Welcome to the

Option Pro t
Accelerator!
Jeff’s Favorite Trading
Techniques
As we begin this course I want to introduce you
to several of my favorite “tricks” I use on a daily
basis when trading. If you are a member of my
WeeklyMoneyMultiplier service, you will see me
put these principles to work each day in live
trading. I am going to outline 6 key principles
you need to think about when trading. After
this, we will get into the nuts and bolts of how
to actually apply these to trading options.

The 6 key principles we will start with are:

Use stop losses.

Time entries and scale into positions.

Know the current market conditions.

Know when to get aggressive.

Risk manage your positions.

Go against the herd.

The Argument for Stop

Losses
There’s a dichotomy between active and
passive traders. Some argue for stop-loss
orders, while others think the trading
algorithms (algos) are front-running your
orders. Now, that may be the case in some
situations, where there are algorithms known
as “stop hunting algos.” They use computer
science and math to force traders and investors
out of their positions by driving the stock or
exchange-trade product’s price to a level where
many individuals have chosen to set their stop-
loss orders.

Now with options, if you don’t currently use a

strategy to stop out of your options position,
listen up.

Remember, options derive their value from

factors such as implied volatility, interest rates,
strike price, time to expiration, and the
underlying stock price.

You see, when you’re trading options and

looking to multiply your money with directional
bets, it makes more sense to use the stock’s
price as the stop loss, not the option itself. Since
the factors that go into options pricing are
dynamic, the option’s price could move even if
the stock price doesn’t.

That in mind, charts help with setting stop

losses. For example, here’s a look at a real trade
in which I used the stock price to give me an
out.
Here’s a look at the hourly chart of Roku Inc.
(ROKU).

Notice the red horizontal line. If ROKU broke

below $39 while I was in the trade, I would stop
out of my position and cut the loss. This was a
clear support area, and if it broke below, chances
were the stock could fall further.

Now, it’s ne to take small losses, it’s nearly

impossible to have all winning trades. You need
to understand how to risk manage your trades if
they look like they’re going to turn sour.

Stop losses help if a stock is going against your

options trade.
But what about the other side of the trade?
What if the stock is working to your favor and
your options are in the money?

Well, you can place trailing stops on your

positions when you’re sitting in pro ts. For
example, if your goal is to generate 100%+ on
your options trades, sell or cover half of your
position, and let the rest ride – placing a stop
loss around an area you’re comfortable with.

I let the stock charts tell me when the trend is

over and when to lock in pro ts.

For example, here’s a sample trade in which I

took half off the table when I was sitting in
pro ts.

Keep in mind, you would need to set alerts for

the stock price – letting you know when to get
out of a position. For example, if you’re long at-
the-money calls in the SPDR S&P 500 ETF (SPY)
and it’s currently trading at $245.

If you notice on the daily chart of SPY, the red

horizontal line ($240 area) was previously a
support area. If SPY breaks below that area, you
can set an alert on your brokerage platform…
thereafter, if the alert is triggered, you can sell
those options.

It takes a bit of experience to determine where

to place your stop losses; you’ll need to evaluate
the charts, current market conditions, as well as
any potential catalysts that might affect your
position.

That said, successful options traders understand

timing, whether it be for stop losses or entries.

Timing Entries
You’re probably thinking, “Okay, I understand
stop-loss orders and why they’re useful, but how
do I select the right option to buy?”

Well, you could use trendlines or other technical

indicators you feel comfortable with…if a signal
is generated, you would make a move on the
options.

For instance, here’s a look at a trade example.

Now, I was keeping an eye on AeroVironment

Inc. (AVAV) here.

The stock had multiple tops and a clear

resistance area.

I gured once I saw the money pattern ash a

sell signal in the name, it was time for me to buy
puts.
Here’s how the trade turned out, and members
were able to rake in some pro ts.

If you recall, options are like fresh produce…

there’s an expiration date. That in mind, it makes
sense to buy yourself a little more time.

When you’re selecting expiration dates, try to

gure out within what time frame you think the
stock will make the move. Thereafter, buy
options about two to three times as long as that
– this gives you an added layer of protection
against time decay. For example, if you think a
stock will make a move in the next week (which
I usually do, or else I won’t make the purchase),
then you would buy options that expire at least
3 weeks from today.

What about position sizing?

You never want your position to be too big in

relation to your account size.
Many novice traders know how many contracts
they want to be in, but make the mistake of
buying all at once. You see, when you’re trading,
it’s essential that you learn how to scale in.

For example, if the options go against you a

little, you might want to purchase some more to
bring your average cost down. However, you
should not keep averaging down, especially if
the stock goes above or below your stop price.

That said, if you want to trade 10 call option

contracts in a stock, scale into your position.
Maybe, you purchase 5 options contracts and
buy more if the stock pulls back to an area of
support.

Don’t Follow the Herd

Understanding market conditions helps with
options trading. The market environment lets
you know what options strategies you should be
using, or whether you should sit this one out
and watch from the sidelines.

You see, markets overshoot on the upside, and

when markets fall, they typically correct too far
and fast on the downside as well. Traders and
investors pile in stocks for far too long during a
bull market, thinking it will continue for another
decade. In turn, they may be buying overvalued
assets, driving stocks to unseen levels.

On the other hand, when the market is

correcting…panic consumes traders. They tend
to sell stocks too far below where the true value
may be.

This is what is known as the “herd mentality.”

You can’t make outsized pro ts if you’re always

following what the “herd” is doing. Instead, you
will make money with them and lose money
with them. Moreover, you’ll always be one step
behind because you’re waiting on their every
move. That in mind, it makes sense to learn
when to go against the herd.

For example, one of the greatest options traders

of our time, Nassim Nicholas Taleb, knew when
to go against the herd. Rather than following
the trend and buying “overpriced” options, he
used a strategy that was contrary to what
everyone was saying and trading. Heck, just a
few years ago, a fund he serves as the scienti c
advisor for was rumored to pro t $1B during the
August 24, 2015 ash crash.

That said, being contrarian pays off sometimes.

Next time you trade options, take note of the

market conditions. Is the market choppy and
can’t nd a direction, or is it trading in a clear
uptrend or downtrend?

Ultimately, this will let you know when to be

aggressive and when to stay on the sidelines.
Understanding
Trends
When market leaders are in a bull market, the
market tends to run higher and stick with that
trend.  However, when they reverse course, even
the best stocks will fall.

For example, here’s a look at the daily chart of

Apple Inc. (AAPL).

Notice how it took AAPL nearly 1 year to get

from the $140s to $230s. However, when the
stock started selling off, it took just over 2
months to fall from its highs down to the $145
area.

You see, traders and investors typically consider

stocks to be in bear market territory when
they’re down over 20% in a two month trading
period. Now, at the time, AAPL broke all key
support areas, as shown in the chart above (the
rst line of defense was the blue, second was
the purple, and third was the red horizontal
line).
Once a stock breaks key support areas and the
overall trend, it could be time to call it quits in
the name.

The same thing happened with Amazon.com

Inc. (AMZN).

The stock broke its uptrend line, which took one

year to develop. In just around two months,
AMZN dropped by more than 30% – placing it in
bear market territory during the last quarter of
2018.

Baron Rothschild once said, “Buy when there is

blood in the streets.”

Warren Buffett has been famously quoted

saying, “Be fearful when others are greedy. Be
greedy when others are fearful.”

Remember what we said about the herd

mentality? Well, the world’s best investors and
traders typically follow the contrarian mentality.
That said, when the market is in bear market
territory and there’s extreme pessimism, it may
be time to look for selective buys.

Now, this means you need to conduct your due

diligence and look at technicals.
But how would you know when to buy?

Well, of course, I like to use my money pattern.

Here’s a look at the AAPL chart when it was in

bear market territory.

Most people will say, “It’s Apple, it’s a great

company… I’m getting it for a discount!”

However, that’s not the mentality to have. Of

course, the idea of being contrarian works…but
you need indicators to time your entries.

You see, at the time, I wouldn’t even consider

buying AAPL call options until the red line
crossed above the blue line. In other words, I
want to see the 13-period simple moving
average (SMA) cross above the 30-period SMA.

This pattern has worked well for me, and once

the indicator ashes a buy, I’ll be aggressive.

The money pattern is great if you have no

position and are looking to buy options on a
stock or ETF.

But what if you’re already long and want to stay

long, but are afraid the of a market correction?

Well, you can hedge your position.

As a trader, you need to be exible and it helps
to not always be 100% on one side of a trade.
Hedging can help with that. For example, if
you’re long shares of AAPL, you can hedge by
purchasing put options. If AAPL does go against
you, the puts will gain, but your stock position
would suffer. That said, the puts would help
minimize your losses.

Great traders either move to cash during volatile

times, or they hedge their positions.

You know what great options traders also do?

They’re willing to sell, or write options, in

addition to going long calls and puts.

I know I mentioned this earlier, and I’ll reiterate

again because it’s really important: beginners
should not naked sell options because there’s a
lot of risk involved.

However, there is a time and place to sell

options.

If you want to be successful in options trading,

you need to learn to be dynamic and willing to
sell options…

This all sounds contradictory at rst, but listen

up.
Sometimes It
Makes Sense to
Sell Volatility
You see, volatility is not stagnant. By now, you
should have a good grasp of implied volatility. If
you don’t, go back and refresh your memory.
Before we get into why it makes sense to sell
options at times, we’ll need to go over a bit of
mathematics. Don’t worry, it’ll be short and
quick.

First, you’ll need to understand the basics of

probability distributions. Now, a probability
distribution is simply a function providing
probabilities of occurrences of different
outcomes.

In the markets, the empirical probability

distribution takes returns and plots a histogram
of those returns. In other words, daily
percentage returns are calculated and placed
into buckets.

For example, the buckets could be in 0.5%

increments. If the S&P 500 Index falls by 0.25%, it
would be placed in the 0% to -0.50% bucket, and
so on. Thereafter, you would nd the average of
the returns and its standard deviation.

Now, the normal distribution is split up into

standard deviations (known as volatility in the
options trading world). The standard deviation
lets you know how dispersed the daily
percentage returns are from the mean.

