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Riskreward

Why Options Are DangerousIn today’s article, I want to answer a few questions about why options can be dangerous. What are the risks of trading options? Are puts or calls riskier? Why is option selling risky? We’ll also talk about the safest options trading strategy. So let’s get started and let’s jump right in. Buying Calls & Puts First of all, you need to understand that there are different types of options. There are call options and put options. So calls versus puts, which one is riskier? Some people think that trading puts are riskier, while some people might think that trading calls are riskier, but this is not the case at all. The key question is that you should ask yourself is, are you BUYING options or are you SELLING options? There’s a huge difference between buying and selling, as well as different levels of risk involved between the two. So when you’re buying options, the maximum amount you can lose is the premium you paid. So let talk about a very specific example. Let’s look at a trade I took with TSLA and let’s say that we want to trade a call. So let’s maybe say a 700 call and right now the price is $700. What is the maximum that you can lose? Let’s say that we are bullish on Tesla and we believe that Tesla might go above $750, and we want to buy a call with a strike price of 750. So a 750 strike call expiring next week costs around $1.70 (at the time of writing this article on March 19th, 2021). Now options come in 100 packs, so this means that you’re paying $170 for this option. So in this case, if TSLA does not go above 170 by next Friday, you would lose the $170. So this is very easy, the maximum amount that you can lose is the premium that you paid. On the other hand, you are bearish on Tesla. You believe that it might actually go down to $560 so you’re thinking about a put option with a strike price of 560 that expires next week. A put with a 560 strike price expiring next week is $4.50 so a little bit more, pricier here. Again, since options come in 100 packs, this means that your total risk here is $450 per option traded. It’s the same risk here because it doesn’t really matter whether you’re buying calls or you’re buying puts. The maximum amount that you can lose is the premium. Now, on the other hand, there are SELLING options, and when you’re selling options, this is when your risk is almost unlimited. When you’re buying options, and let’s just say you want to buy a call, this means that you want the stock to go up. So going back to our TSLA example, if we would buy a call 750, that it is expiring next week for $170, if Tesla goes above 750, we make money. If Tesla goes below 750 or stays at 750, we lose the premium or $170. So not really a big deal. Now, how much money could we make on this one? Well, if we buy a call for 750, we have the right to buy 100 shares of Tesla for $750. So let’s say that Tesla closes at $800. So in this case, our profit is $800, minus the $750 that we bought Tesla for, which is $50 per share. Since options come in 100 packs, this means that we would make $5,000 in profits. This is why people love trading options. Because if you think about it, we’re risking $170 and can potentially make $5,000 if Tesla would go up to $800. Now, let’s quickly do an example here for buying a put. So buying a put and in this case, you want the stock to go down. Using our example for TSLA again, we will buy a put with the strike price of 560 for $4.50. So our total risk here is $450. So now if Tesla goes below $560, the strike price here, we make money. Now, if Tesla stays above 560, we lose the premium. But that is the maximum that we can lose. So even if Tesla rallies right now to 800, we would only lose $450. So that is pretty cool, right? Let’s say Tesla goes to $500. So we were able to sell the shares for $560, now we can buy it back for 500. So this would be $60 per share. Since one option equals 100 shares, it means that we would make $6,000 in profits. So as you can see, with options, you can benefit from a stock going up, as well as a stock going down, and the really cool thing is that you can risk a little to make a whole lot. Now, here’s the challenge with this. If you buy a call, you only make money if TSLA is really going above $750. So if it stays below, that’s not enough for the buyer of an option to make money. If Tesla goes sideways well, same here, right? Then you not only won’t benefit from it, but you also lose the premium. If Tesla goes down, you also lose the premium. So if you think about it, there are actually three ways how you can lose money and only one way how you can make money, and this is if Tesla really shoots up. This is why many people, including myself, are interested in SELLING options. Selling Calls & Puts What are the pros of selling options? The first pro is that you don’t need to be right about the direction of a stock