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Stock Options 101

Welcome to Stock Options 101

Our goal is to explain stock options in simple English. As you learn more, you will appreciate how difficult a task it is. People say that investing in stock is like playing checkers, while investing in options is like playing chess. We look forward to teaching you how to play the more complex game of stock options.

Are Stock Options Risky?

Most people would answer that question with a resounding "yes". True, according to some studies, over half of all options that people buy end up being worth absolutely nothing. Nada! Tear up your ticket stub and walk away.

If buying options is such a bad investment, maybe a strategy of selling options to someone else would be a better idea. Let their loss be your gain. But there is a problem here as well - it is called selling a naked option, because that is how you feel for the whole time you have sold that option. You are facing a theoretical unlimited loss. You can lose many more times the amount you invested. At least when you bet on a horse, that is all you lose when he trips on his way to the finish line.

So if buying options is usually not a good idea, and selling them can be worse, it is easy to see why people decide that options are risky no matter what you do. It does not occur to most of them that a strategy of buying an option and simultaneously selling another option to someone else might be an entirely different story.

This website is designed to explain an options strategy that we believe is less risky than buying stock or mutual funds, and potentially a whole lot more profitable. We hope you will read through this material and learn to love the world of options as we do.

Why Trade Stock Options?

Stock options are exchanged for two main reasons: for speculation (adds risk) and for hedging (reduces risk).

Speculation

Stock options are a way of leveraging your money. This is usually done by buying call options. You are able to participate in any upward moves of a stock without having to put up all the money to buy the stock. However, if the stock does not go up in price, the call option buyer may lose 100% of his/her investment. For this reason, options are considered to be risky investments.

Hedging

Stock options can be used to considerably reduce risk. Put options are usually traded for hedging purposes. While hedging reduces risk, it also limits the amounts of gains you can make. Since most stock markets go up over time, and most people invest in stock because they hope prices will rise, there is more interest and activity in call options than there is in put options.

Terry's Tips Stock Options Trading Blog

June 17, 2019

The Trade Desk (TTD) Has Doubled in Value YTD

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies. We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

The Trade Desk (TTD) Has Doubled in Value YTD

TTD has had an impressing rally in the year thus far, and these two analysts think it can continue the upward moment

June 9, 2019

Has the Tide Turned for Five Below Inc (FIVE)?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Has the Tide Turned for Five Below Inc (FIVE)?

Several analysts are looking for more upside in FIVE, here are two of them – Hedge Funds Have Never Been This Bullish On Five Below Inc and I’m Sorry, But the Five Below Stock Selloff Is Overdone.

FIVE fell under a little bit of pressure after reporting earnings in the past week. However, the stock recovered on Friday, resulting in a bullish engulfing candle. This pattern often signals a reversal but what makes it even more significant is that the pattern occurred following a test of important support. Specifically, from the 200-day moving average and the lower bound of a trend channel. A second reversal candlestick is seen on a weekly chart that makes an even strong case that FIVE might turn higher from here.

If you agree there's further upside ahead for FIVE, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.

Buy To Open FIVE 12JUL19 124 Puts (FIVE190712P124)
Sell To Open FIVE 12JUL19 127 Puts (FIVE190712P127) for a credit of $1.33 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when FIVE was trading near $127.50.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $130.50 and your broker would charge a $300 maintenance fee, making your investment $169.50 ($300 – $130.50).  If FIVE closes at any price above $127 on July 12, both options would expire worthless, and your return on the spread would be 77% (878% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

June 4, 2019

Amazon (AMZN) Is Testing a Major Technical Support Area, Is It Time to Buy?

This week we are looking at another of the Investor’s Business Daily (IBD) Top 50 List companies.  We use this list in one of our options portfolios to spot outperforming stocks and place option spreads that take advantage of the momentum.

Terry

Amazon (AMZN) Is Testing a Major Technical Support Area, Is It Time to Buy?

Some analysts did a double take this past week when a Piper Jaffray analyst said AMZN could reach $3000. Granted, his views are over a few years, but the article stands to spark some buying interest.  Take a look at the following article for full details – Can Amazon Really Reach $3000? You Bet.  Also take a look at this article which discusses an upside target from another analyst, and contains a video of Yahoo staff discussing the Piper Jaffray call – Amazon Stock Poised for Continued Growth; Here’s Why.

As indicated by the headline, Amazon is seen testing a significant support area.  Specifically, there are three items that are lined up to create a confluence – The 100-day moving average, 200-day moving average, and a horizontal level.  It’s quite rare to have all three lined up pretty much perfectly at the same price point and probabilities favor that buyers will be there to defend it.

If you agree there's further upside ahead for AMZN, consider this trade which is a bet that the stock will continue to advance over the next five weeks, or at least not decline very much.

Buy To Open AMZN 5JUL19 1770 Puts (AMZN190705P1770)
Sell To Open AMZN 5JUL19 1775 Puts (AMZN190705P1775) for a credit of $2.25 (selling a vertical)

This price was $0.02 less than the mid-point of the option spread when AMZN was trading near $1775.  Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will only be $2.50 per spread (the rate charged by thinkorswim for Terry’s Tips’ subscribers).  Each contract would then yield $222.50 and your broker would charge a $500 maintenance fee, making your investment $277.50 ($500 – $222.50).  If AMZN closes at any price above $1775 on July 5, both options would expire worthless, and your return on the spread would be 80% (913% annualized).

Changes to Investor’s Business Daily (IBD) Top 50 This Week:

We have found that the Investor’s Business Daily Top 50 List has been a reliable source of stocks that are likely to move higher in the short run.  Recent additions to the list might be particularly good choices for this strategy, and deletions might be good indicators for exiting a position that you might already have on that stock.

As with all investments, you should only make option trades with money that you can truly afford to lose.

Happy trading,

Terry

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TD Ameritrade

This Chicago brokerage firm with the unlikely name thinkorswim, Inc. by TD Ameritrade is considered by many to be the best option-friendly broker. For openers, they have extremely good analytic software and their option trading platform is exceptional. Thinkorswim Mobile has been called the best mobile app in the industry. In 2017, TD Ameritrade received 4 stars out of 5 in the annual Barron`s* Best Online Brokers Survey. TD Ameritrade was tops as an online broker for long-term investors and for novices. The company is the only broker that receives the highest 5.0 score for research amenities among all firms participated in the ranking last year.

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TD Ameritrade, Inc. and Terry's Tips are separate, unaffiliated companies and are not responsible for each other’s services and products.

Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options

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