Ultimately, you would have thousands of

returns, and you would see something that
looks like the bell curve (something you may
have seen in a high school math or statistics
class).

Source: Corporate Finance Institute

Don’t worry about the Greek letter next to the

numbers, it’s just called sigma (also known as
the standard deviation).

Let’s put this into perspective.

The market tends to have more small

percentage moves than ones greater than 4%.
Just by watching the market, you would know
that the market normally doesn’t have
abnormally high or low daily percentage returns
all the time. However, that’s not to say that the
market actually follows this distribution.

In theory, it makes sense, but in practice, we see

moves greater than 3 standard deviations more
times than you would expect. In the trading
world, the distribution is actually known as a
Levy distribution or fat-tailed distribution.

You see, during times of panic, you’ll notice

markets have crazy moves. For example, the
average annual standard deviation of the S&P
500 Index over the past 15 years is around 13%.
Over that period, you would expect the S&P 500
to move around 0.82% on a daily basis (13%
divided by 15.87, or the square root of 252).

However, we all know the market moves farther

than 0.82% at times. In 2018, we saw multiple
days in which the S&P 500 Index fell more than 3
standard deviations, or 2.46%, in a day.

Although the normal distribution is useful, you

should take it with a grain of salt and know that
the market could have moves greater than 3
standard deviations at times.

Now, that’s great for long volatility traders

betting the market will do something crazy, in
either direction. Remember, when you’re
trading volatility, it’s just like the stock market…

You want to buy when volatility is low and sell

when volatility is high.

How do you know when volatility is high or low?

Well, you can compare current volatility levels to
historical ones.

For example, let’s assume the SPDR S&P 500

ETF (SPY) has an average annual volatility of 13%,
and currently, it’s implied volatility is 50%. It may
make sense to sell volatility.
Well, since naked options selling is out of the
question for some, we’ll look at how you can sell
volatility with spread trades.

For example, let’s assume that you think SPY will

trade in range and volatility will die down…well, if
that’s the case, you can use the butter y
strategy.

Here’s the risk pro le of a butter y trade.

Take note, if SPY stays around where it’s trading

and volatility subsides, you would be near your
maximum pro t point. However, what happens
if you’re wrong and the volatile environment is
here to stay?

Well, since it’s a spread trade, you cap your

downside here.

Now, a typical butter y strategy involves buying

1 OTM option, 1 ITM, and selling 2 ATM options.
Keep in mind, you can be exible with this
strategy and do not necessarily need to follow
the traditional guidelines.

You can also use the condor as a short volatility

trade.
With the condor strategy, you can use calls or
puts. For example, with calls, you would sell 1
ITM, buy 1 ITM with a lower strike price, sell 1
OTM call, and buy 1 OTM call with a higher strike
price.

Here’s how the risk pro le of the iron condor

strategy would look.

Keep in mind, at the time, SPY was trading

around $234.

You could also use ratio spreads. For example,

here’s how you could sell volatility if you think
the market could bounce around the $230 level.

With this trade, you would sell 2 OTM puts and

buy 1 ITM put.

What happens if the trade moves against you?

Well, you can hedge your position and turn it
into a butter y trade to limit your downside.
Now, you’ve probably heard of the straddle
strategy before. With a long straddle, you would
want to buy it when volatility is low, but when
it’s high…you would short a straddle.

Here’s how a short ATM straddle on AAPL would

look.

Notice how your risk is substantial if AAPL

moves a lot in either direction. This is one
strategy that you would only want to use if
you’re an advanced options trader.

But what happens if you decided to short a

straddle, and feel that volatility would actually
increase? You can hedge that straddle.

How?

Well, you would buy the wings. Remember the

normal distribution and how the market
actually has more abnormal moves than
expected?

The way distributions work is the fact that when

there are extreme events, the days of low
volatility are over, and you would see stocks have
2 or even 3+ standard deviation moves.
Now, I won’t bore you with all the mathematical
details…however, if you nd yourself in a short
straddle situation, and volatility is actually going
up, either get out or buy a ratio of deep OTM
options.

For example, let’s assume you shorted 1 ATM

straddle in AAPL, but think there will be an
increase in volatility next week due to some
catalyst events.

Well, here’s how you could hedge that straddle.

Now, if there is a large move in either direction,

you would make money.

The Bottom
Line
Remember, no one else’s account matters
except your own. Keep your eyes on the road
ahead.   You should never compare your trading
to me, your brother-in-law or any fools you see
on Twitter. Stay in your own lane and focus on
building your own account and setups that suit
your personality.

Great traders use stop losses, time entries and

scale into positions, know the current market
conditions and when to get aggressive, risk
manage their positions, and go against the
herd.

Also, when you’re trading options, there is a ne

balance of technical and fundamental trading –
I believe every trader needs to learn that. You
can’t make money simply by using one of these
styles, you need to learn how to use both if you
want to develop into a seven- gure trader.

Focus on the options trading process, and who

knows…maybe you’ll be hitting 100%+ winners
soon.

Now that we’ve wrapped up some of my favorite

trading tips… Let’s get into how to apply these to
trading with options!

In the sections that follow, I am going to outline

the basics of trading options from the very
beginning. I’ll assume you have never traded
before and we will start from ground zero.

Even if you are comfortable trading options

already, I think it is always good to review a lot of
the ner points to reinforce what you already
know.

Let’s get to it!

Option Basics
In a letter to shareholders in 2002, Warren
Buffett infamously said, “In our view, however,
deriv- atives are nancial weapons of mass
destruction, carrying dangers that, while now
latent, are potentially lethal.” Derivatives often
have a negative connotation and many think
they are just tools for speculation with a high
degree of leverage invented by
mathematicians. However, I don’t think that’s
the case if you know how to use them properly.

Heck, derivatives have been around before all

this fancy math and technology. The rst
reference to a derivative-like security dates
back to Genesis 29. That’s right, derivatives have
actually been around for thousands of years,
whether traders like it or not.

In this guide, we will be discussing options and

how to use them to your advantage while lever-
aging your capital.
First things rst, we need to de ne options.

Options Explained
An option contract in the nance world is
ultimately just an option to buy or sell an
underlying asset, which could be a stock, index,
futures or commodities. Here, we will be
sticking with stock options because it’s our
community’s bread and butter. Quite simply, an
option contract is just a choice about whether
you want to do something or not, it’s not
different than any other options we have in life.

A call  option  gives you the right to purchase

the underlying  stock at the speci ed  strike 
price, on or before the expiration date. On the
other hand, a put option gives you the right to
sell the underlying stock at the strike price on
or before the expiration date. When trading
call or put options on the long side, you pay a
premium to receive the right to buy or sell 100
shares of the underlying asset, and you’re not
obligated to do so. That said, the amount of
premium you paid is the maximum amount
you could lose.

The underlying stock is simply the product

to which the option

The strike price is the price at which you

would buy or sell the

The expiration date is the date that the

option would stop trading. American
options could be exercised at any date
before or up to the expiration American
 options have nothing to do with the
geographic location because they could be
traded all across the world.

On the other hand, if you short options, you

would receive a premium for taking on the risk.
If you sell short, or write, a call option, you are
obligated to sell shares of the underlying stock
if the call option holder exercises the option, or
if the option expires in the money. If you write a
put option, you are obligated to purchase
shares of the underlying stock, if the put option
expires in the mon- ey or the holder exercises
the option.

Here are some examples of options:

AAPL Feb 16 2018 170 Call 

If you owned the call option, you would

have to right to buy 100 shares of AAPL at
$170 per share, on or before the expiration

SBUX Feb 16 2018 58 Put 

If you owned these SBUX put options, you

would have the right to sell 100 shares at
$58 per share, on or before the expiration

Moving on, let’s see how options are priced.

Options Pricing
There are a plethora of option pricing models
out there, and we won’t go over them at all
since we’re sticking to the basics. Options
pricing models involve heavy math, and I don’t
think it’s necessary to overwhelm you with all
that information when you’re just starting out.

However, you do need to understand what

factors affect option premium.

There are three major factors affecting option

prices:

The underlying stock’s price

Time to expiration date

Volatility

The two “less” important factors affecting

options prices:

Short-term interest rates

Dividends

Keep in mind that interest rates would matter

in a rising rate environment.

Underlying Stock’s Price

Again the underlying stock’s price movements
affect option premiums.

For call options, when the underlying price

rises, the premium should follow suit.
Conversely, as the underlying price rises, put
option premiums fall. When the underlying
price falls, call option premiums would fall,
while put option premiums would rise.

Time Value and Expiration

Typically, when there is a lot of time remaining
until the option’s expiration date, the premium
would be higher. In other words, an option with
two months until expiration would have a
higher premium than one with one week until
expiration.

Volatility
Volatility is the underlying stock’s tendency to
uctuate in price. In other words, volatility
re ects the price change’s magnitude and does
not have a bias toward price movement in one
direction or another.

The higher the volatility, the higher the option

premium. The lower the volatility, the lower the
premium.

Interest Rates
Generally, interest rates do not affect premiums
as much as the time value, the underlying stock
price and volatility. However, in a highly volatile
interest rate environment, rates matter. An
increase in interest rates typically increases call
prices and decreases put prices, based on the
famous Black-Scholes pricing model (we won’t
get into the details of the options pricing
model).

Dividends
Options are often priced assuming they would
only be exercised on the expiration date. That
means if a stock issues a dividend, the call
options could be discounted by as much as the
dividend amount. However, put options would
be more expensive since the stock price should
drop by the dividend amount after the ex-
dividend date.

Now that we understand the basics of the

factors affecting option premiums, let’s move
onto intrinsic and extrinsic value.

Intrinsic and Extrinsic Value

An option’s value is comprised of two
components: intrinsic and extrinsic value.

The intrinsic value simply tells us the amount

an option should be worth, when comparing
the underlying stock’s price and strike price.
Let’s assume Apple (AAPL) is trading at $170,
and you own $160 call options. The options give
you the right to buy the stock at $160, and
therefore, the calls should be worth at least $10
a piece, or $1K per contract.

If the call options were trading under $10, it

would be possible for traders to buy the call,
immediately exercise the call to buy the stock
for a net price below the current trading price.
This is known as a risk-free arbitrage pro t,
which cannot exist in the market, at least for a
long time.

