Ultimate Option to Living - Beginner

Hi there! Welcome to Ultimate Option to Living!

This training course was created by Ultimate Option team. It is the successor to the well-known option trader spent years developing and perfecting this new, innovative and pioneering option trading system.

This course will be guide new trading to understand how the option work, solid training module help trader to achieve the better option trading result.

beginner module will cover module 1-3:

Good luck with the course!

 

Module 1. Fundamental & Technical Analysis

About this course

Ultimate Option is the first learning management system (LMS) course in the Option Market that enables you to go live within less than 3 months.

It allows you to easily manage even the most complex processes yourself.

Ultimate Option course is innovative and interactive. It clearly instructs trader on what they need to do and when. Click the "i" icon for more details on option path to be profitable trader

Module 1: Content

The Importance of Homework

1.Know the companies you trade and trade the companies you know.

2.Create a watch list.

3.Trade companies that are financially sound (Fundamental Analysis)

4.Learn to recognize patterns of behavior by other traders (Technical Analysis)

5.Every trade is a guess. Make your trades educated guesses.Fundamental and Technical Analysis

Your Watch List

Your Watch List

1.Start with 10 to 15 companies in at least three different sectors of the market.

2.Learn each companies primary competitors.

3.Know the date of the next earnings report.

4.Find a reliable source of news for each company (http://www.sectorspdr.com/sectorspdr/tools/sector-tracker).

5.Study past performance around major events like earnings and look for patterns.

Your Watch List

Know the Competitors of Your Watch List

Know the Competitors of Your Watch List

1.Is your company strong in its industry?

2.Is the sector strong?

3.Is the sector seasonal?

4.How is your company effected by news and events of its competitors?

sector seasonal

Knowledge Check: which sector will be benefit on Q4 Oct-Dec?

  • XLY - Disney, Starbucks
  • XLV - Johnson & johnson, abbott
  • XLK - Apple, Microsoft
  • XLU - NextEra Energy Inc, Dominion Energy Inc

Earning

Know the Earnings Dates and Earnings History of Your Watch List

1.When was the last earnings?

2.When is the next earnings?

3.What happened last earnings?

4.What is the expectation for the upcoming earnings?

5.How much does this company move on earnings (good or bad)?

Earning

Check Earning

1. go to https://www.tradingview.com/chart

2. enter your stock ticker

3. earning will be [E] icon

other website to check earning:

https://www.investing.com/earnings-calendar

https://www.earningswhispers.com/calendar


Technical Analysis

The Importance of Patterns (Technical Analysis)

1.RSI, 5/20 Day EMA, MACD

2.Support and Resistance

3.Volume

4.Other Technicals

5.Sentiment and Earnings

Technical Analysis

The 3 Big Technical

1.RSI –Relative Strength Index -A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

2.5/20 Day EMA -A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average".

3.MACD –Moving Average Convergence Divergence -A trend-following momentum indicator that shows the relationship between two moving averages of prices.

Technical Analysis

Macd

will be our leading indicator for trend change, 1st thing to check

RSI

above or below 50 might lead for trend change, combine with ema crossover

EMA crossover

last confirmation when 5/20 ema cross up or down.

TA combo indicator

Knowledge Check: which indicator we used most in our system

  • SMA
  • EMA
  • stochastic
  • RSI
  • MACD

knowledge check: confirmation signal order always come with 1..2..3.., which will be correct order?

