Investment Strategy. Options.
Important. This post is NOT investment advice. Investments in Etrade options are NOT FDIC-insured and may lose value all the way to $0. Buying puts/shorting a stock has severe or unlimited risks.
Day trading option has very big leverage and serious potential to profit (or to lose money).
One of my favorite strategies is to buy puts where there is a gap that shows a price decrease. Why?
- Gaps tend to fill the same day.
- You are betting on a price decrease.
- A decrease in price will increase volatility and time value. This means you have to worry a little bit less about your options losing value due to time.
All image credits in this post are to Etrade.com.
Investment Strategy - Filling the Gaps
Image 1- a gap that shows the stock needs to fill it if it drops.
Image 2- we are buying puts that have expiration today through 3 days (depending on your risk preference). The sooner the higher the risk.
Image 3- the gap is filled.
Image 4- shows the percent of gain.
Image 5- the same trading strategy- filling gaps to bet on the stock to go down.
Image 6- bought 100 put options at $1.80; sold 100 put options for $2.30. The same day, within a hour-two.
Image 7- total gain. NOTE, this is a PAPERTRADING account. Learn before you trade with real money.
If you have a loss or a gain on your trading, you will receive a tax form by January 31. The gain or the loss needs to be reported to the IRS.
Investment Strategy - Let Your Options Expire
Image 1- the same approach- filling the gaps.
We are using a different way to earn: we are selling calls vs buying puts. We are NOT betting on a direction. We are betting on the stock staying relatively the same. What does it do?
- It limits our gain to the amount of money we sold the calls for.
- It also may result in a loss, of course, if the stock goes up.
- The loss is “cushioned” due to time value loss. Options lose value due to time. Also, calls are not reacting so aggressively to panics due to stock dropping. It means their value doesn’t go up so drastically, as if you buy puts and the stock drops. Additionally, SPY stock doesn’t tend to go up more than 5-10% in 1 week. So, yes, there is a risk of a loss, but it is “cushioned”.
- We are betting on having the options expire by the end of the week, or lose a lot of value due to time.
Image 2- selling 10 options of calls, expiration the end of the week.
Image 3- the gap is filled.
Image 4- bought calls to "reimburse" the sale. I didn't have to wait the whole week (only waited a couple of hours), because my max gain was already there, waiting to be realized.
Image 5- No gaps now. Just the strategy to have the options expire by the end of the week. Sold calls.
Note: Don’t forget to paper-trade before you start real trading!
Image 6- First selling, then buying back.
Image 7 & 8. As you can see the gap is filled.
Image 9- sold calls, betting on the stock staying relatively the same.
Image 10- the stock dropped a little and started going up, staying relatively the same. Options value dropped around 40%. Time to buy to reimburse the sale. It may drop significantly more by the end of Friday trading.
Image 11- the options value dropped around/ close to 80%. So, this is the percent of your gain once you buy the options back.
The stock needs to go up about $3 for you to start losing money. It is possible, of course. Never put in money you can not afford to lose.