Arbitrageurs tend to eat those pro ts before

you even get a chance to do any of that.
Now, if an option has not expired yet, it also has
extrinsic value. The extrinsic value is an option
value’s component, re ecting the fact the
option has optionality. For example, let’s
continue with our AAPL option example. If
AAPL is trading at $170, the $160 put options do
not have any intrinsic value.

You de nitely do not want to exercise the

option to sell AAPL shares at $160 when they’re
trading at $170, that’s an instant loss. However,
if the puts have enough time until its expiration
date, it could still have some value. This is
because there is some probability that AAPL
could trade down to $150, and the puts would
become in-the-money (ITM) and have intrinsic
value of $10.

In-the-money, out-of-the-money and at-

the-money just re ect an option’s
moneyness in relation to its strike price. For
example, if a stock is trading at $50, the $40
strike price Options Pro t Accelerator 7 call
options would be considered in-the-money,
while the $40 strike price call options would
be considered out-of-the-money. Moreover,
the $50 call and put options would be
considered at-the-money.

In short, extrinsic value re ects the value of

owning the option because its intrinsic value
could rise in the future.

This brings us to the put-call parity.

Put-Call Parity
Put-call parity is a highly important relationship
between puts and calls. Fundamentally, puts
and calls are the same thing. Put-call parity
applies to only put and call options with the
same strike price and expiration date.

Let’s take a look at call and put option payoff

diagrams to understand this important detail.

Here is an example of a put option payoff

diagram:

The red is the option payoff, or pro t-and-loss,

diagram at the expiration date, while the blue
line is the current option price given different
scenarios where the underlying is trading.

Similarly, here’s an example of a call option

diagram:

Everything is exactly the same here. Same

underlying, expiration date, volatility and
interest rates.
Take a look at the symmetry of the option
payoff diagrams above. If the underlying stock
is trading at $120, the calls have $20 of intrinsic
value, while the puts will have no intrinsic value.
Conversely, if the underlying stock is trading at
$80, the put options would have $20 of intrinsic
value, while the call options would be
“worthless”.

The beauty about options is you could

synthetically create various strategies with
different call and put options. Now, it’s possible
to synthetically create a similar payoff pro le of
the $100 call options, using the $100 puts and
the underlying stock. All you need to do is
simply hedge the $100 strike price puts with
the underlying stock, and let’s assume the
stock is at $100. Here, we would create a
synthetic $100 call option. The same could be
done to create put options with calls and the
underlying stock.

Again, this is a very important detail for option

traders. Quite simply, the only difference in a
call’s value and a put’s value with the same
strike price and expiration date is the intrinsic
value. If you recall, intrinsic value is the value
that an in-the-money option must have by
being ITM. That means an option must be
worth as much as the difference between the
strike price and the underlying stock price. For
call options, its the maximum of 0 and the
underlying stock price minus the strike price.
For put options, its the maximum of 0 and the
strike price minus the underlying stock price.
Remember when we said an option’s value has
two components? Well, the extrinsic value is
the remainder of the option’s value once you’ve
gured out the extrinsic value. Due to the put-
call parity, put and call options with the same
strike, expiration and volatility should be worth
the same, in terms of extrinsic value.

What’s Next
Now that we’ve got the basics of options down,
you’re well on your way to learn how to use
options and some basic strategies. I know, this
is a lot at rst, but once you’ve got the basics
down, it’ll be a lot easier. You might need to go
back a few times to review this before you
move onto the next section of the guide.

Ways to Trade
Options
If you recall from our rst section, options allow
you to be creative with trading. Options are one
of the most exible asset classes in the market
because you could accurately re ect your view
on the market.
For example, if you are bullish on a stock that is
optionable, or has options, you could place a
directional bet. The same is true when you’re
bearish or neutral. Moreover, if you expect a
stock to move a lot, you could place a volatility
strategy. You could also use options to hedge
your stock. The possibilities are pretty much
“endless”.

Now, let’s take a look at ways to use options.

Using Options for

Directional Trading
Options could be used to gain exposure to the
price movements of the underlying stock. This
is known as directionally trading options and
it’s what we’re all about. For example, if you are
bullish on a stock and think it could rise by $10,
you could buy some call options to pro t from
a move up in the underlying stock.

For example, let’s assume you think a stock

could rise by $10 in one month, and the
underlying stock is trading at $50. You go out
and purchase one $50 strike price call option
expiring next month for $1.59. Since stock
options have a multiplier of $100, your risk
would just be $1.59.

Well, here’s how your PnL would look at

expiration:
Well, if you look at the chart above, if your
option rises to $60 before the expiration date, it
would be worth at least $10 (or $60 minus the
strike price, here it’s $50). If it stays above $60
and the options expire, you would
automatically be exercised since the options
expired in-the-money and you would be long
100 shares of the underlying stock at $50 and
essentially, you could sell them at $60
(assuming the stock doesn’t gap up or down
hard overnight).

Another way you could express your bullish

opinion on the stock would be to write put
options. Now, this is highly dangerous and I
don’t suggest beginners go out and do this
even if they think the stock is going to the
moon. When you naked write, or short options,
you have a high degree of risk. What happens if
the company goes bankrupt? Well, those put
options would be really expensive and you’ll
have to give that money to your broker.

Let’s assume you short one $50 strike price put

option with the same expiration date and
collect $159 in premium. Here’s a look at the
short put option pro t and loss (PnL) at
expiration:

Just look at that, the risk-reward isn’t there. It

does not make sense to collect $159 to
potentially lose $5K, or ($50 * 100), in the worst
case.

Now, you could also express your bearish

opinion on a stock with put options. Let’s say
you notice a negative press release in a stock
and think it could fall 10% in 1 week. Assume the
stock is trading at $100 when this press release
came out, and you were able to buy the $100
put options expiring next week for $1.65, or $165
per contract.

Here’s how your PnL would look at expiration:

Well, if the stock does fall to $90 before
expiration, the put option contract would be
worth at least $10. You would pocket $8.65, or
$10 less $1.65 (what you paid for the options), if
you’re able to sell them before expiration for
just the intrinsic value. This is assuming there’s
no extrinsic value left at all.

Hedging Your Stocks

You could also use options to hedge your stock
position. For example, if you are long stock, but
are afraid of a short-term fall, you could hedge
your stock position by purchasing put options.
If you think the stock will rise over the long
term, but sell out of your position, you’ll
probably end up kicking yourself if the stock
drops 2% then rises 10% in a month. Think of
this as insurance. You could protect your stock
position over the short term but still take part if
the stock rises over the long term.

If the underlying stock price rises, you would

pro t by owning the stock, but you would lose
the premium paid for the put. That said, could
be used to alter your risk pro le of a stock or
portfolio to t your needs.

Remember the call option PnL diagram at

expiration? Well, here’s how your position
would look if you’re long 1 put option with a
strike price of $100 and 100 shares of the
underlying:
Keep in mind you would multiply the scale by
100. Now, if the stock falls signi cantly, you
would be protected. The blue straight line is
your stock position, and the other plot is your
long stock and put position at expiration. This is
known as a married put, and it looks pretty
similar to the call option payoff diagram right?
Well, in essence, it is. You’re long the stock and
if it rises you’ll pro t, but if the stock price falls,
you’re hedged and could exercise your option
and your maximum loss is premium paid.

Writing Options to Generate

Income
Remember, you could also short options to
collect premium, or generate income. Again, I
don’t think this is useful for beginning option
traders because it’s extremely risky, if you’re not
hedged, but it’s worth going over.

This strategy hinges on the fact some options

have extrinsic value, which will be gone by the
time the options expire. So, the idea here is that
by selling options, the fall in value, also known
as time decay, could be captured for a pro t.
Even though the extrinsic value will fall as the
option gets closer to its expiration, or maturity,
date, the intrinsic value could still rise.

Let’s take a look at an example. We’ll go over

the covered call strategy here. A covered call
strategy is comprised of a long stock position
and a short call position.

Now, if you own a stock, you could enhance

your returns by selling out-of-the-money call
options on the underlying stock. If the stock
price falls, you would lose money, but the calls
will expire worthless and you would minimize
your losses because you collected that
premium.

On the ip side, if the stock rallies and

continues to make highs, you would pro t from
the rise in the stock’s value. However, you
would lose money on the short call position.
Theoretically, a call option as unlimited upside
potential because we simply don’t know where
the stock could go. Since you are hedged with
the position, if you are exercised on those
options, you would still pro t, which would be
equivalent to the strike price of the call option
less the purchase price of the stock. There’s a
tradeoff here. What if the stock is in buyout
talks and it rises 40%, well your upside is
limited. You maximum loss would be limited to
the price you paid for the stock less the
premium you received, if the stock starts to
drop below the strike. That said, I think you
should stick to directional trading and we’ll
discuss this in How to Capture 100% Pro ts on
Small Moves in Stocks.

Trading Volatility with

Options
One of the primary reasons to trade options is
to gain exposure to or protect your position
against volatility. If you recall from the section
on Basic Option Strategies, one of the three
essential components of an option’s price is the
underlying stock’s volatility. Now, you might be
wondering why would anyone want to “trade”
volatility?

Well, volatility is often viewed as an asset class.

There are various derivatives allowing traders to
gain exposure to volatility, such as variance and
volatility swaps. Since volatility impacts nearly
all trading strategies, it’s become important to
traders to manage that risk or capitalize on
changes in the level of volatility.

Volatility is one of the most important factors of

an option’s value, and we’ll leave you with a
simple strategy.

Let’s assume you think a stock is going to move

signi cantly after its earnings announcement,
but you don’t know in which direction. Well,
you could put a straddle on, which is a play on
volatility.

For example, if the underlying stock is trading

at $100 and it’s reporting its quarterly earnings
this week, you could put on a straddle. You
could do this by simply purchasing at-the-
money call and put options.

Here’s how your PnL would look at expiration:

Take note that the red line is just what the

strategy would currently be worth, while the
blue line is the option’s value on the expiration
date.

It’s pretty clear that you could make money if

the stock moves a lot in either direction.