  • macd crossover
  • RSI above/below 50
  • EMA crossover

Volume & Support Resistance

Support

assume price was fall and been support at certain price level, market not agree with the sell off and start buy back

strong support area come with high volume

Resistance

price was going up higher and higher certain level, market was not accept this expensive price anymore, hence fall back

price might re-test few time on resistance area and might breakout

Other Technicals

Other Technical

there was a lot of Other Technicals indicator and analysis, but too much focus on analysis paralysis will leading to failure

KISS - keep it simple and stupid

Other Technical - heikin ashi

heikin ashi

this will be our prefer candle stick pattern, try to watch the video first and read more from below link


https://www.luckscout.com/what-is-heikin-ashi-and-how-to-trade-with-it/

Other Technicals - chart pattern

Chart Pattern

Learn how to read patterns in your trading trading charts and to understand what they are trying to tell you. Trend patterns and chart patterns such as rectangles, head and shoulders, triangles are the ultimate key to price action. Breakouts, Reversals and Continuation of trends will also help forecast the markets.


read morehttps://optionalpha.com/13-stock-chart-patterns-that-you-cant-afford-to-forget-10585.html

Other Technicals

Elliot Wave

Mr. Elliott showed that a trending market moves in what he calls a 5-3 wave pattern.

The first 5-wave pattern is called impulse waves.

The last 3-wave pattern is called corrective waves.

In this pattern, Waves 1, 3, 5 are motive, meaning they go along with the overall trend, while Waves 2 and 4 are corrective.

Other Technicals

Wolfe Wave

BREAKING DOWN 'Wolfe Wave'

If identified correctly, Wolfe waves can be used to accurately predict the scope (equilibrium price) of the underlying security

To identify Wolfe waves, they must have the following characteristics:

Waves 3-4 must stay within the channel created by 1-2

Wave 1-2 equals waves 3-4 (shows symmetry)

Wave 4 is within the channel created by waves 1-2

There is regular time between all waves

Wave 5 exceeds trendline created by waves 1 and 3 and is the entry point

The estimated price is a price along the trendline created by waves 1 and 4 


Other Technicals

Elliot & Wolfe wave

in short, it was very subjective and hard to apply to today market

in lower time frame might show bullish and higher time frame maybe side ways or bearish

not easy to practice/draw by normal trader, and the accuracy was limited

just learn as FYI. Dont predict, just re-act on what market tell us.

Chart Setup - Trading view

Trading view

1. go to https://www.tradingview.com/chart

2. click on left top button - > Join now

Chart Setup - Trading view

Trading view

1. fill in your email & username 

2. finish up the sign up process

Chart Setup - Trading view

Trading view

1. trading view allow max 3 indicator for free account, that is good enough

2. click on indicator button

Chart Setup - Trading view RSI

Trading view

1. we going to import 3 indicator,

2. key in "RSI"

3. choose the Relative Strength index

Chart Setup - Trading view Macd

Trading view

1. key in "macd"

2. choose the Macd Custom Indicator... by ChrisMoody

Chart Setup - Trading view EMA crossover

Trading view

1. key in "Moving Average Cross"

3. choose the [RS] Moving Average Cross... by Ricardo Santo

Chart Setup - Trading view EMA crossover

edit the indicator by click the Gear icon

change the input as screenshot

go to style

follow the color setting

Closing

Closing

from here we will end the module 1, take 5min to re-call what you learn in module 1.

Closing -Summary

Learn about What to trade

we focus on stock watch list base on 14 sector etf,

only pick the top 10 company

understand each sector & seasonal factor.

Technical Analysis

focus on KISS method

RSI

EMA 5/20

MACD

Volume & support resistance

both 2 factors might caused price change direction 

Module 2. option definition

Module 2: Content

You will learn in module 2

1. stock vs option

2. The Definition of an Option

3. The 4 options

4. Option Chains

5. Earning - range and trending chart

stock vs option

Stocks vs. Options

1. Stocks are real assets. They are tangible.

2. Options are simply contracts to buy or sell stocks.

3. Options were designed for protection.

4. Options are most often used for leverage.

The Definition of an Option

The Definition of an Option

1.Options – Contract between a buyer and seller of an underlying security that obligates the seller to either buy or sell a stock at  a certain price within a certain time frame.  The buyer of the option contract has the right to buy or sell the underlying stock during the same period of time.

2.What Does Options Contract Mean? One options contract represents one hundred shares (100) in the underlying stock. The quoted price of an option is per share.

