recommended to INCREASE THE TIME frame” (Brian looks at no less than a 1hr chart, unless it is QQQ, IWM, or SPY)

Rule 4 (Relative Strength/ Relative Weakness)
It is also our job as traders to understand if a stock or the market we are looking at is:
A. neutral (where technical analysis will work best – no emotion)
B. if there is a sell-off out of fear/panic/bad news (relative weakness)
C or euphoric/optimistic (relative strength independently compared to the overall market)

(Keep in mind this could be the entire market or just one stock in particular)

EMOTION WATERS DOWN YOUR TECHNICAL ANALYSIS SUBSTANTIALLY

Rule 5 (a) (Strategy for Reversal trading)
“Red candles are to look for call opportunities at major supports.
Green candles are to look for puts at major resistance

Rule 5 (b) (Strategy Momentum trading)
In an uptrend, support is always stronger than resistance….
To put it in other words, resistance is always weaker than support

In a downtrend, resistance is always stronger than support
make it simple, Support is weaker than resistance”

Rule 6  (Strategy Momentum trading)
Remember “The trend is your friend, til the end” (DON’T GO AGAINST THE TREND- unless you know what you are doing with calculated risk)

Rule 7 (Risk Management)
“When an argument could be made for both BULLS and BEARS that signals uncertainty and can go either way. It is best not to trade in either direction and wait for confirmation”

Rule 8 (Risk Management)
“NEVER trade an open candle (a candle that has not closed and the time is still running on it) – that is called chasing and/or gambling”

Rule 9
“THE LONGER WE RANGE…….THE HARDER WE BREAK UP OR DOWN”

Rule 10a (Gaps)
“The bottom of a fresh gap (one that has not been filled/closed) “CAN POTENTIALLY” serve as resistance. Even when gaps are filled, the borders of the gap can serve as a weaker support and/or resistance”

“The top of a fresh gap (one that has not been filled) “CAN POTENTIALLY” serve as support. Even when gaps are filled, the borders of the gap can serve as a weaker support and/or resistance”

Rule 10b (gaps continued)
“Once a gap is closed/filled there is a highly likelihood the price will reverse (80%+). Please also understand if Rule 4 (relative strength/weakness) plays into whether this rule is respected.”

Rule 10c (gaps continued)

“We usually move in the direction of the gap made premarket”

Rule 11 (Choosing strike prices & exp in options)
“In estimating the appropriate strike price and exp date, you need an entry and forecasted target. You always want the stock price to PASS your strike price which should be between entry and target. If you don’t know technical analysis and/or Price action, stay ITM or slightly OTM and reduce risk”

Keep in mind, the further away the strike is OTM (cheaper the contract) the HIGHER RISK you are taking

15 min time frame = This week’s exp date

1hr time frame  = 1-2 week exp date

4hr time frame = 1-3 week exp date

1D time frame = 2-4 week exp date

1W time frame – 2-6 week exp date

1M time frame – 3-8 week exp date

Rule 12 (Reversal trading)
The first touch of a major resistance OR first touch in a while/long time is always the strongest rejection. Every subsequent touch  of resistance typically has a weaker rejection where rule 2 and 11 could play a role

Rule 13 (time frames wiggle room)
The bigger the time frame you are making a trade from, the wider you have to make your stop/the more room/time you have to give your trade.

Rule 14 (Risk Management)

NEVER. EVER. Trade without a stop loss. That is not trading. That is gambling. Stop losses are there to protect you should your thesis for entering the trade be invalidated. (see photo below)