Table of Contents

CHAPTER 1- What are Options? 3

Trading Psychology: The Emotional Toll Of Being A Trader 4
Market Volatility Affects Your Trading Psychology 5
CHAPTER 2- Trading Guide: Options Trading for Beginners 6
Getting Setup to Sell Options and Collect Option Premium 6
Why Do I Only Trade A Few Stocks? 7
Should You Trade Naked Options? 8
Trading Options as a Beginner: Best Beginner Option Trading
Strategies 9
CHAPTER 3: Is Trading Options Profitable? 11
Can You Make Money with Options Trading on Your Own? 11
Can you Make Enough Money Trading Options to Live Well? 11
Can you Make Money with Options Trading by Taking an Online
Course? 11
Can you Make Money on Options Trading by Following Trade
Alerts? 12
Why Don't Some Options Traders Make Money? 12
How to Be a Consistently Profitable Option Trader 12
a. Limit your information sources 12
b. Trade based upon your account size 12
c. Use your capital efficiently 13
Three Trading Hard Truths about Trading Options 13
#1 Truth: You should target a return of 40% a year when trading
options 13
#2 Truth - Bigger Accounts Earn More Money 14
#3 Truth: You need to manage your buying power extremely
well 15
#5 Truth: Trade Later in the Day 16
CHAPTER 4: Options Trading Example: How To Look for Trades 18
CHAPTER 5: What Is A Naked Option? 19
Naked Options Explained 19
Naked Options: Risk vs. Reward 19
Naked Call Options: Controlling Risk 20
Naked Put Options: Controlling Risk 21
Naked Option vs. Vertical Credit Spreads 22
Quick Note on Covered Calls 22
CHAPTER 6: Online Stock Trading: Getting Started 23
Online Option Trading Key Points 23
Best Online Brokerage for Beginners 23
Choosing the Best Online Brokerage 24
Important Online Brokerage Reminders 25
CHAPTER 7: Trading Mistakes: Biggest Reason Why Traders Lose
Money 25
Why Do Most Traders Fail? 26
How to Avoid Trading Mistakes 27
CHAPTER 8: Options Trading Strategies 28
Trading Examples of Naked Puts and Spreads 28
Conclusion 31

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CHAPTER 1- What are Options?
Options are derivatives.
Options may seem hard to understand, but it'll become a lot easier to
understand them (and how to profit from them) after reading this book.
Investors usually like to diversify their investments with different financial
products such as bonds, stocks, mutual funds, futures, options, etc.
Personally, I prefer only trading options because by selling options, you're
able to turn yourself into a casino and insurance company by collecting
option premium.
Additionally, options are leveraged products which are more capital
efficient than trading stock outright.
Options represent a contract to sell or buy stock. An option contract gives
buyers the right, rather than the obligation, to sell or buy the underlying
asset at a stated price before the expiration date.
People use options to hedge risk, to generate additional income or as their
primary method of profiting from the market.
An option is also known as a derivative because its value is derived from an
underlying asset.
Here are some basic terms that you'll need to become familiar with when
trading options:
- Strike price (also called the “exercise price”) refers to the
predetermined price at which the holder may decide to sell or buy
when the option can been exercised.
- Option premium is the amount of premium received (or paid) when
buying or selling an option.
- Expiration date is the date when an option becomes invalid and
becomes worthless. Generally, options lose value as their expiration
date gets closer.
- Option price is the current price of the option as quoted in the market
- Theta decay is the daily decay of an options extrinsic value
 - Extrinsic value is the time value of the option. An OTM option is
comprised of all extrinsic value
- OTM refers to out-of-the-money, we usually sell OTM options.

I don't want to confuse, or overwhelm you, and we will expand upon

these definitions, and define other terms, later in this book.

Depending upon your experience level, you may, or may not, feel
very comfortable with the terminology.

What I can tell you is that it's extremely important to keep things as
simple as possible.

If you overwhelm yourself with trying to remember every definition,

then you may not focus on the most important task: making good
decisions.
Trading Psychology: The Emotional Toll Of Being A Trader
Before we begin with the actual strategy, let's discuss realistic expectations
of trading.
As much as others may want you to believe that you are going to make
money every day, remember that there is no easy money when trading
options, and you will experience challenging times.
The emotional toll of being a trader can affect you if you are not prepared.
How will you react if you lose 5% of your account size in a week?
This is not common but, when it happens, it can cause massive stress,
anxiety, and even depression.
The big question is: are you able to overcome the greed to make as much
money as possible (and take unnecessary risk) so that you can easily
overcome the 1x – 2x a year when the market acts irrationally and the
actual moves are more than the expected moves?
Remember that the pain of losses far outweighs the happiness from gains.
In February 2018, I experienced a 20% decrease in my account in one
week.
This was a stressful situation and, despite making everything back within
about 2 months, I realized that it's better for me to be less aggressive and
mitigate my portfolio volatility.
No one ever wants to lose money trading, but the good news is that as long
as you're disciplined and patient when entering positions, you should be
able to consistently profit by selling options.
Unfortunately, people oftentimes need to learn from personal experience
before they modify their behavior.
It's not enough to hear that the stove is hot, instead people oftentimes must
touch it and get burned (I hope that's not you though!).
It's important to fight the belief that you're special and that bad things will
not happen to you.
One of the most important aspects of trading is knowing when NOT to
trade.
By being patient and disciplined, you will reduce your stress while also
leading a much wealthier life.

