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    Lesson 3 Long Calls and Puts

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    vvpvarun
    This document provides an overview of long call and long put options strategies. It defines the optimal conditions for using each strategy, including when to deploy based on market conditions and optimal technical patterns to look for in the underlying asset. It also provides examples of entering and exiting each trade, including calculating costs, risks, break-even points, and potential profits and losses. Key risks of each strategy are also summarized.

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    Lesson 3 Long Calls and Puts

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    vvpvarun
    499 views19 pages
    This document provides an overview of long call and long put options strategies. It defines the optimal conditions for using each strategy, including when to deploy based on market conditions and optimal technical patterns to look for in the underlying asset. It also provides examples of entering and exiting each trade, including calculating costs, risks, break-even points, and potential profits and losses. Key risks of each strategy are also summarized.

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    This document provides an overview of long call and long put options strategies. It defines the optimal conditions for using each strategy, including when to deploy based on market conditions and optimal technical patterns to look for in the underlying asset. It also provides examples of entering and exiting each trade, including calculating costs, risks, break-even points, and potential profits and losses. Key risks of each strategy are also summarized.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    499 views19 pages

    Lesson 3 Long Calls and Puts

    Uploaded by

    vvpvarun
    This document provides an overview of long call and long put options strategies. It defines the optimal conditions for using each strategy, including when to deploy based on market conditions and optimal technical patterns to look for in the underlying asset. It also provides examples of entering and exiting each trade, including calculating costs, risks, break-even points, and potential profits and losses. Key risks of each strategy are also summarized.

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    Professional Options Trading Course

    Lesson 3: Long Calls and Long Puts

    Adam Khoo Bang Pham Van


    Professional Trader Options Trader & Specialist

    www.piranhaprofits.com
    www.wealthacademyglobal.com
    Strategy 1: Long Call
    When to Deploy:
    • Very Bullish
    • Expect Price to Move Up Sharply
    • Low Implied Volatility (IV Percentile <50%)
    • High Risk, High Reward

    Optimal Technical Pattern


    • High Momentum Stock (Rising Relative Strength), Uptrend Stock Where…
    • Price Breaking Out from Consolidation
    • Price Bouncing off Support on Uptrend

    Long Call
    Resistance Long Call
    Bullish on PG. Current Price $90
    on 24 Dec 2018

    Target $98
    Buy PG Mar 90 Call at $4

    ATM Long Call $90


    81 to
    Expiration
    Long Call
    1 Contract = 100 Shares
    Profit 81
    PG 90 Call At $4 Days to
    Profit at
    Expiration
    Profit or Loss expiration

    +$400

    Unlimited
    return
    Strike Price
    $90
    $0
    Limited Breakeven Stock Price
    Risks $94 $98
    Premium Paid
    -$400 Breakeven = Strike Price + Premium
    = $90 + $4 = $94

    Maximum Risk = Premium Paid Profit At Expiration


    = $4.00 x 100 = $400 = Stock Price - Strike Price -Premium
    =$98- $90- $4 = $4 x 100 = $400
    Exercise – Long a Call
    Trade Setup:
    • There is a Bullish setup on McDonalds (MCD)
    • MCD is trading at $175
    • You want to buy 1 Contract of MCD Mar 175 Call @ $8 premium

    Target $193

    Long Call $175


    Exercise – Long MCD Mar 175 Call at $8
    1. How much does it cost to buy one contract?
    - Premium is ___________________________________
    2. What is Your Maximum Risk?
    - Maximum Risk is ___________________________________
    3. What is your break-even point at Expiration?
    (Strike + Premium)
    - Break-even is _______________________________
    4. If MCD price goes to $193 before expiration date, what is the minimum
    profit would you earn?

    (Stock price – Strike price – Premium)
    - Minimum profit = ____________________________
    5. Draw the Risk to Return Graph showing the maximum risk, breakeven
    at expiration and profit if the stock reached $193 at expiration
    Advantage and Risks of Buying Calls
    Advantages :
    • Limited Risk (Premium paid) and Unlimited Return
    • Control high priced stocks with minimal capital
    • Magnify returns -> High ROI (> 100% returns)

    Risk of Buying Straight Calls


    • Expensive. To Breakeven, Stock Price must move past the Strike
    Price + Premium Paid at Expiration
    • Risk of Loss if Price Does not Make a Large Move Up within the
    Expiration Date
    • You lose money if price goes down or sideways
    • You lose money if price takes too long to move up or does not
    move beyond the strike price + Premium
    • Option loses value as time passes (Time value decay)
    • Option loses value if volatility falls

    7
    Steps to Long a Call
    • Identify a Bullish Trade on a Stock, Index or ETF
    • (See Lesson on Technical Analysis)
    • Ensure IV percentile is below 40%
    • Check the Option Chain
    • Choose Date to Expiration - At least 60 Days is Ideal
    • Choose Strike Price
    • I prefer Delta (0.5-0.6) ATM or 1 Strike ITM
    • Choose Quantity (minimum 1 Contract = 100 Shares)
    • Total Premium should be < 2% of Your Net Liquidation
    • Analyse your Risk- Return Profile
    • Check your potential loss or profit at different prices, 30 days
    to expiration
    • Place a Limit Order at Bid/Ask/Mark When the Market is Open
    • Ensure Bid/Ask Spread of Option not more than $0.40-$0.50
    How to Exit a Long Call
    Scenario 1:
    • Sell the Call Option at a Profit once stock has reached the target price
    • Target price could be at next level of resistance or previous swing high
    • OR…Sell the Call Option once it has doubled it price
    • Sell the option before it reaches 30 days to expiration to avoid fast decay
    • Whichever comes first