The Definition of an Option

Long Options vs. Short Options

Long = Buy = Debit = Rights

Short = Sell = Credit = Obligation

The Definition of an Option

Strike Price - What Does Strike Price Mean?

The price at which a specific derivative contract can be exercised. Strike prices are mostly used to describe stock and index options, in which strike prices are fixed in the contract. For call options, the strike price is where the security can be bought (up to the expiration date), while for put options the strike price is the price at which shares can be sold

The difference between the underlying security's current market price and the option's strike price represents the amount of profit per share gained upon the exercise or the sale of the option. This is true for options that are in the money; the maximum amount that can be lost is the premium paid. 

Also known as the "exercise price".

The Definition of an Option

Knowledge Check: in option world, margin trader allow to ...

  • buy option
  • sell option

Knowledge check: if you short sell option, you obligation to buy/sell your stock at the contract strike price anytime before expire. True or False

  • True. buyer might exercise the option and i have to buy / sell the stock
  • false. i m free from assignment of stock.

The 4 option

The 4 option - cheat sheet 

Options_Definedx

The 4 option -Long Call -Bullish

The 4 option -Long Put -Bearish

The 4 option -Short Call -Bearish

The 4 option -Short Put -Bullish

Knowledge Check: if you think the stock price will go up [Bullish], you will ....?

  • Long Call
  • Long Put

Option Chain

Option Chain

each [i] icon will show the basic definition of option chain

get familiar with:

1. strike price

2. DTE (date to expire)

3. ITM/OTM 

Option Chain - ATM/OTM/ITM

Option Chain - Bid/Ask/Mid Price

Bid Price - What Does Bid Price Mean?

The price a buyer is willing to pay for a security which you are trying to sell.  It is the credit you will take in on a short option.

Ask Price – What Does Ask Price Mean?

The price a seller is willing to accept for a security which you are trying to buy.  It is the debit you will pay on a long option.

Option Chain - Intrinsic/Extrinsic Value

Intrinsic Value

For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the respective difference value is negative, the intrinsic value is given as zero.

Extrinsic Value

The difference between an option's price and the intrinsic value.

also refer to time/theta value

Option Chain - Delta/Vega/P.ITM

Vega

Options tend to be more expensive when volatility is higher. Thus, whenever volatility goes up, the price of the option goes up and when volatility drops, the price of the option will also fall.

Delta

The option's delta is the rate of change of the price of the option with respect to its underlying security's price. The delta of an option ranges in value from 0 to 1 for calls (0 to -1 for puts) and reflects the increase or decrease in the price of the option in response to a 1 point movement of the underlying asset price.

Prob.ITM

the probability the underlying expires below a put’s strike price or above a call’s strike price. We can derive an options probability ITM by subtracting its probability OTM from 100%. 

Knowledge Check: Drag and drop the terms to their correct location in the picture

  • Option DTE
  • Option Strike price
  • stock close price

Knowledge Check: which option greek definition below is correct? check all the possible answer.

  • Delta - stock move $1, my option strike will increase or decrease value base on delta
  • theta - each day my option strike will drop value base on theta
  • Intrinsic - also refer as time value

Earning

Earnings

We only know three things about any company we trade:

1. We don’t know anything at all about what direction the price of the stock will go.

2. We do know when the next earnings event is.

3. We know that earnings events are the most likely thing to change the direction of a stock.

Earning Report

A Typical Earnings Report

1. Report on Total Sales

2. Report on Profit

3. Earnings Per Share

4. Revenue Per Share

5. Guidance Statement (Outlook & future), conference call

Earning - Analysts and Analysts Expectations

What Does Analyst Expectation Mean?

A report issued by an individual analyst, investment bank or financialservices company indicating how a particular company's stock willperform in the coming quarter. 

Analysts provide guidance as to how they expect a company to perform. 

This is typically a range of values that a particular variable is expected to fall between.