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Market Volatility Affects Your Trading Psychology
When it comes to trading and consistently making money, you have to bend
and not break during a market correction.
Prior to February 2018, I made money every month by selling premium for
almost two straight years.
I got used to always making money and even took it for granted.
After taking a few losses, my mentality has changed so that I make less
during the good times to ensure that I lose a lot lesser during the bad times.
Minimizing losses to avoid unhealthy stress during violent market
moves should be the primary goal of every trader.
Selling option premium is the best way for traders to consistently make
money.
But even so, you are not going to win every trade.
Despite winning up to 98% of my trades, losing trades are very stressful
and if you're unable to handle the occasional losing trade, and the stress
overwhelms you, then perhaps it's best to acclimate yourself, and get
comfortable, with challenged positions so that, over time, the feelings of
anxiety will be less intense.
Options trading requires discipline, and there is no easy money.
But in the end, as long as you never trade too large and are patient and
disciplined, then you will be able to profit consistently.
Remember to play the long game and always fight the urge to get greedy
and trade too aggressively because, in the long-run, you'll cost yourself a lot
of unnecessary stress and you'll miss out on big profits.

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CHAPTER 2- Trading Guide: Options Trading for
Beginners
Before we get started, remember that profitable trading is not all about
knowledge; it requires discipline and patience.
I can't stress how important it is to internalize that knowing when NOT to
trade is one of the most important aspects of trading.
Getting Setup to Sell Options and Collect Option Premium
In order to be able to sell option premium, you need to set up your account.
I use E*Trade, but any legitimate broker can be used for options trading.
Some of the more popular brokerages include Schwab, Fidelity, Interactive
Brokers, Tastyworks and TD Ameritrade.
Trading commissions are significantly less expensive than they were just a
few years ago .
Even so, you may be able to negotiate commissions with your brokers by
calling them.
As of early 2022, a good rate is to pay $0.50 or less per contract.
Sometimes, brokerages even offer free sign up bonuses.
I would recommend asking the brokerages for the ability to sell naked puts
and calls.
If they don't permit you to sell naked options, then you can sell vertical
credit spreads.
---
When trading, it's important to focus only on the most important things.
One of the best ways to accomplish this is to limit the number of underlying
stocks on your watch list.
My watch list contains Amazon, JP Morgan, Apple, McDonald’s, Visa, and
a few others.
There are two types of options: puts and calls.
As an example, a typical trade that we would make looks like this:
Amazon's recent trading range is between $3400 and $3700 / share. Once
Amazon falls to the low end of its range, near $3400, we would sell one put
option with a strike price of $2700 and an expiration date of 27 days in the
future. By selling this $2700 put option, we would be forced to buy 100
shares (1 contract = 100 shares) of Amazon if it were trading below $2700
at the expiration date.
In exchange for agreeing to buy Amazon at $2700, we collect $9 / share of
premium (or $900 / contract).
This trade has a probability of profit of over 90%.
We believe that if Amazon has fallen to the low-end of its trading range, it's
more likely to find support and stabilize than fall an additional $400.
Even in this “worst case scenario”, you're able to buy 100 shares of
Amazon at a price of $2700 when just a few weeks before it was selling
above $3400.
One important point of clarification is that we try to not take ownership of
the stock. So if Amazon were to fall below $2700, we would simply close
out the existing option and sell a new option at a later date with a lower
strike price (perhaps we'd sell a strike price of $2600) – this is called rolling
or managing the position.
We will go into detail on rolling and managing positions later in the book.
Why Do I Only Trade A Few Stocks?
It's best to focus on market leading stocks that are highly liquid with large
market capitalizations.
By doing so, you can easily open and close positions.
Additionally, and probably the most important reason, is that there is no
need to spend time researching or reading about the stocks since virtually
all the publicly available information will be reflected in the current market
price.
Also, by keeping a small watch list, you're able to get comfortable with the
trading range of each underlying stock. As a result, when a stock falls to the
low end of its recent trading range, then it'll be easy for you to identify this
and sell a put option.
If a stock on your watch list appreciates in value to the high end of its
trading range, then it'll be easy for you to identify this and sell a call option.
My current watch list, as of early 2022,includes the following underlying
stocks:
1) VIX
2) AMZN
3) MSFT
4) GOOG
5) AAPL
6) FB
7) TSLA
8) DIS
9) JPM
10) PYPL
11) MA
12) V
13) MCD
14) UNH
Many of these stocks are market leaders and are highly liquid – which helps
you to get higher quality fills without significant slippage.
Additionally, as stated previously, because they are market leaders, you do
not have to spend time reading articles and news because almost all of the
public information is already priced into the current market price.
Should You Trade Naked Options?
Sometimes I prefer to trade naked options because it maximizes the
premium received.
Naked options are easy to manage and roll, and they also reduce your
commissions when compared to vertical credit spreads (although
commissions are extremely low as of 2022).
In general, I sell naked options when the VIX is trading over 20.
And, I sell vertical credit spreads when the VIX is under 20.
The reason for this is that when the VIX is over 20, I don't want to buy
expensive options.
However, when the VIX is under 20, then options are less expensive and I
want protection against violent sell-offs and large volatility expansion.
---
People often worry that they will sell a naked option and then the stock will
go bankrupt.
This does not make sense because people who buy Amazon stock are not
concerned that Amazon will suddenly go bankrupt.
What is the probability that a company like Amazon, which is currently
worth about $2 trillion dollars, will go bankrupt?
The probability is virtually zero.
Overall, although I believe that trading naked options is worthwhile for
most traders when the VIX is trading over 20, I believe that trading spreads
is better when the VIX is below 20.
The primary reason why I prefer spreads is that I believe that the tail-
risk protection and the capital efficiency of spreads outweighs the
decreased premium received (when compared to naked options).
Let's review a few examples of spreads:
If Amazon is currently trading at $3,400, trades down to $3,200, we would
then sell a $2,600 put and buy the $2450 put.
A quick side note: if there is an opportunity for you to sell puts, that
means that it is not a good time to sell calls.
I have seen many people get in trouble by indiscriminately selling strangles
(selling both a put and a call with the same expiration and different strike
prices) and then having the call side get tested.
In the situation above, we are only selling a $2,600 put. We wouldn't sell
the $3,500 call as well because stocks that we believe to be oversold have a
tendency to bounce back quickly and potentially challenge a call strike.
I have seen many people sell strangles on an oversold stock and then have
the stock jump and challenge the call side.
A much better strategy is to sell the put strike and then, opportunistically,
sell the call once the stock has rebounded.
For example, if AMZN trades down to $3,200 then a trader can sell the
$2,600 put option, then if AMZN rebounds to $3,400, the trader can then
sell the $3,700 call option.
Trading Options as a Beginner: Best Beginner Option Trading
Strategies

