(Last Updated On: September 19, 2020)

I started to learn options in summer time year 2019. I didnt had a good strategy that time. Was planning off trades from 5 min time frame. Didnt know anything about GREEKS, expirations, what strike to take, where and how to place stops. What broker to use for options. It took me nearly 1 year of hard work to find success in options. My strategy is quite simple now, the simplier, the better.

In start of 2019 I was trading small caps and slowly started to wet my feet in options. I decided to switch because small caps isnt active all year long, except for 2020, lol. Start was quite dramatic, no proper risk management, no strategy, nothing…, complete disaster. As I said, it took me about 1 year to find a good strategy. Until then I was learning the hard way.

In this post I want to show how Im using OPTIONS to trade Stocks. What is important in my perspective. I dont trade any complex option strategies, in time I am sure I gonna expand my knowledge, but now just doing what I am good at.

Some important stuff

US BROKERS

I know a lot of readers of my blog comes from United States. As I am located in United Kingdom myself, I dont know a lot about broker possibilities in US, but gonna list some brokers what I have heard over a time. These are top, professional brokers to trade Options, also other securities, like stocks.

UK / INTERNATIONAL BROKERS

Actually there is not a big choice if you wish to trade US options. I am using Interactive Brokers account and as far I have used it and other platforms, IB is the best choice in UK. And its possible to open account internationally.

Interactive Brokers is professional broker with a lot of possibilities. Review to follow soon.

Recently Interactive Brokers teamed up with Tradestation Global and now you can connect Tradestation Global platform to your IB account. That is good opportunity to get a better charting software, cause charting in IB Traders Workstation asks for improvement. 

GREEKS

In my trading I am not giving a big attention to GREEKS. One I use the most is DELTA, when I swing trade – THETA.

Lets have a look what each of these means.

Information taken from INVESTOPEDIA

DELTA 

Delta represents the rate of change between the option’s price and a $1 change in the underlying asset’s price. In other words, the price sensitivity of the option relative to the underlying. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. For example, assume an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option’s price would theoretically increase by 50 cents.

THETA

Theta represents the rate of change between the option price and time, or time sensitivity – sometimes known as an option’s time decay. Theta indicates the amount an option’s price would decrease as the time to expiration decreases, all else equal. For example, assume an investor is long an option with a theta of -0.50. The option’s price would decrease by 50 cents every day that passes, all else being equal.

GAMMA

Gamma  represents the rate of change between an option’s delta and the underlying asset’s price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option’s delta would increase or decrease by 0.10.

VEGA

Vega represents the rate of change between an option’s value and the underlying asset’s implied volatility. This is the option’s sensitivity to volatility. Vega indicates the amount an option’s price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option’s value is expected to change by 10 cents if the implied volatility changes by 1%.

RHO

Rho represents the rate of change between an option’s value and a 1% change in the interest rate. This measures sensitivity to the interest rate. For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

How to read options chain

Main tool to trade options is Options Chain. Here you can see all data about options. I gonna show you how I have set up my Options Chain layout on Interactive Brokers Traders Workstation.

I have set it up so I got Expiry dates in Tabbed view, easier for me to browse through expiry dates like that. You can change it where is the tabbed view option. At the current setting it is showing all strikes, cause TSLA used to move even more than $100 a day so you need to view more strikes.

  • Calls is on Left side, Puts Right side. Sides can be configurable in settings.
  • Strike price in middle. So you just can click right or left side of strike what you are planning to trade.