 If a stock performs better than what analysts expected, it is considered to have "beat expectations" or delivered stronger-than-expected results.

Earning - Sideway & trending

before earning 20 days

market might start trending, look for green zone,

ema 5/20 start show confirmation signal

after earning 10 days

market start show side way, look for blue zone.

entering blue zone, RSI start go flat

Closing

Closing

from here we will end the module 2, take 5min to re-call what you learn in module 2.

Closing -Summary

Learn about stock vs option

option definition

option contract

option strike price

Option Greeks

4 options, long call, long put, short call, short put

option chain

option Greeks: delta, theta, vega, 


Earning

earning report

analysts expectation

earning before & after 

Module 3. risk & portfolio management

Module 3: Content

You will learn in module 3

1. Risk

2. Type of Risk

3. stock assignment

4. MonteCarlo Simulation

5. portfolio management


benefit and risk

Why option???

You may be wondering - why would an investor want to get involved with complicated options, when they could just go out and buy or sell the underlying equity(stock)? There are a number of reasons such as:

  • An investor can profit on changes in an equity’s market price without ever having to actually put up the money to buy the equity. The premium to buy an option is a fraction of the cost of buying the equity outright.
  • When an investor buys options instead of an equity, the investor stands to earn more per dollar invested - options have "leverage."
  • Except in the case of selling uncovered calls or puts, risk is limited. In buying options, risk is limited to the premium paid for the option - no matter how much the actual stock price moves adversely in relation to the strike price.

Type of Risk

Type of Risk

margin account risk

max loss risk

vega risk

delta risk

gamma risk

theta risk

stock assignment risk

Type of Risk - Margin account

Margin account

why margin account - we need margin account to short sell option [we dont own the stock, but broker can borrow stock to you first], unless you only want to buy option you can go for cash account.

what will be the risk of holding margin account:

  • total burn account, if you not control the margin
  • brokers can force the sale of securities in your account
  • you can lose more funds than you deposit in the margin account
  • when market was panic, broker can increase its “house” maintenance margin requirement at any time and is not required to provide you advance written notice
  • You are not entitled to an extension of time on a margin call [to secure your position during market panic, you need to fund in extra $]

Type of Risk - max loss risk

Max loss risk

Before you open new position, think about exit plan first

if you dont have trading plan before you enter new trade, just skip it

good question before open any trade:

  • what will be my max loss? < 4% of total account portfolio
  • can we survive the max loss or max risk if market give us the worst case scenario
  • do you have adjustment plan if price against me?
  • when you going to take profit? where?
  • if stock has earning in next 20 days, what will be my plan?
  • if stock been upgrade or downgrade by analyst, what will be my plan next day gap up/down
  • ready/standby fund for trade adjustment if price against me?
  • my overall portfolio was balance[beta weight with spy]? will you open too much bullish trade ?

Knowledge Check: What type of account for option seller? mean you can short sell option even without own the stock

  • cash account
  • margin account

Knowledge Check: Which answer best describes the purpose of the trading plan before open any new trade?

  • It gives you a overview of the trade, max lose, checklist and plan to exit
  • It is the first step to become rich

Type of Risk - vega risk

Vega risk

Vega is the risk to volatility risk, or the change in option price per unit (percent) change in volatility.  If an option has a 2 vega and the vol. Goes up 1%, the option value increases by $2. 

Out of the money options have the largest vega as a percent of option value. 

Long-term options also have the highest vegas. 

At the money options have fairly stable vega’s with respect to changes in volatility.


Vega crush: best example will be before earning, Vega will increase to max, the same to 3,6,9 month

vega increase due to demand of option before earning. people look for protection of their stock 

vega crush after earning when everything was settle down.

Type of Risk - Delta risk

Delta risk

Delta is the change in option price per unit (point) change in the underlying price and thus represents the directional risk. Delta is interpreted as the hedge ratio, or alternatively the equivalent position in the underlying security: a 4000 delta position is equivalent to long 4000 shares.