    Scenario 2: Rarely Practiced


    - By the expiration, if the stock price goes beyond the strike price (ie. the
    option goes ITM), exercise the call option to convert it into shares (at
    the strike price)
    - Sell the shares at market price (higher than the strike price)
    - Earn the difference as profit
    How to Exit a Long Call
    Scenario 3:
    •Sell the Call Option at a loss when…
    •Option Loses 50% of its value
    •Options reach 30 days to Expiration
    •Stock Price no longer bullish uptrend
    •Downtrend signal
    •Price breaks 1 ATR below support or below Recent Swing Low
    • ….Whichever comes first
    • Note: Rarely do we allow a loss of 100% of the Option premium. We
    normally exit the trade when we lose 50% of the option premium or less
    Strategy 2: Long Put
    When to Deploy:
    • Very Bearish
    • Expect Price to Move down Sharply
    • Low Implied Volatility (IV Percentile <40%)
    • High Risk, High Reward

    Optimal Technical Pattern


    • Low Momentum Stock Where…
    • Price Breaking Down from Consolidation
    • Price Bouncing off Resistance on a downtrend

    Long Put Long Put


    Bearish on EQT. Current Price $20
    on 11 Dec 2018

    Buy EQT Feb 20 Put at $2

    66 to
    Expiration ATM

    Long Put $20

    Target $16
    Risk/Return Profile of Buying
    1 Contract EQT 20 Put At $2
    Profit or Loss
    Profit 66 days
    Profit at to Expiration Maximum Risk = Premium Paid
    Expiration = $2.00 x 100 = $200

    Breakeven = Strike Price -Premium


    = $20-$2 = $18

    +$200

    Strike Price
    $20
    $0
    Limited risk $16 Breakeven Stock Price
    $18
    Premium Paid
    -$200
    Profit at Expiration
    = Strike Price- Stock Price -Premium
    = $20- $16-$2 = $2 x 100 = $200
    Exercise – Long a Put
    Trade Setup:
    • There is a Bearish setup on Facebook (Fb)
    • FB is trading at $145
    • You want to buy 1 Contract of FB Feb 145 Put @ $10 premium

    Long Put $145

    Target $125
    Practice - Buy a Put
    1. How much does it cost to buy one put contract?
    - Premium is ___________________________________
    2. What is Your Maximum Risk?
    - Maximum Risk is ___________________________________
    3. What is your break-even point? (Strike - Premium)
    - Break-even is _______________________________
    4. If FB price drops to $125 before expiration date, what is the
    minimum profit would you earn?

    (Strike price – Stock price – Premium)
    - Minimum profit = ____________________________
    5. Draw the Risk to Return Graph showing the maximum risk,
    breakeven at expiration and profit if the stock reached $125 at
    expiration
    Advantage and Risks of Buying Puts
    Advantages :
    • Limited Risk (Premium paid) and Unlimited Return
    • Control high priced stocks with minimal capital
    • Magnify returns -> High ROI (> 100% returns)

    Risk of Buying Straight Puts


    • Expensive. To Breakeven, Stock Price must move down past the
    Strike Price + Premium Paid, at Expiration
    • Risk of Loss if Price Does not Make a Large Move Down within the
    Expiration Date
    • You lose money if price goes Up or sideways
    • You lose money if price takes too long to move down or does not
    move down enough
    • Option loses value as time passes (Time value decay)
    • Option loses value if volatility falls
    16
    Steps to Long a Put
    • Identify a Bearish Trade on a Stock, Index or ETF
    • (See Lesson on Technical Analysis)
    • Ensure IV percentile is below 40%
    • Check the Option Chain
    • Choose Date to Expiration - At least 60 Days
    • Choose Strike Price
    • I prefer Delta (0.5-0.6) ATM or 1 Strike ITM
    • Choose Quantity (minimum 1 Contract = 100 Shares)
    • Total Premium should be < 2% of Your Net Liquidation
    • Analyse your Risk- Return Profile
    • Check your potential loss or profit at different prices, 30 days
    to expiration Place a Limit Order at Ask/Bid/Mark When the
    Market is Open
    • Ensure Bid/Ask Spread of Option not more than $0.40-$0.50
    How to Exit a Long Put
    Scenario 1:
    • Sell the Put options at a Profit once stock has reached the target price
    • Target price could be at the next level of support or at previous swing low
    • OR… Sell the Put Option once it has doubled in price
    • Sell the option before it reaches 30 days to expiration to avoid fast decay
    • Whichever comes first

    Scenario 2:
    • Sell the Put options at a loss when…
    • Option Loses 50% of its value
    • Options reach 30 days to Expiration
    • Stock Price no longer bearish downtrend
    • Uptrend signal
    • Price goes 1 ATR above resistance or Above Previous Swing High
    • Whichever comes first
    • Note: Rarely do we allow a loss of 100% of the option premium. We normally exit the
    trade when we lose 50% of the Option Premium or less.
    Professional Options Trading Course
    Lesson 3: Long Calls and Long Puts

    Adam Khoo Bang Pham Van


    Professional Trader Options Trader & Specialist

    www.piranhaprofits.com
    www.wealthacademyglobal.com

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