Layout columns

  • VOLUME – contracts traded for a day
  • BID/ASK – Bid and ask prices
  • SPRD – spread size. To me very important to know. Usually not taking bigger than 0.3
  • DELTA – strike price change per $1 of stock price change
GOOD TO KNOW
  1. I trade only naked calls and puts, no spread trading or other strategies yet. Willing to learn it in future but just not yet. Buying naked calls or puts means, that I buy calls if I think stock price gonna go up, or puts if stock price is due to go down. Quite simple, similar to buying shares, just a bit more complex.
  2. One option contract cost x 100 it’s price. So if you are buying 1 contract per $3.43 strike price, you need $343 to buy it.
  3. ITM, OTM. In the money, out of the money strikes. The more strike is out of the money, the slower moves it gonna make. Out of money strikes is good if you are planning to hold it for longer time, if you are planning that stock gonna reach strike price after some time. Can buy more contracts as it’s cheaper but also have bigger possibility to expire worthless. In the money strikes is strike prices at or inside of current stock price. These gonna be more expensive but also gonna bring bigger gains, just use your stops accordingly.
  4. Always before placing a trade watch the SPREAD. I have burned myself a loads of times because of this. If you just buying naked calls or puts then spread size is very important. By buying naked calls or puts you always gonna get in at ASK price and SELL at BID price. So it means, if you take trade with huge spread, by selling it straight after you gonna be down the spread amount.
  5. Don’t hold naked calls, puts through earnings. Volatility before earnings makes the option price gain value, but just right after earnings volatility premium comes crashing down, lowering the value of all options. So your options bought for high price before earnings now can end up worthless.
  6. Be patient on opening trades on Mondays, Fridays, after news or Earnings. Usually we start Mondays with some sort of GAP and you shouldn’t open trades straight at open. You need to give a little time for option prices to settle. 5-10 mins usually is fine. Same goes for spreads, after some events, gaps, weekend, earnings you need a little time to let it settle. Fridays usually is expiry days and option price drops. If the stock price closes and opens next day same price, if the option expiry day is close enough option prise not gonna be the same as of previous days close.
  7. Expiration. Plan your trades so they don’t expire worthless and wait for setup and only then execute. Have a look how big are daily movements on underlying stock. If stock is a slow mover, bigger float, you will need longer expiration.
  8. I need to see option chart when I am trading. Its easier to see my stop levels by looking at 5 min stock chart and 5 min option chart. If my stop on stock is just below previous 5 min candle low, same goes for option, with just few cent wiggle room.
  9. Always plan your trades and trade from stock charts. Pick proper option strike based on delta price.
  10. Option DELTA. I use it to manage my trade, so I know I am not loosing more than I should. Delta is showing how much option price gonna change in every 1$ underlying stock price move.

MY STRATEGY

My strategy is quite simple. You are just required to put in some work to find setups and have patience to execute them on time.

Most of time I am using DAILY charts to find and set up my trades. I am trying to find some compression in price and then trade the breakouts. These are usually any type of triangle setups, channels, flags, All Time Highs breaks, CUP and HANDLE.

As I cant afford to trade stocks yet, I am trading Options by watching stock prices.

I am taking all trades off the Interactive Brokers platform. Might be harder to adjust to their charts but after a while you get used to it. If you dont like the charts you can use separate charting. The ones I like is TradingView and TC2000, but there is a lots more. As you can see in pictures I am using TradingView charts to set up, explain and or share the setups. Overall very nice looking charts.

Take a look on some sample setups.

Triangle Setups

Perfect triangle breakout on NIO. 20 EMA acts as a support. You see, when it’s ready to break out, there gonna be a a lot more volume. A lots of people are watching these.

As we know now, DKNG had a huge breakout after this setup. Here I traded first breakout of it, missed the one with the retest. On retest see how  20 EMA is helping it.

Huge breakout, followed by earnings gap. Very often with catalyst these stocks explode higher. Again see how its curling up on 20 EMA

CHANNELS

AMD channel breakout. See channel forming at $ 49-59 area. And some catalysts on the way up

Sometimes its good too look back and see how your setup worked out

FLAGS

Here you can see how I am doing technical analysis.

These are just few setups what I am using, but these are the best ones.

I used to set up my trades from 5 min charts, trade premarket highs or lows, what was complete waste of time. The best trades comes from higher time frames.

Dont trade if you don’t have a setup. If you think you have a setup, please back test it, by testing it on 50 charts. You need to know its actually working before putting your money on line.

This was just an introductory post, just to give a glimpse how I am using options to Trade Stocks.

If you got some questions, please ask them in comments section or DM me on Twitter.