There are various ways to use options, but when

you’re rst starting out, I think you should only
place directional bets. When you start getting
the hang of things and pro ting, then you
could move onto hedging your stock or placing
volatility trades. Now, in the next section,
Understanding Implied Volatility, we’re going
to go over implied volatility, which is one factor
beginning option traders have a tough time
grasping. Again, options may seem tedious at
rst, so you’ll need to continue studying this
guide to understand the way options really
work, and this could help you with your trading
success.

Implied
Volatility
Explained
Implied volatility originates from the options
market. Typically, with stocks, you just have
realized, or historical volatility. In other words,
how much a stock has moved historically, in
percentage terms.

Recall that there are several factors affecting an

option’s price including: the underlying stock’s
current price in relation to the strike price and
time to maturity. The others (dividends and
interest rates) are not as important. Another
important factor is the expected volatility of the
underlying stock over the option’s life.

Now, for an out-of-the-money option to be

worth anything, there has to be some
probability that it could expire in-the-money.
Otherwise, there’s no point to trade options
minus the fact that they help to leverage your
capital. That said, the underlying stock needs to
have some price volatility. That means, the
stock’s price needs to move in order for the
option to become valuable.

Now, the more volatile the stock, the more

valuable the option will be. No matter what
type of option, whether it be a call or a put
option. Think of tech or healthcare stocks. If you
have seen these stocks in action, you’ll know
that they move a lot. Therefore, options on
those types of stocks would be more expensive
because there is a higher probability they could
expire in the money.

This is a bit tedious to understand at rst, but

it’ll make sense once you read it a few times.
Since you can uniquely identify an option’s
value with one level of expected, or implied,
volatility, the option value inherently implies
the expected volatility level. Now, we won’t get
into the mathematics of options pricing model
because it involves working knowledge of
stochastic differential equations, probability
and partial differential equations. We’ll leave
that to the math geniuses at the NYU Courant
School of Mathematics or Columbia’s Financial
Engineering Department.

Getting back on track, in order to calculate an

option’s value, the factors affecting an option’s
price is plugged into the model. You would
need to work in reverse and start with the
option value and all the other factors except the
expected volatility. All you would need to do is
rearrange the formula and make the expected
volatility level the point. Good thing we have
trading platforms that do all that for you. Again,
you don’t need to do any maths to nd the
implied volatility.

That said, let’s skip over how implied volatility is

actually calculated and look at how to interpret
implied volatility gures.

Interpreting Implied Volatility

Figures
Take out all the math, and implied volatility
numbers are intuitive. Let’s make this easy to
understand.

One way to interpret implied volatility is by

looking at expected standard deviation in the
underlying stock price for the upcoming year.
Now, standard deviation is simply the
dispersion of a set of data points, here it’s just
the stock prices.

For example, assume an at-the-money option

expiring in one year on a stock has an implied
volatility of 40%. You could interpret this as:
Over the next year, the option market expects
the stock to move 40% in either direction.

There are a lot of assumptions behind the

implied volatility. In the example, we use an
option expiring in one year. Well, you might be
wondering, Could I use the the implied volatility
for one month? You can’t really do this in
practice. Sticking with the same example, the
implied volatility used to price the option, even
though it’s an annualized gure, it really only
relates to the expected volatility over the
option’s life. That in mind, it would not make
sense for you to use the implied volatility for
one month, if the option is expiring in one year.
The one month implied volatility does not really
tell you anything about an option expiring in
one year’s time.

Now, you must be careful if you’re converting

an implied volatility into a stock’s expected
range one year from now. It’s possible to
compare implied volatilities across different
stocks and stock indices because implied
volatility is quoted in percentage terms, and
therefore, it’s indepent of the underlying stock
price or index level.

If it’s dif cult to gure out how much a stock

should move per day, given the annualized
implied volatility. You could easily convert the
annualized implied volatility gure into a daily
standard deviation, or implied volatility. This is
fairly common practice and I do this often too.
Generally, option traders have a good feel for
how much a stock should move day-to-day, but
it’s harder to have a feel for price movements in
a week, month or year. I know, I know, this
doesn’t really make sense. There’s a disconnect
here.

Implied volatility is shown in annual terms, but

the historical volatility experienced in the stock
is matters on a daily basis. You care about what
your PnL and the volatility level is today, not in a
year.
Let’s take a look at how you could convert the
annual volatility level. This is quite simple to do.

Converting the annualized implied volatility

into a daily number is simple. All you would
need to do is divide the implied volatility by the
square root of a time frame. For instance, if you
want to gure out what the options market is
implying about the stock’s price movement in
one month, you would divide the annualized
gure by the square root of 12, since there are 12
months in a year. For example, let’s assume the
annual implied volatility of a speci c call option
contract on Facebook (FB) is 70%.

Here’s how you would calculate the monthly

volatility:

F B Monthly Implied Volatility = 0.70 ÷

(√12) = 20.23%

Now, a more common conversion is from

annualized to daily. We would use 252 trading
days because that’s the convention. The square
root of 252 is 15.87. So dividing the annualized
by 15.87 would give you a rough estimate of the
daily implied vol.

Here’s the calculation, continuing with the FB

example:
 F B Daily Implied Volatility = 0.70 ÷

(√252) = 4.41%

That means the options market is expecting a

4.41% move for that speci c strike price and
expiration date.

Now, if you multiply this by FB’s current stock

price, it gives you a rough estimate of FB’s daily
move in terms of dollars and cents. This gives
you an idea of theoretical prices changes in the
underlying stock that the options are currently
pricing in.

You could also use implied volatility as the

“price” of options. In addition to interpreting
implied volatility as the underlying stock’s
standard deviation, implied volatility could be
viewed as the option’s price.

Now, the implied volatility is uniquely mapped

to the option value. Remember, higher implied
volatility means higher option prices, and you
could use these interchangeably. Options
traders like to use implied volatility to quote an
option’s value because there’s an edge over an
option’s dollar value.

Remember, there are three main components

of an option’s value, and the underlying stock
price is one of them. In dollar terms, an option’s
value is highly sensitive to the underlying stock
price. This is known as an option’s delta. Now,
this is out of the scope for what we’re trying to
do. But the delta is simply an option’s
sensitivity to the underlying stock price. For
example, if a call option has a delta of $0.50, for
every $1 move up the option would gain 50
cents. However, if the underlying moves down
$1, then the call would lose 50 cents.

To volatility traders, the intrinsic value is just

noise, which is driven by the underlying stock
price. It really doesn’t tell them about the
option’s value that is due to the extrinsic value.

Just know that the dollar value of an option is

sensitive to the price change in the underlying.
In other words, if you’re long a call option and
the option value increased, but the implied
volatility remained the same, this is only
because the intrinsic value increased.

In implied volatility terms, the option value is

the same. This is one interesting and important
factor to grasp. Now, if you did not know what
the underlying stock price was, you would not
know if the call option price increased due to
an increase in implied volatility or if the stock
price moved up. However, if you’re at implied
volatility changes, you could pinpoint exactly
why the option price changed. Keep in mind
we’re assuming rates are the same and the
stock does not pay a dividend.

Since we’ve got a good idea of what implied

volatility is, we’re going to look at what affects
implied volatility.
 Factors Affecting Implied
Volatility
Let’s take a look at three important factors that
affect implied volatility. These factors are not all
independent and there could be a ripple effect
if one changes signi cantly.

The supply and demand for options.

Supply and demand affect the market and

is one of the key factors affecting prices,
whether it be stocks or options. Remember,
implied volatility is one of the primary
factors affecting option prices. Moreover,
implied volatility could be used to quote
options prices. That said, supply and
demand will cause changes to an option’s
price, and therefore implied volatility.

If the traders want to buy options, the

option would be bid up, causing a rise in
prices and implied volatility will follow suit.

Now, what drives supply and demand? Well,

it’s hard to say. Supply and demand for
options could depend on trader sentiment.
It could also depend on the implied vol
level.

For example, let’s assume a stock’s volatility

is below the implied vol in the options
market. Assume the company is expected
to make a big announcement soon. The
demand for options would be high due to
the uncertainty of what the company might
say, regardless of the current actual vol
level. What if the company has a press
release and the stock price runs up after.
Now, what typically happens is the implied
vol will fall sharply. We see this with
earnings releases all the time. Implied vol
runs up into earnings, then wham. The vol
gets sucked out after because there’s no
more uncertainty. The demand for options
falls, and there’s an oversupply of those
contracts because traders may be looking
to liquidate their options.

Remember in the Ways to Trade Options

section, one way to use options would be to
hedge your stock position. Now, the higher
the degree of uncertainty over the future
stock price volatility, the greater the
demand for options as hedges. This leads to
higher prices and implied vol.

For example, if a stock is near all-time highs,

you might see a greater demand for puts
because longs might be worried of a pull
back and bid up the put option prices.

Recent Historical Implied Volatility.

Keep in mind, implied vol is forward

looking. However, this does not mean we’re
memoryless and forget about the historical
volatility. Volatility is known to cluster
around certain levels. Consequently, you
could have a reasonable estimate of
tomorrow’s volatility by looking at the
recent realized volatility. So it should not be
surprising to you that that implied volatility
often relates to historical vol.

For example, if a stock’s price has an annual

historical volatility of 25%, and it’s done that
every year, more or less, over the last
decade. Then it’s probably a good estimate
that the implied vol this year would be 25%,
all else being equal.
However, what happens if implied vol for a
speci c options contract, say the call
options, is 60%. Well, something is up. If this
is the case, clearly someone knows
something or has high expectations the
stock could run up.

Over the longer run, there’s a low

probability that implied vol and historical
vol will signi cantly diverge in one
direction. Now, quick and large changes in
actual vol levels should impact implied
volatility. Again, since realized vol tends to
cluster, implied vol does too. That said,
implied vol is likely to resemble historic
volatility Now, if you notice large
discrepancies between the two different
volatilities, there could be a trading
opportunity or re ect some some new
information that could affect the underlying
stock price that you might not have seen
before.

Changes in the market’s expectation of

the underlying stock.