to make money. Here is an example I’m in right now (at the time of this writing on March 19th, 2021) with LL Lumber Liquidators. So right here, Lumber Liquidators, I actually sold a put with a strike price of 22. When does the buyer of a put make money? Well, the buyer of a put makes money if it goes below $22. For me, the seller of a put, I make money if Lumber Liquidators goes up, it goes sideways, or it goes down. It can go down all the way to 22. This is a drop of a little over 10%. So if you think about it, if LL can go down by 10% and I am still making money and this is why again, this is why selling options is so fascinating. So you don’t need to be right about the direction and you can keep the premium. So here’s the deal, the premium that you receive is exactly what the buyer is giving you. So the premium is rather small, right? So the cons are the premium is rather small, and this is where your risk is almost unlimited. So back to our example here with Lumber Liquidators. I sold a 45 of the 22 puts, and I received $0.20 per share, so $20 per put option. $20 multiplied by the 45 options means that I’m making $900. So this is the premium that I receive. However, here’s the deal. The buyer of a put has the right to sell 100 shares at the strike price. So what does it mean for me? So the seller, which is me, has to buy LL at $22, and again, this is where one option means 100 shares. So for me here, since I’m having 45 options, this means that I would have to buy 4,500 shares. Because this is where we get to the risks of this strategy here. Now, again, Lumber Liquidators can drop more than 10% and I will be just fine. But what happens if it drops below, let’s say to $20 from $22. OK? So I would have to buy Lumber Liquidators at $22, and therefore I would lose $2 per share. Here, in this case, I have 4,500 shares times $2, this means that I would lose $9,000. Now you get the idea of why selling options is fairly risky, because I’m receiving $900, but if it only goes down by $2, I’m already losing $9,000. But what if it gets worse? What if LL drops to, let’s say, $15, right? Again, I have to buy LL at 22, so I would lose $22 minus $15, $7 per share. Since I have 4,500 shares, time $7, this is where I would lose $31,500. OK. So as you can see, it is super risky if you don’t know what you’re doing. Now, I have been doing this for a long time here, selling premium, and I’ve been doing really, really well. Analyzing Risk With RIDE Let talk about a particular trade that I made with RIDE . I sold the 21.50 put and RIDE dropped. I sold 47 contracts, 47 contracts, which means that I own 4,700 shares at a price of 21.50. RIDE right now (March 19th, 2021) is trading at $13.50. So right now, RIDE is at 13.50. So this means that I lose (21.50, minus 13.50) $8. So I’m losing $8 per share and I’m having 4,700 shares, bringing me down to a total of $37,600. Now, let’s talk about it. How much money did I make selling premium on RIDE? Just on RIDE here. I sold the puts initially, then I sold calls, I sold calls, and I just sold a few more puts. In total on RIDE, thus far, I collected $4,935 in premium, but I also have an unrealized loss of $37,600. So it’s super important that you understand that there is risk involved. Now I know my way out of this. I know how I can trade my way out of this if needed. So I collected $4,900, but right now I’m down that amount. However, this means that my net loss is if I would close it right now, which I’m not intending to do, would be $37,000 minus the $4,935, let’s just say $5,000 to make the math easy, is $32,600. That would be a real loss. This is why it’s super important that you understand the risks when you’re trading options. Safest Options Trading Strategy Now, one of the questions that I receive all the time is, “what is the safest options trading strategy?” The safest options trading strategy is covered calls, and here’s why. When you are trading covered calls, it means you own the stock, and now you are selling calls against it. So what does it mean when you are selling calls? When you are selling calls, it means you have to sell the stock at a certain price. Back to my example with RIDE I own 4,700 shares, and I own those at $21.50. So this is where if I sell calls at 22.50, so this means that I have to sell RIDE shares at $22.50. So how much money do I make? So I bought at $21.50, and I sell at $22.50, so this means that I’m making a dollar profit, $1 profit per share. And since I have 4,700 shares I would make $4,700 plus the premium I receive for selling the call. OK. So this is in addition, and therefore, covered calls are by far the safest options trading strategy. The only way how you can lose with this strategy is when the stock goes down. This is where you already own the stock, and therefore, if you want to sell calls against it, it is the safest option trading strategy, at least based on my experience and my opinion.
