Getting Up to Speed on Options

If you are experienced with options ignore this post...

I will be talking about options quite a bit over the next week or two (WTI future options, UBS calls, and Data Center REIT puts), so for those of you interested, but not sure where to start; I thought I’d put this together.

The Options Alpha free resources were some of the best stuff on options trading I found, and this Options Trading For Beginners course on Youtube is excellent (I’ve zero affiliation and never will have with anything I recommend on this Substack, for that matter).

Regarding what I’ll be talking about on my on-show, 97% will be one of the below strategies due to the known risk.

• Straight calls or puts if volatility is cheap, and I can get long-dated options.

• Bull call spreads, or Bear put spreads, give a knowable risk/reward and reduce the impact of expensive volatility.

• Covered calls my bread and butter of earning income off my equity holdings.

This is a great interactive resource for option strategies.

If you are struggling to remember all the terms, this is a useful option trading encyclopedia

My mate Jordan also wrote a great piece on options trading which I recommend you read. Jordan is living off options trading while based in Buenos Aires, Argentina.

He broke down the actual process of putting on a covered call with screenshots on IB, which is super useful.

My old option trading videos

There is also my old backlog of options trading videos on Youtube, where I breakdown the details of my option strategies.

• Investing: Finding and Executing Income Trades

• Creating Income Today with Options: A Guide

• Taking Advantage of Volatility with Bull Calls

You can read about how to ride a bike, but all the important lessons happen when you get on the bike.

It has always been my advice to spend a week getting familiar with the above material, then give it a go.

Think of the first covered call as tuition. To sell one covered call, you need 100 shares, so select something with a low share price and a liquid option market. I initially recommended the likes of RIG and BTU to Jordan, but both have re-rated significantly since (bigger outlays to start).

I’ve had a hunt and found two companies that should do the trick: Kinross Gold Corporation (KGC) and Harmony Gold Mining Company Limited (HMY).

KGC is trading at $4.59, so 100 shares mean the outlay is $459 + brokerage (this is just a training exercise really have no view on either of these companies other than I guess gold should do ok).

Liquidity isn’t great, but if you are only trying to get filled on a single-option contract, it shouldn’t matter. There are weekly options (only KGC, not HMY) that can speed up the learning process. Write covered calls for KGC at the $5strike and at the $4.50strike to understand getting exercised.

HMY, I can currently write a 4strike Aug18 covered call for 0.23 ($23 premium for $400 outlay = 5.8%)

Once you’ve gone through the process a few times, it becomes a lot less intimidating.

The great thing with options is once you understand the process, there is no difference between 1 contract and 100 contracts.

Cheers,

Ferg

P.S. If you want a book, this was the only options book I ever read, and I remember it being solid (not that I had anything to compare it to).