I know, I sound like a broken record, but

Implied volatility re ects the current
expectation of future realized vol of the
underlying stock price. Now, these changes
could be due to a number of factors. Maybe
there’s a potential press release or the
market might have clues about earnings.
The greater the stock’s price sensitivity to
potential news and earnings, the higher the
implied vol due to the increased
uncertainty.

Take note that the traders could be wrong

about implied volatility Everyone has an
 opinion, but the market doesn’t care about
opinions, sometimes.

Now, some ways to trade implied vol would be:

Trading against technical levels in implied

vol or moving averages

Trading implied vol ahead of corporate

announcements like earnings

Implied volatility is one factor you need to

understand if you’re looking to trade options.
It’s what drives the extrinsic value of option
prices. Now that we’ve gone over most of the
basics of options, you’re ready for what most of
you have probably been waiting for: How to
Capture 100% Pro ts on Small Moves in
Stocks. Now, make sure you understand the
concepts in this section and the previous two
before moving on because it’ll be a lot easier for
you to understand how you could capture 100%
pro ts on small moves in stocks.

How to Capture
100% Pro ts on
Small Moves in
Stocks
Now, we’re going to focus on directional plays
here because that’s our bread-and-butter in our
community.

First things rst, let’s look at an option’s chain

for Net ix (NFLX):

Source: Yahoo Finance

Source: Yahoo Finance

We wanted to make things simple for you to do,

and you can access options chains from Yahoo
Finance or Nasdaq before you start live trading
options. Options chains are the same across all
platforms and data providers. You have your
strike price, the last price, the bid and ask price,
the volume traded, the open interest (how
many contracts are still held) and implied
volatility.

Let’s get right into things and highlight some

trades that were good for 100%.

Timing is Key, Weekly

Money Multiplier Highlights
Timing is key when you’re trading. Let’s say you
think gold miners will fall over the next few
weeks, so you purchase put options in the
VanEck Vectors Gold Miners ETF (GDX).

Well, if you’re timing is off, you would lose your

entire premium. This is where technicals and
market experience come into play.

Here’s a look at GDX on the hourly chart:

If you notice, there are two places I annotated
the chart. One where the 13 SMA broke above
the 30 SMA, which is a bullish signal. Now, I
watched this rise over the entire time and
missed the move. However, I gured this was
topping out, so I purchased 200 GDX put
options with a strike price of $23.50 expiring on
January 19, 2018 at 28 cents a piece (so $5,600 in
premium).

Now, I noticed my “money pattern” and

believed this thing was going to pull in hard. So
with the stock trading around $23.50, I
purchased at-the-money put options, thinking
it would break lower. I was looking for a quick
drop, and we got just that. The options more
than doubled, and I was able to net $5,800 on
just a $5,600 investment. Not a bad trade! This
all happened within 3 days (that included
weekends too). On just a small move (around
3% or 70 cents in GDX), the options gained
some intrinsic value and went up 29 cents to 57
cents. That’s the power of options. Instead of
making 70 cents and using a lot of capital, I was
able to use just $5,600 to generate 105% in
pro ts, this isn’t really possible in the stock
market. Although some stocks do double, it
doesn’t happen as much as it does in the
options market.

Let’s take a look at another example. Our

community was watching the small caps index
in early January 2018. Our thesis was the
market was strong and small caps were going
to outperform to kick off 2018.
Rather than going out and buying the iShares
Russell 2000 ETF (IWM), which would be
extremely expensive, we went out and bought
calls.

Here’s the email we sent out to the community:

Here’s a look at IWM on the hourly chart:

Now, we bought $154 IWM call options expiring

on January 12, 2018 and were looking for a 100%
gain on these options. Why the $154 strike
price? Well, these were at-the-money and
relatively cheap, and we had a feeling this was
going to spike higher. These calls were only 85
cents, so my risk was $5,100 (and that’s if IWM
fell and I wasn’t able to get out before the
expiration date for a small loss).

Well, sure enough, these doubled to $1.70 in

just two days because the ETF moved up to
$155.

This wasn’t the only trade we had in IWM.

At the time, I gured the market was going to

run much higher even after we doubled up on
previous options trade. There was some
weakness after IWM failed to break about
$155.50. Well, I bought on that weakness.

Here’s a look at my thought process:

Well, we can’t always go for 100%. On this trade

our community settled for 60%.
Now, the iShares 20+ Year Treasury Bond ETF
(TLT) was also on our radar.

Here’s what our thought process was:

Take a look at the hourly chart when we got

into the trade on January 17, 2018:
We gured with rates set to rise and strong
economic outlook, bond prices had a high
probability of falling. To con rm our thesis, we
had the 13 SMA cross below the 30 SMA.
We took that off the table for +130%. Well, how
was that possible? TLT dropped over a point,
that meant the options became more
intrinsically valuable, therefore, the stock price
increased.

Now, I’m not telling you it’ll be easy to make

100% on small moves. But it’s highly possible to
make over 50% on your options trades on small
movements. It’ll take you some time an
experience, but if you have a mentor who has
battle-tested strategies, well you’re able to
atten the learning curve. Things will be much
easier if you have people around you to answer
questions about options. Let’s face it, options
could be dif cult to trade when you start, but
when you have experience people around you,
you’ll pick up on them a lot quicker.

Bonus: How to
Think Like
Smart Money
There are levels to the markets. Managing your
emotions, position sizing, risk-reward ratio,
trading activity, being mindful of key catalyst
events, and knowing key indicators and tools
are all part of the game. Moreover, time
management and being around like-minded
individuals helps. Not only that, understanding
some factors affecting your money and returns
helps.

Now, through my two decades of experience,

I’ve learned:

Scared money doesn’t make money. In fact,

scared money tends to lose money.
 If you don’t have the right risk-reward ratio,
you cannot properly manage your positions.
— You won’t be able to properly size your
positions.
— You also won’t have the right exit
strategy.

Losing traders churn their accounts.

— Smart money focuses on their strengths
and don’t try to follow thousands of stocks.

Successful traders are mindful of key

catalyst events like earnings
announcements.

Great traders don’t spend their time

dabbling in social media and internet
gossip. They spend time talking to
successful traders and study the game –
focusing on things that will make them
money.

Genius traders understand the notion of

compound interest – what Albert Einstein
once called “the eighth wonder of the
world.”

That said, let’s look at some ways to think like

smart money and how you could potentially
multiply your money.

Scared Money Don’t Make

Money
You’ve probably heard someone say, “Trading
options is like gambling, you’re bound to lose
money… it’s right.” Well, they’re wrong about
that. That’s just letting emotions control your
ability to make money. You’re letting someone
else’s fears in uence the way you think.

Of course, when you’re trading or investing,

you’re going to have to risk something…
nothing is guaranteed. That said, you need to
trade options with an amount you’re
comfortable with losing. This will help you ride
out any bumps along the way.

If you know what to look for and focus on risk-

reward ratio and position sizing – which we’ll go
over in detail later – it’s easy to remove the fear
of trading options.

For example, how often have you heard of

people “panic selling their positions?” In other
words, witness a crashing market… seeing their
stocks get decimated… let fear set in… sell the
bottom… only to see the stock rebound.

You see, they’re actually losing money twice.

First, they could’ve used stop losses and the

money pattern to signal when to get out of
their positions.

Second, they give up the potential to make

money. You see, when you can spot
potential shifts in trends, you could actually
purchase put options and make money that
way.

You’ve seen how powerful the money pattern

can be, and we’re going to go over that again,
just so you can solidify how smart money thinks
about trading stocks and options.
Now, scared money tends to be short sighted
and obsess over their positions… they watch
their positions tick by tick… they see their
positions down a little, and get frustrated…
selling their positions way too early. Moreover,
they “need” to see pro ts quick, otherwise
they’ll end up selling for a loss.

If you’ve traded before and were forced out of

your positions for small losses because you
were afraid of losing a large portion of your
capital… there’s a simple solution: trade with
less capital.

For example, let’s say you have a $25K account.

It doesn’t make sense to slam into an options
position with $5K of your capital, right?

This is where managing your risk-reward ratio

and position sizing comes into play.

Focus on Risk-Reward and

Managing Position Sizes
The smart money looks for low-risk, high-
reward trades.

What am I talking about here?

You’ve probably heard of the Massachusetts

Institute of Technology (MIT) blackjack team
before… yes, it’s the one they made the movie
about.

Well, why were they able to beat the casinos?

It boils down to risk-reward.

You see, they would bet a certain amount given
the circumstances, and their payout was
known. In general, they were looking to at least
double their money. In other words, if they bet
$1K, they were looking to get $1K back… if they
hit blackjack, they would get $1,500.

So what’s the idea here?

Find a risk-reward ratio that works for you.

The MIT blackjack team had a 1-2 risk-reward

ratio. In other words, they were willing to risk
say 5% of their capital to make 10%.

Similarly, I have the same risk-reward ratio.

Since I’m shooting for 100%+ winners, I’m
willing to lose 50% of my capital on the ones
that don’t work out. You might be thinking,
“Wow, that seems like a lot! Losing 50% of your
capital… I don’t have the stomach for that.”

That’s ne. You just need to nd what works for

you. When you’re rst starting out to trade
options, it makes sense to aim for smaller
percentage returns and focus on the process
until you understand the trading process. Once
you’re able to do that and show consistent
pro ts, you can start to scale up your position
sizes.

At the end of the day, understanding risk-

reward will make you a better trader.

For example, if you know how much you’re

risking when you get into a trade, chances are
you won’t get stuck holding the back. Let’s look
at one example in which not knowing your risk-
reward ratio would have got you into quite a bit
of trouble.

Check out the hourly chart on Tilray Inc. (TLRY)

below.

Let’s say you bought shares at $130, after the

stock broke out above the previous resistance
(the blue horizontal line). Well, if you didn’t have
a set risk-reward, you might have thought this
stock could keep going…

And it actually did.

Now, if you didn’t have a risk-reward ratio in
mind, you probably would’ve continued to hold
onto this stock because you wouldn’t know
where to take pro ts. Moreover, when you’re in
the heat of the moment, it’s easy to get
euphoric and think the stock could still run
higher.

Well, this is when you run into trouble.

Let’s say you kept holding onto this stock,

despite it more than doubling at one point.
Trust me, I’ve seen this happen so much.