REducation
by rockwelltrading
1
BABA FINALLY presents a good long entryHi everyone, here is my chart analysis of the weekly chart of BABA. I've been patiently waiting for months and it's finally come down to a good price level for going long. I prefer using a tighter stop here (stop loss just above $200) with our profit exit in the lower green box around 270. That means we would risk about $20 per share to make roughly $40 per share, meaning our risk to reward ratio is roughly 1 to 2. If we want a wider stop loss (something like at $185), we can then target the final zone near $300. That would be a risk of $40 down and a profit exit of roughly $80 up, which is a similar risk to reward ratio. I've taken a break from posting on trading view, but have still been blogging 1-2 times per week on my blog. You can find all of my past trades since I started, and my analysis and thoughts on my active trades. I've been very profitable (risk-adjusted returns) for the 4 years that I've traded. Blog url: bigfryfinancialmarkets.com If you have any questions or want a chart reviewed, please ask in the comments below! Thanks, and I hope you enjoyed my analysis. -Nathan
NYSE:BABALong
by bigfry
10
USD/CAD Short. Looking for Large R:R in trending marketsI am usually getting chopped up on the minute charts in the Nasdaq and Russell... Those markets are absolutely brutal... Now I see this market... it looks like someone bought it in a magazine. It's been in a downtrend for 80% of the last year. Since I'm noticing it now is obviously the proper time for it to sharply reverse, but seeing this makes me think that it's possible to take 3 or 4 trades on the entire year and hit your mark. Might be time to start noticing forex, Eric.
Short
by emehoke
4
Stocks To Watch (Relative Strength Edition)The Market is pulling back and might be trying to put in a bottom, this week I expect the market to by choppy. This is the Relative Strength Edition of Stocks to Watch. This may give good risk/reward entries on some of the best names. Some of these charts still need to confirm their price action. This video is my watchlist. Most of these names are at or near all time highs or multi year highs. There are 29 total stocks on this list. I add an additional 4 stocks that are on my potential short squeeze watch list. Many of these have IPO'd in the last few years and still have a growth story ahead of them. Know your time frame and risk tolerance. Know your earnings dates! I go through these quickly so grab a pencil and paper and jot down the names that look interesting to you and then make the trade your own. Good Luck!
NASDAQ:QQQLong
by Jtacher51
2
PLUG: Time to buy?Hello traders and investors! Let’s talk about PLUG today! The stock is highly speculative now, so, let’s see what’s going on here, and proceed carefully. Usually, I see drops like this as opportunities to buy . As someone who’s out of PLUG, movements like this caught my attention, yes, but there’s a right way to proceed on situations like this. Now is not time to sell , the time to sell was during our last analysis about exit strategies, nearly 2 months ago, which was a public one and the link to it is below this idea. What’s more, movements like this, caused by news, often don’t change the main trend. I’m not here to talk about news or fundamentals, just Price Action . PLUG is near a support level, and as far as I know, we must buy near supports – but only if the right pattern appears. Since we still don’t know the short/mid-term impacts of the volatility, we must wait for a bullish pattern, be it candlestick or chart pattern, before jumping into any conclusion, and set the appropriate R/R ratio for the trade. Now, let’s see the weekly chart: In moments like this, it is very important to set the R/R ratio and the right size of your position because if PLUG doesn’t react quickly, and it loses the 21 ema, then the next target would be the $ 30.40, or even the $ 22.25. I find it unlikely to drop, because since it did a top in January, the volume was low, mostly below the average, and this doesn’t indicate a real sell-off, just a pullback. All I know is that the R/R ratio is good for the bulls, but there’s nothing to do now, but wait for some confirmation . And if you liked this analysis, remember to follow me to keep in touch with my daily studies on stocks, and if this idea gave you a new insight, please, support it with your like! Thank you very much!
NASDAQ:PLUG
by Nathan_The_Finance_Hydra
16
Bitcoin - Resuming uptrend one more time - 67k/69k TargetBitcoin - Could be reversing now as it bounced off the 50% retracement level of wave 3 and the 161.8% projection of wave 2. So, as long as that 53270 low isn't breached, we should continue higher here. On the 5min chart on the left, it looks like we are finishing an impulsive move, therefore, if you're not in yet, you can buy on the pullback. Look for potential support at the Fib retracement levels but I think the most likely one is the 38.2% retracement.
BITSTAMP:BTCUSDLong
by ElliottWaveBelgium
3
GPS - Getting ready to break out of a 20 year base ?!I'm late to the party here but we have clean price action and wave count, we can therefore take advantage of the smaller mouvements not only the bigger ones. In this case, I'm waiting for the orange wave iv pullback to start initiating some longs that could yield some 20%-25% without much risk. Red wave iv will be the more interesting move afterwards. Btw this stock has been consolidating since 2000 and could get ready to breakout ! And you know the saying, the bigger the base, the bigger the breakout ! So, definitely keep this one on your watchlist and even think about putting it on your longer term portfolio. Another very interesting aspect is that Dividends could come back soon!
GLong
by ElliottWaveBelgium