The delta can represent the probability an option has at finishing in the money (a 40-delta option has a 40% chance of finishing in the money). At-the-money options always have a 50 delta. In-the-money options have a delta greater than 50, and out-of-the-money options less than 50. Increasing volatility or time to expiration causes deltas to tend to 50.

if you have call option, and the stock price going down rapidly, 

now you have delta not in you favor, the more price fall, the more delta value will decrease

re-act if you have confirmation signal(ema crossover) before your delta rapidly drop.

Type of Risk - Delta risk

Delta risk

  • Calls have positive Deltas (as generated by model)
    • Positive correlation to underlying stock price change
    • Stock price ↑ then call Delta tends to go up ↑
    • Stock price ↓ then call Delta tends to go ↓
    • Call Deltas range from 0 to +1.00
  • Puts have negative Deltas (as generated by model)
    • Negative correlation to underlying stock price change
    • Stock price ↑ then put Delta tends to go ↓
    • Stock price ↓ then put Delta tends to go ↑
    • Put Deltas range from 0 to –1.00

Type of Risk - Gamma risk

Gamma risk

  • Gamma is the change in delta per unit (point) change in the underlying security.  The gamma shows how fast the delta will move if the underlying security moves a point. This is an important value to watch, since it tells you how much greater your directional risk increases as the underlying moves. Options at the money have the largest gammas and those close to expiration also have the largest gammas. Lowering volatility raises the gamma.
  • in short, gamma risk appear when close to expired week, the option price was highly affected by gamma + delta [like combo] when price move up or down during last week of option expire.
  • advise to close option early to avoid last week gamma risk.

Type of Risk - Theta risk

Theta risk

  • Theta is the change in option price per unit (day) change in time. Also known as time decay risk, it represents how much value an option loses as time passes. Long-term options decay at a slower rate than near-term options.  The theta is opposite in sign to the gamma and can represent the trade-off between time passing and the underlying security moving. Options near expiration have the highest theta. At the money options also have the greatest theta. As volatility is increased, the theta will also increase.
  • option melt down value everyday until expired date, last day if out of money it become 0.

Stock Assignment

Stock Assignment risk

  • why buyer will assign me? the buyer will assign when there is not much time left or the strike price was too deep ITM, 
    • or at last expire day, your short option strike fall ITM (yellow zone)
    • if you short sell option, no matter covered call, debit spread, credit spread, naked put/call there will chances of assignment
  • what is benefit if i got assign? when you short sell option, you receive the credit [$$]. you no need to folk out money to buy back the option even it was deep ITM.
  • what if my account dont have enough money to hold it? broken will lend you stock for 1 day, you need to sell/ buy back/ close it end of day[market close].
    • or you need to fund in extra margin if you want to hold the stock.
  • assignment fees? any charges? broker need to charge you fee when you been assign, $15 per trip for tos
  • what should do if i got assign? your trading plan should help you here. you can covert this to cover call or collar spread if you plan to own stock
  • if you dont want to hold stock, you can exercise your long option[ if you have], 
    • or you close both option and stock [take the max lose]

Knowledge Check: Which answer best describes the option risk might involve?

  • vega risk
  • delta risk
  • max loss risk
  • no stock assignment

Knowledge Check: match the term with the best description

  • Theta risk
    everyday you holding option, your option value will reduce everyday regardless of price move or not
  • Vega risk
    if you buy option before earning, high volatility, after earning even price move to your direction you still lose money due to volatility drop
  • Gamma risk
    when option close to expire, slight/small price movement will be signification/big move on your option value

MonteCarlo Simulation

Monte Carlo 

below small simulation game before we move into portfolio section, download the file.

enter the value of yellow zone, and press F9 key to run the simulation

Capital: total account money

risk: everytime when you enter trade, how much you will to risk from total capital(0.04 = 4%)

winning prob: what will be you winning rate every time you place a trade

risk/reward: if you will to lose 100, how much you looking for return(1 = if i risk 100, i going to make 100)

MonteCarlo Simulation

MonteCarlo Simulation

account might burn

my risk was 20%, my risk/reward ratio (RRR) was 1

when you increase the risk, 4% to 20%, although you been making 25k few times but still end up with below 2k

it was worst when you increase your risk each time.