This is what could happen to your position if

you don’t have a set target and stop loss.
Ouch. In just a matter of days, you would’ve
witnessed a massive swing in your pro t and
losses (PnL). Ultimately, what happens here is
traders become deer in headlights… panicking…
and then selling, and probably calling the stock
a “turd”.

Well, what would’ve happened if you had a set

risk-reward ratio of 1-2? In other words, risking
50% and taking pro ts at 100%… and putting a
stop and letting the rest ride after taking the
rst half of the position.

First, you need to understand it takes

experience to spot plays like this. What I mean
by that is placing a bearish bet on the position.
Now, with my trading approach, I break it
down, focus on the sector, market internals,
and macro plays.

For example, after I noticed the strong move in

TLRY, I let Weekly Money Multiplier members
know about my next moves.
Just by having the right risk-reward ratio,
understanding options, and the money pattern.
As well as position sizing, allowed me to snatch
gains like these:
This brings us to our next smart-money tip:
position sizing.

Position Sizing
The difference between smart money and
mom-and-pop traders and investors is the fact
that smart money understands risk. Smart-
money traders didn’t get to where they are by
luck or “sure things.” You see, they actually
understand the way risk works and only bet
with an amount that they’re comfortable with
losing. Consequently, they’re able to properly
size their positions.

Now, I can’t tell you how to size your positions

because it all depends on the account size and
your risk pro le.

Some of my biggest losses when I rst started

trading options, stocks, and exchange-traded
funds (ETFs) have stemmed from improper
position sizing and being overcon dent. In
these trades, I realized I went too big and
thought they were guaranteed money trades.

It turns out, just like in life, nothing is

guaranteed (minus death and taxes).

Think about it like this, when you’re playing

poker and you’re dealt pocket Aces… you can
place good bets… but just because you have the
“strongest” cards off the bat, it doesn’t mean
someone can’t catch a river or turn card and
beat your hand.

If I knew what I knew now in my early days:

staying nimble, not being massive in positions,
or overcon dent on my ideas… I would be
much, much richer. So learn from my mistakes,
and understand that proper position sizing is
key to your trading success.

But how can you do this properly?

Well, it’s simple…

Only trade with the amount of capital you’re

willing to lose. What I like to do is limit my
position sizes to 5% of my portfolio in any one
option trade. Consequently, even if all the
premium gets sucked out, which is unlikely
with my trading style, I would only lose 5% of
my portfolio.

This is what’s known as a xed-dollar (or

percentage in my case) amount position sizing
strategy. When you use this strategy, it actually
helps you become a better trader because it
has a built-in mathematical formula.

If we go back and look at the MIT blackjack

team, they were actually using the Kelly
Criterion. Don’t worry, we won’t get into all the
mathematical details of this. What it all boils
down to is this:

When you make more money, you’re

essentially betting more.

If you’re in a slump, you would bet less.

Consequently, this would protect your
account.

So using this xed-percentage or xed-dollar

could be a way to start off trading. In general, if
you’re rst starting to trade options, you might
consider sizing your positions 1-2% of your
portfolio. For example, using a 2% maximum
position size, if you have a $25K account, you
should size your positions no more than $500.
That way, you’re able to learn the options
trading process, while minimizing the potential
damage to your account.

On the other hand, there is the equal-share or

equal-contract sizing strategy.

What that means is you would only trade a

speci c amount of shares or contracts
depending on your account size. Now, this
position-sizing strategy is what gets a lot of
beginners into trouble.

Why’s that?
Let’s say you set your position sizing to 5
contracts. If you buy 5 call option contracts in a
stock like Apple Inc. (AAPL), it’s a lot different
than buying 5 call option contracts in small-cap
stock. Moreover, having a set contract size
could get you into trouble because it doesn’t
take into account your capital. If you’re in a
slump, you’ll still be trading 5 contracts, which
could destroy your account. Conversely, when
you have a xed-percentage position-sizing
strategy, if you’re in a slump… you would
essentially bet less. If you’re making more
money and building your account, you would
risk more and your potential pro ts would get
bigger.

In general, the smart money understands how

to size positions relative to their personalities
and account sizes. For the most part, the xed-
percentage strategy has worked well for me,
and I’ll continue using that. That said, nd a
position-sizing strategy that works for you and
never get “too big” in relation to your account
size.

Moving on, there’s another smart-money tip

that could help you with your options trading –
limiting the number of trades you take.

Don’t Overtrade
Overtrading – sometimes traders call this
churning – is when you’re excessively trading
your account and getting eaten up by
commissions. When you’re rst starting out to
trade, you need to understand the costs of
trading options.

Depending on your broker, your costs will vary.

For example, here’s a look at TD Ameritrade’s

Options fees:

Think about how much this can eat at your

account. For TD Ameritrade, and many other
brokers out there, you’re paying $6.95 per trade,
and on top of that $0.75 per contract. So let’s
say you trade 10 contracts, you’re spending
$6.95 and then $7.50 on top of that, just to get
in. So round trip, you’re spending $28.90. Now,
think about doing that multiple times a week…
that adds up.

Now, most beginners get too excited and just

start trading options for the heck of it. Maybe
they’re bored, maybe they like the thrill of it…
but for whatever reason, they overtrade and
usually realize too late how excessive trading
could be to their accounts.

The way I like to think of it is by the options

price. You see, I don’t like to trade options
under 50 cents because a bulk of the pro ts
could be eaten up by commissions. Think about
it like this… if you trade options that are 50
cents, a bulk of the pro ts could be eaten up by
commissions. The higher the price, the less
percentage of the trade the commission will be.

You might think 75 cents a contract is

negligible when you’re trading with small
position sizes… but think when you start
trading bigger, like 100 option contracts, you’d
be spending $163.90 round trip.

What happens if you have 10 trades like that,

and you’re break even on those?

Well, you’ve just spent $1,639 just to trade.

But would you prevent overtrading?

Focus on your A+ setups. For me, that’s the

13-30 hourly moving average crossover,
macroeconomic variables, understanding
risk-reward, and having an exit strategy in
place.

Trading a set number of stocks and options.

For example, I focus on a basket of stocks
and ETFs, which allows me to focus on how
they move.
— There are thousands of stocks trading on
the market, and the smart money doesn’t
try to focus on every… it’s just too dif cult to
do. If you just stick with focusing on a
basket of stocks, you can truly understand
what works and doesn’t work for you.
Essentially, you’ll be more effective and
ef cienty when you trade 50 or less stocks.
However, when you’re rst starting out to
trade options, follow around 10 stocks of
companies you like, and build a list of stocks
you’re comfortable with.
— Once you have a list of stocks, watch the
price charts and learn how they move with
the market. When you get a feel for these
stocks and the overall market, you’ll realize
how volatile they could be, as well as their
trading ranges.

— For example, maybe you like Apple Inc.

(AAPL) and are current with its products
and news. Well, you could start by looking
at the hourly chart, with the 13-, 30- and
200-period simple moving average (AAPL).

— Now, compare that with a market index

ETF, like the SPDR S&P 500 Index (SPY) or
PowerShares QQQ Trust (QQQ).
— When you look at the two charts, which
one looks more relatable to AAPL? I think
it’s QQQ. The reason being? QQQ tracks
Nasdaq stocks (it’s often thought of as the
technology ETF), and AAPL is one of its
largest holdings. That said, when you follow
AAPL, you’ll start to realize it trades with
stocks like Microsoft Corp. (MSFT),
Amazon.com Inc (AMZN) and Alphabet Inc.
(GOOGL).

— Plan your trades. When you plan your

trades, it allows you to think about them
thoroughly and should prevent you from
overtrading. For example, since I focus on
 the money pattern (13- and 30-hourly SMA
crossovers) and other macro variables, it’s
unlikely I’ll trade more than 30 stock
options because it allows me to hone in on
setups that work for me.

Now, these are not the be-all and end-all tips

for preventing overtrading. It takes experience
and discipline. That’s why beginner options
traders should focus on the process and trading
small, rather than just slinging options and
thinking they could be overnight millionaires.

Moving on, let’s look at another key smart-

money tip.

Be Mindful of Catalysts
(Earnings)
I’ve seen this time and time again… beginner
traders buy options contracts, not knowing that
there’s an event coming up… only to wake up
and see their entire investment gone. Well, a lot
of beginners trade options not knowing how
catalysts like earnings announcements could
affect their positions.

For example, if you understand implied

volatility, as we explained in an earlier section,
you’ll know that the options market prices in
events. When there are catalyst events like
earnings announcements, traders bid up the
implied volatility. This is due to the fact that
earnings announcements experience wild
swings.
Although earnings season could provide a lot of
opportunities, you need to be mindful of
earnings announcement dates. There are a
plethora of ways to know when these dates:

Company website. Companies typically

include their earnings announcement dates
on their investor relations page.

Brokerage platform. Your platform, whether

it be TD Ameritrade, E*Trade, or Interactive
Brokers, it should include an earnings
calendar.

Nasdaq offers an earnings calendar.

Earnings Whispers offers a comprehensive

earnings calendar.

Weekly Money Multiplier members receive

a comprehensive list of earnings and
economic indicators every Sunday.

Once you know when a company in your stock

list reports earnings, it will help you a great
deal. You see, beginner options traders tend to
lose money on earnings strategy. Beginners will
buy contracts into an announcement, thinking
they’re going to hit a massive winner… only to
realize they risked too much and see a large
portion of their account evaporate.

Heck, some try to buy an at-the-money (ATM)

straddle in an attempt to take advantage of an
increase in implied volatility and hold the
position into the earnings announcement.
However, what they don’t know is the fact that
implied volatility tends to get crushed after the
earnings announcement. The reason being: the
market has nothing to look forward to
anymore. The news is out already.

That said, there’s an added cost of volatility

when you hold options through earnings.

The smart-money tip: Don’t buy options into an

earnings announcement, unless you can really
afford to lose all of the premium.

If and when I trade earnings, I will rarely hold

them into the announcement. But that doesn’t
mean I won’t take a small position – in relation
to my account size – through earnings from
time to time. For the most part, I want to buy
options ahead of an earnings announcement
and sell them prior to the date.

