5 Favorite Options Setups.pdf

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My Five Favorite Option Trades

John F. Carter

TradeTheMarkets.com

SimplerOptions.com


Options

• There are hundreds of books written about

options.

• There are hundreds of strategies a trader can do

with options.

• For my style of trading, there are 5 basic

strategies that I like to follow.

• Let’s Dive In . . .


Strategy #1

Directional Swings

Trades That Last a Few Weeks


Buying Options

• Main thing is to have a setup on the underlying stock.

• Squeeze on the daily chart works really well.

• Think of it this way – you are just using the option as a CHEAPER WAY to buy the stock.

• $16 for an option is a lot cheaper than $160 for the stock.

• 1 option = 100 shares of stock. $16 option = $1600 out of pocket cost.

• Key is buying IN THE MONEY strike prices



Buying Options

• Squeeze fires off long on MA at $170

• July options at this point only have 1 week

left.

• TWO OPTIONS:

• Buy DITM July Options – like $155

• And if trade is still valid at expiration sell

these options and then buy the Aug 155s.

• Or just start off with the Aug 155s.


Buying Options

• Exit strategy same as stock – I’m looking

to scale out.

• Stop on option is 50% of the value.

• $16 option, then $8 stop.

• First target is 50%, for 1/3. So $24.

• Second target is 100% for 1/3, $32.

• Last hold on for squeeze loss of

momentum, TTM Trend change etc.



Buying Options

• 1 option at $17 = $1700 cost

• 1 option at $55 = $5500 in proceeds

• Proceeds $3800 per contract



Strategy #2

Directional Swings

Trades That Last a Few Days


GS Call Option Trade Setup

• This is one of my favorite trade setups.

• It generally lasts 1 to 2 days.

• The signal is taken off the hourly chart –

but it has to be in alignment with the daily

chart.

• BONUS – if its also in alignment with the

weekly chart.






GS Call Option Trade Setup

• I want to go in the money on the calls with

an option delta of at least (or very close to)

70.

• In this case, the Nov 155 calls had a delta

of 68, which is close enough to 70.



Stop & Target?

• Stop is just below support at 156.00.

• Target – Squeezes on average last about

6 bars.

• If the stock moves 1.75%, I look to start

scaling out of the position.

• GS at $161. 1.75% move = $2.82

• On $2.82 stock move, Delta 70 option

move = $1.97



Strategy #3

Directional Day Trades

Trades That Last a Few Hours


Criteria for Directional Day Trades

• There is an established swing high or low

on the stock that has been established.

• We are approaching that swing high or

low.

• There is a squeeze setting up on a 15

minute chart.

• Target is a 1.272% extension of that swing



Mastercard (MA) Example

SETUP:

Stock jumped up after earnings and

then pulled back.






Strategy #4

Selling Credit Spreads

on Weekly Options


Criteria for Selling

Weekly Credit Spreads

• Actively traded stock that, of course,

trades weekly options. AMZN is the

example we will use today.

• Stock is at a key extended support or

resistance level.

• Reversion Bands are good levels for this.

• No squeeze setting up.




Weekly Credit Spreads

• Looking to sell the at the money strike,

and but the next one out for protection.

• This generates a “credit”

• Ideally able to sell for half the strike. So

on a stock with $5.00 strikes, then sell for

$2.50.

• More likely it will be lower than that. $1.50

and above is “ok”





Weekly Credit Spreads • Exit? In a perfect world the spread expires

worthless and you collect the whole premium.

• In the real world, once you make about 70% of your profit target, it’s a good idea to just get out.

• So if you sell a spread for $2.00 (so your max profit is $2.00), and it gets to the point where the value is $0.60 cents – it’s a good idea to take the money and run.

• At $0.60, there isn’t much more upside to your profit – but there is $4.40 worth of downside!

• GET OUT!


Strategy #5

Implied Volatility (IV) Crush

On Bad News


Criteria for BNIVC

(Bad News Implied Volatility Crush)

• Looking for stocks that are gapping down on bad news. Earnings or some other sort of bad news.

• Typically the bulk of this down move is already priced in “pre-market” before the cash session opens.

• Panic at the open – Implied Volatility explodes for the first 5 to 10 minutes of trading.




Documents

5 Favorite Options Setups.pdf