MonteCarlo Simulation

account stay flat

my risk was 4%, my risk/reward ratio (RRR) was 1

when you stay the risk, 4%, after many trade your account might stay flat


but this is hard to burn your account

account double

my risk was 4%, my risk/reward ratio (RRR) was 1

when you try to adjust/repair each time you are wrong, exit at break even


it has chances to double up you account 

Knowledge Check: which one factor will help your portfolio grow in healthy way?

  • low risk %
  • high winning rate %

Portfolio

What is a 'Portfolio Investment'

Portfolio investments can span a wide range of asset classes such as stocks, government bonds, corporate bonds, Treasury bills, real estate investment trusts (REITs), exchange-traded funds (ETFs), mutual funds and certificates of deposit. Portfolio investments can also include options, derivatives such as warrants and futures, and physical investments such as commodities, real estate, land and timber.


in this course we only focus on option and stock, and will diversify the portfolio to different sector.

Portfolio

 Portfolio Attribute

  • Low Risk - every trade involve risk, every time we place new trade we not sure this trade will win or lose, but if we limit our risk on each trade it will help to grow our portfolio
  • Aggressive Growth - after sustain with low risk,  look for different option strategy to diversify our risk and same time will growth our portfolio 
  • Cash Flow - we need to allocate cash to run the portfolio, stay in healthy balance cash will help when we spot new opportunity or need margin to adjust your trade that went into trouble
  • Re-balance - always beta weight our overall portfolio with SPY, balance in different sector

Portfolio - low risk

Low Risk Portfolio 

each trade we suggest only using 4% max per trade

max 5 trade any given time, don over trade

for option strategy suggest to use up to 20-25% [this will cover in module 4]

for stock collar spread suggest use up to 40-50% [this will cover in module 5]

for free margin, we need to maintain at least 30% free cash


Portfolio - low risk

Low Risk Portfolio - tool we use

  • cash flow generator 
    • calendar spread after earning
    • debit spread before earning
  • collar vs exploding collar
    • collar would be preferred for a larger portfolio capable of holding 300 plus shares
    • exploding collar can be used for smaller portfolio, and with fewer, smaller capped stocks

Portfolio - Aggressive Growth

Aggressive Growth Portfolio 

  • using option spread to generate cash flow
  • use the cash flow buy stock that in growth sector
  • convert stock in to collar spread
  • diversify into different sector
  • https://www.investopedia.com/articles/basics/13/portfolio-growth-strategies.asp

Portfolio - Cash Flow

Cash Flow Portfolio 

  • if you start you account with 5k, never using 100% of total amount of portfolio
  • allocate free margin (30%), option margin (25%), stock margin (45%)
  • before place any new trade, always check the netliq (net liquidity)
  • free cash flow will help you in spot new opportunity and adjustment.

Portfolio - Re-Balance

Re-Balance Portfolio 

  • always diversify you portfolio into different sector
  • beta weight with spy before you place new trade, check you position was too many bullish or bearish trade
  • if too much bullish position, any market crash you will in trouble.
  • https://www.dough.com/blog/beta-weighted-portfolio
  • https://www.tastytrade.com/tt/learn/beta-weight

Closing

Closing

from here we will end the module 3, take 5min to re-call what you learn in module 3.

Closing -Summary

Learn about Risk

all risk we cover is essential to survive 

understand risk will help you grow your portfolio

Stock Assignment

happen when last day expire, strike price ITM or last week of expire too deep ITM.

dont panic, check what is your available option after assignment

portfolio

understand your portfolio, keep balance, diversity and stay in low risk mode.