When you buy options ahead and sell them

ahead of an earnings announcement, you can
bene t from the increase in volatility.

Another smart-money tip for earnings

announcements: Try to nd a spot to enter
after the earnings announcement date.

That said, let’s look at some earnings trade

example.

For example, I bought Constellation Brands

(STZ) options into earnings, and alerted Weekly
Money Multiplier clients about my moves.
The idea here was to take advantage of the
increase in implied volatility and stock market
crash. Remember, my risk-reward ratio is 1-2 or
more. In other words, for every 1 unit of risk, I’m
looking to make 2 units in reward. For me, I’m
risking 50% to make 100%+.

Well, in just a few days, I was able to lock in a

120% gain, or over $20K in realized pro ts.
You see, that’s the beauty of options.

Moving on, let’s look at a trade that I actually

held through earnings.

Take a look at the hourly chart on XPO Logistics

(XPO).
This is the power of the 13- and 30-hourly SMA
crossover. The best part here was the fact I had
an exit plan.

You see, XPO had a clear area of resistance. In

other words, the stock had a tough time
breaking a speci c level. Here, I was looking at
the way the stock traded ahead of earnings. It
broke below the green line (the 200-hourly
SMA), and tried to break back above it three
times, but failed. That told me it was time to
look to start looking at a bearish trade.

Generally, I wait for the 13-hourly SMA (the blue

line) to cross below the 30-hourly SMA (the red
line). However, I couldn’t pass up the
opportunity to purchase put options in XPO. I
was anticipating a bearish crossover, and I had
a clear exit in mind. I would have cut the
position loose if it broke above the 200-hourly
SMA. Moreover, I was looking to take some off
of the table at 100%+.

Well, when XPO options nally opened, I was

looking at 380.49% in pro ts.
However, I know when stocks sell off, they tend
to go a lot farther than you would expect. I
wasn’t going to let this trade go against me, so I
had exits in place. I also wanted to let this
winner run.

Holding on for a few more minutes got me an

extra 40%+ in pro ts…

Time to take pro ts?

No.
Just by being patient, using the money pattern,
risk-reward, and understanding how XPO
trades… I was able to make 5 times my money!

Keep in mind, this was a small position for my

account… and it wasn’t anywhere close to my
5% max position size.

Here’s a look at the hourly chart after I took

pro ts.
As you can see, yet again, the 13- and 30-hourly
SMA crossovers are powerful and could be
great tools to help you identify changes in
trends.

The key takeaways:

If you can’t stomach the risk, don’t hold

options through earnings.

Understand your risk-reward ratio.

The 13- and 30-hourly SMA crossovers are

powerful.

Always have an exit in mind. In an earlier

section, we covered exit strategies and how
to use stops.
— For the XPO trade, I had a clear exit and
target in mind. I had a place where I would
have cut my position loose. Once you nd a
stop-loss area, you need to stick to that.

— When you have pro t targets, you should

try to let winners run farther than you’re
comfortable with. Don’t take it the wrong
way though. Take some pro ts off of the
table when you’re sitting in pro ts
(whatever you’re comfortable). However, if
you want to trade like the smart money, you
need to hold a core position and place a
trailing stop.

For example, I like to take half of my

position off of the table when my
position is up 100%. Thereafter, I’ll move
my stop up to say 50% and hold on for
more gains. Therefore, even if the
position comes back in, I’ve already
locked in 100% gains on half of the
 trade… and I would still be locking in
50%.

Don’t feel like you need to sell the entire

position unless the charts or
fundamentals are clearly reversing on
you.

Moving on, this brings us to another trading tip

– spend less time on social media and
participating in Internet gossip.

Spend More Time Studying

the Process
If you own a business, would you do anything
other than try to grow and make more money?

No.

So as traders, why would you spend a bulk of

your time on social media and Internet gossip…
guring out what the Kardashians, Jenners, or
trolls on Stocktwits are doing?

There’s a difference between millionaire traders

and amateurs – the millionaire trader has a
winning mindset. Smart money focuses on
ways to make them more money, they
constantly study about trading, and are always
looking for the next best trade. Moreover,
they’re studying the world in general.

For example Warren Buffett’s key tip for

success is to read 500 pages a day.

I get it… not everyone has the luxury of time to

read 500 pages a day. But think about it like
this, how much time do you spend on social
media and just fooling around on the Internet?

My guess is a few hours a day.

If you are serious about building wealth,

allocate those hours to accumulating
knowledge about trading. You could be reading
books, watching webinars, or chatting with like-
minded individuals immersed in the trading
world.

Think about it like this: if you spend 3 hours a

day on average browsing the web for funny
videos, catching up on news about celebrities
lives, looking at your friends’ most recent
vacations on social media, and what not…
you’re spending 21 hours a week.

If you dedicated 20 hours to learning about the

trading process, different tools for options
trading, and trading strategies, as well as,
reading up on macroeconomics, politics,
company news, and just general knowledge…
you’ll be much better off.

I spend my time always looking for my next

play, and a lot of the times they’re 100%+
winners. That said, let’s look at how time
management browsing the web for useful
information helped me lock in over $25K on just
one trade alone.

Managing My Time Properly Made

Me Over $25K
At the time, I gured the bonds were signaling
a move higher.

You see, traders and investors like to look to the

bond market to hedge their risk. Take a look at
the hourly chart of the iShares 20+ Year
Treasury Bond ETF (TLT) – an exchange-traded
fund (ETF) that holds U.S. Treasury securities
with maturity dates 20 or more years from now.

In late 2018, when volatility was picking up and

the market was selling off, traders and investors
bid up the prices of TLT in an attempt to hedge
their portfolios.
Now, I looked at the chart of SPY and noticed a
disconnect.

Generally, the bond market doesn’t move with

the stock market. This is due to the fact that
when corporations are growing their pro ts
and the economy is expanding, in ation tends
to increase… in turn, it causes bond prices to
fall.

If you look at the hourly chart on TLT and the

way the market rallied… TLT should be at the
low-end of its range… but it wasn’t falling at all.
In fact, it remained strong with the market.
That said, there was a disconnect between
these two markets – potentially signaling a
pullback.

You see, TLT is thought to be a safe haven. In

other words, if it’s risk-off sentiment… the smart
money will look to buy bonds and gold. There’s
one viable reason for this disconnect: smart
money is protecting themselves with bonds.

Moreover, by scouring the web for news and

talking to my millionaire-trader friends, I
realized the market actually saw out ows from
both mutual funds and ETFs. Now, in the
month prior to when I entered the TLT trade,
investors took out nearly $20B from U.S. stock
ETFs, and that was one of the worst monthly
out ows in years.

Not only did investors take money out of stock

ETFs, they used that money to go on the
defensive and purchased low-volatility ETFs.
That signaled to me it was time to start looking
to get into TLT call options.

If you look at this annotated chart, you could

see I clearly identi ed my exits:

In addition to identifying this trade, I was able

to re ect about the trade and what I could do
better next time:
Even though I made money in the trade, there
were some mistakes… and I used my time
wisely to review this trade.

I came to the conclusion that I should’ve taken

some pro ts off the table when TLT reached my
target, instead of going through a swing. It was
a good lesson on sticking to my game plan and
not giving up on a trade because it didn’t do
exactly what I wanted.

Again, spend less time on social media and

listening to the trolls of the web, and focus your
time on learning from successful traders and
the trading process, and conducting your due
diligence.

Moving on, there’s one smart money “secret”

that you should know about: compound
interest.

Smart Money Understands

Compound Interest
Albert Einstein once called compound interest
the “eighth wonder of the world.” He added,
“He who understands it earnings it; he who
doesn’t pays it.” Now, I’m no Einstein, but I am
in MENSA. That said, I agree with Einstein.

It is magical how your returns on returns grow

over time.

What do we mean by compound interest here?

It’s simple when you break it down.

There are a few ways to take advantage of one

of the most beautiful mathematical discoveries:

Reinvest your dividends or earnings

Continue to grow your account every year

Add money to your trading account

Learn different strategies to increase your

returns

Let’s focus on growing your account every

year… it’s essentially the same idea for these
bullets.
For example, let’s say you start trading options
with $25K. Keep in mind this is hypothetical
and we’re not taking trading costs into account.

Assume you make 50% of your capital (which

isn’t far-fetched) the year of your options
trading career. Your account would sit at
$37,500.

Stick with me here.

Let’s say you leave your pro ts in there and the

following year, you make 50% again. Well, your
account would now sit at $56,250.

What happens if you do that for 5 consecutive

years?

Well, your account would be nearly $190,000,

assuming you didn’t take any of your returns
out. Now, you could imagine what would
happen if you put in an extra $5K a year in this
example…

A lot of amateurs don’t protect their pro ts.

Instead, when they’re up money… they’ll just
take it and spend it all in one place. It’s ne to
spend your money on things that will make you
a better trader, but think if you actually just
grow your account every year and protect your
pro ts.

Those who understand compound interest will

take full advantage of it.

But what happens to those who don’t manage

their risk properly and fall into the habit of
gambling – just because they didn’t have a
mentor who has a proven track record making
money in the options market?

Well, think about it like this.

If you go at it alone, don’t know how to manage

your position sizing, trade without a proper risk-
reward ratio, and spend your time on social
media instead of studying the markets, it’s not
crazy to lose 20% of your portfolio quickly.

That’s a big draw down in my opinion. Again,

assume you have a $25K trading account and
you actually lose 25% the rst year. Ouch.

Your account would sit at $18,750.

In order to just get back to $25,000, you would

need to make 33.33% the following year.

What happens if you let your account get to

50% of your initial capital? (I’ve seen this
happen to lazy options traders before.) Well,
you would need to make 100% just to get back
to your initial capital. It’s doable, but you never
want to put yourself in a position in which your
back is against the wall… and you have to dig
yourself out of a massive hole, because that’s
when emotions take over.

That said, avoid big drawdowns (going well

below your initial capital) and try to protect
your pro ts.

Final Thoughts About the

Smart-Money Mindset
Now, I’m not telling you these smart-money
tips will make you an overnight success, but
they should help your trading process. Here are
the takeaways:

Only trade options with capital you could

afford to lose. If you trade with your savings,
chances are you will trade scared… which
would most likely cost you money.

Trade with a risk-reward ratio that you’re

comfortable with. For me, I think of my risk-
reward in percentage terms, rather than
dollar terms. I’m willing to risk 50% to make
100% (or more).

Size your positions properly. I set my

position sizes based on a percentage of my
account size. I never allocate more than 5%
of my account to any one position.

Focus on a basket of stocks, rather than the

entire market.

Know when companies in your stock list are

reporting earnings.

Spend less time on social media and

listening to Internet trolls. Rather, try to
spend more time learning about trading
and the world.

Be mindful of compound interest, and

protect your account and try to grow it
every year.
The Moment
You’ve Been
Waiting For:
Jeff’s Inside
Secret
Traders don’t usually associate options trading
with technical patterns. However, through
experience and constantly testing a key
technical indicator for entries, it’s shown to
potentially generate more than 100% returns.
Now, you might be wondering, “How’s that
possible?” Well, it’s simple, you select speci c
options, look for the money pattern and use
options as a directional play. With some
options, all you need is a small move in the
stock price, and the options could double or
even triple in a few days.

Well, this money pattern is your friend and a

powerful trading tool. First, you’ll need to
understand simple moving average crossovers.
Basically, you can take high-probability trades
by mastering the 13/30 hourly-crossover
pattern. If the 13-hourly simple moving average
(SMA) crosses above or below the 30-hourly
SMA, that alerts you to buy speci c options.
This pattern produces clean signals to trade
with and you’re using options to leverage the
battle-tested signal.

First things rst, let’s take a look at how to set

up your charts.

Indicators and Charts

If you have a brokerage platform you like to use,
it should have simple moving averages. All you
need to do is set the time frame to hourly, and
plot the 13-period, 30-period and 200-period
SMAs.

If you don’t have charting software, that’s ne.

There are plenty of free charting websites out
there, such as TradingView, Investing.com and
Stockcharts.com.

For example, here’s a look at how I set up all my

charts.
Now, if the 13-period SMA crosses above the 30-
period SMA on the hourly, it’s considered a
bullish crossover. Conversely, if the 13-hourly
SMA crosses below the 30-period SMA, it’s
considered bearish. That in mind, we look
to buy calls on a bullish crossover and buy puts
on a bearish crossover. It’s that simple.

Moreover, the 200-hourly SMA can give you a

good idea of the longer term trend and could
act as a support or resistance level.

Next, you need to understand the basics of

support and resistance. Support is an area
where a stock has had a hard time breaking
below. Think of it as a “ oor” and traders are
willing to step in and buy the stock at that
price. Resistance is the exact opposite of
support. Resistance is like a “ceiling” and
traders are either selling their stock or short
selling it at the area. In other words, stocks tend
to bounce off of support areas and fail at
resistance.

For you to really understand the money pattern,

let’s take a look at some real trades. I actually
traded these names and bought options on the
underlying stock, depending on the 13/30
hourly crossover pattern. If you get the hang of
this, it’s not rare for you to double your money,
or more, in just a few days to weeks. Don’t
worry if you don’t know what support and
resistance, or if any of this isn’t clear. Once you
see how these tools work in real trades, it’s not
that dif cult to spot them.

The “Money Pattern”

Examples
Alarm.com Holdings Inc (ALRM) is one perfect
example of how you could multiply your money
in just a short period. Here’s a look at the chart
and what we were looking at.
Here’s a look at ALRM before we bought
options on the stock. You can clearly see the
$39 area was support. In other words, ALRM
had a tough time breaking below this area.
That said, we were looking to buy call options
on ALRM, anticipating a move higher. Now, a
higher probability trade would have been to
wait for the 13-hourly SMA to actually cross
above the 30-hourly SMA. Notice how the 13-
hourly SMA (the blue line) looks like it’s going to
cross above the 30-hourly SMA (the red line).
This pattern was just starting to ash “buy”.

ALRM is a strong stock that just pulled back,

and I wanted to take advantage of it. The stock
still seemed strong, and was holding up fairly
well.

Take a look at the plan above. I bought the call

options expiring on June 15, 2018 on May 9, 2018
at $1.20. I was looking to add more if the calls
pulled back to the $0.80’s. Moreover, I would
stop out if the options fell around $0.60. Now,
this is something you should always do when
you’re trading. Always have a plan and specify
where you would buy more and stop out of
your position.

Here’s a look at what happened with ALRM.

The 13-hourly SMA crossed above the 30-hourly
SMA, as shown in the encircled area. The stock
got a nice pop and had a nice move to the
upside. The options doubled and we were
sitting on some nice pro ts.

That’s right, that small investment turned into

$14K. If you were to do this with stock, it would
be a lot harder to see returns like this. This is
due to the fact that stocks are linear. In other
words, if you’re long 1K shares of a stock and it
moves up $1, you make $1,000. However, with
options, you’re able to generate high returns
with a “small” initial investment because they
provide leverage and are non-linear. If a stock
runs up just a few bucks, the call options
could more than double, depending on the
strike price and expiration date.

The takeaways from this trade are:

ALRM found support around the $39 area

and was a strong stock

The 13-hourly SMA looked to potentially

cross above the 30-hourly SMA

Just buying at-the-money (ATM) call

options was a good play. (You should have a
good understanding of moneyness, but if
you don’t, ATM just means the strike price of
the options is near the stock’s current
price.)

Let’s take a look at another example of the

13/30-hourly SMA crossover in action.

The Global X MSCI Greece ETF (GREK) was

another trade that we used the 13/30-hourly
SMA crossover to get in. This time, puts were
involved. Rather than shorting the exchange-
trade fund (ETF), which could lead to large
unexpected losses, we bought put options.
Remember, put options allow us to express our
bearish opinion on a stock or ETF. Keep in mind,
when you purchase options, the maximum you
could lose is the amount of premium paid.

GREK had a clear long signal, but I missed out

on this one. It had a move from around $9.60 to
more than $10.80. This time, the 13-hourly SMA
was changing direction and looked to
cross below the 30-hourly SMA. So what do we
do here? We buy puts because, again, when
the 13-hourly crosses below the 30-hourly, it
signals the stock price could fall.

I wasn’t going to miss out on this trade after I

saw the ETF run higher after the buy signal.
Now, it’s indicating it could fall.
I bought put options expiring on May 18, 2018
with a strike price of $11 for just 50 cents on
April 20, 2018.

Keep in mind, the ETF made a high of $10.81,

and I would have stopped out if the stock broke
above that level. When you’re wrong, you have
to realize that and just cut your losses quick.
The ETF did try to make a new high above
$10.81, but failed. I was close to stopping out of
my position, but luckily, GREK didn’t make a
new high.

Here’s what happened with the ETF.

When the ETF started pulling in, I gured it was

a good time to start taking pro ts.

Even though I wasn’t up 100% on the options

position, it was prudent to take pro ts when
the puts were up 70%. When you’re up, you
should always look to take pro ts and let the
rest run, and that’s what happened with the
put options on GREK.

Take a look at what happened with the ETF.

The ETF continued to collapse and the options

more than doubled!

Again, this isn’t an unusual trade in the options

market. By holding onto a portion of the
position, the trade generated an
additional $12K. If you traded this ETF, you
would’ve had to short around 10K shares, just to
make the same amount, which would eat up
your buying power.

 
Moving on, let’s look at another options trade
that generated a high return with just a little bit
of capital.

TripAdvisor Inc (TRIP) had an excellent breakout

on strong earnings. However, it’s best not
to chase stocks. Rather, you should wait for it to
consolidate and show you a clear entry.

If you look at the chart above, you can clearly

see the support area is around the $47.60s. The
stock started to trend higher after
consolidating. That in mind, this was a good
time to buy call options since the trend was
rising. When this happens, you can ride the
trend as long as the tide doesn’t change.
If the stock broke below the support area, that
would’ve been an indication to sell the call
options.

However, that didn’t happen. Here’s what the

stock actually did.

The 13-hourly SMA crossed above the 30-hourly

SMA earlier, and TRIP started to trend higher.

In just a matter of days, the options went up

over 200%.
Remember, it’s always good to take pro ts
when the option prices are near your targets.
TRIP continued higher, and the stock was up
20% from when I purchased the calls. This was
a good time to take pro ts.

The options trade returned nearly 500% on a

$6,500 investment. If you wanted to do that
with stock, you would have to buy around 3,000
shares, which would’ve been over $130K just to
make the same amount. Moreover, you would
have to be nearly perfect if you were trading
the stock to get the same pro ts in dollar
terms.
Now, another reason to trade options is due to
the fact that not everyone has the amount of
capital to trade high dollar names. For example,
Chipotle Mexican Grill Inc (CMG) was trading
over $400 and just 100 shares would’ve costed
you over $40K! Here’s a look at a trade where
you could have purchased options on CMG and
more than doubled your money.

Notice the fake out here. The stock gapped up

and the 13-hourly SMA crossed above the 30-
hourly SMA. If you bought the stock there, you
would’ve paid up and potentially got stopped
out. You need to take into account the fakeout
breakout when using this indicator. The stock
broke above resistance, only to pull in. However,
it started to consolidate, and there was no clear
direction yet.

In just a matter of days, CMG found some

support around the $429 area. Thereafter, the
13-hourly SMA clearly crossed above the 30-
hourly SMA and trended higher.

Rather than buying 100 shares of the stock,

which would’ve costed you around $40,000,
you could have purchase 1 call option at $8.85. 1
call option leverages 100 shares, and was only
$8,850 in premium.

Notice how the plan was clearly laid out. There

were spots where I was willing to add and a
price where I would’ve stopped out. This was
another “easy” trade following the hourly-
crossover indicator. CMG never broke below
$425, so I stayed in the trade.
That’s right, the options trade was good for a
216% return! That’s really hard to do when
trading the stock alone.

Final Words
Now, you should have a good idea of how to
use the 13/30-hourly crossover. However, this
takes time and grit to truly understand how to
use the indicators. You’ll need to continue
looking at charts and trying to nd trades.
When you’re rst starting out, it always helps to
have a mentor to guide you along the way,
especially if you’re trying start trading options.
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