The goal of this options trading guide is to teach you how to be consistently
profitable.
Probably the most important skill to master is to know when NOT to
trade.
You need to let some trades pass you by in order to patiently wait for better
opportunities.
In addition to being patient, I recommend that traders of all skill levels
immediately enter a buy to close order once they open a new position.
For example, once a new trade fills, I recommend that traders immediately
submit a Good Till Canceled (“GTC”) closing order that allows them to
keep about 50% - 65% of the premium received.
For example, if you were to sell a put on Amazon and collect $10 of
premium, or $1,000 per contract sold, then once this trade fills I would
recommend that you immediately enter a GTC closing order to buy back
the AMZN put contract at a price of ~$4. By doing this, you're securing
your profits and reducing your risk, while also allowing yourself to
reallocate capital to better opportunities.
One reason I like to close out trades early is that if you sold a put at $10 and
then were able to buy it back a week later at $4, then the underlying stock
validated your original assumption. There is no need to wait until expiration
to collect the remaining ~40% (since you've already captured 60% of the
available premium in just one week).
You're better off closing out the position and reallocating that buying power
to another opportunity.

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CHAPTER 3: Is Trading Options Profitable?
There are plenty of coaches encouraging people to get into options trading.
With so many online courses and YouTube videos promising incredible
results, it can be difficult to know where to start, and so the big question
remains: Will you make money with options trading?
Can You Make Money with Options Trading on Your Own?
Plenty of successful options traders get started on their own, learning as
they go and correcting their mistakes along the way.
While you certainly can make money by trading trading yourself, success
may come at a slower rate and you'll also likely make costly mistakes.
These costly mistakes could result in the loss of money and time.
Can you Make Enough Money Trading Options to Live Well?

A lot of people will ask, “Can I make a living trading options?” While some
want to add to their existing income, others want the financial freedom that
comes from being your own boss. Options trading provides opportunities
for both.
We target a return of 3.5% per month, so if you'd like to replace a full-time
income, then you'll need a large account.
While it's possible to earn more money by selling option premium, your
portfolio volatility will also increase and you'll be more likely to experience
large drawdowns.
The best way to make money with options trading is to treat it like a
job.
You'll need to hone your skills, learn from the best, and put your knowledge
to good use.
You can make excellent money trading options, but your gains will likely be
slow and gradual.
Can you Make Money with Options Trading by Taking an Online
Course?
Yes, you can make money trading options by learning from an online
course; and it's extremely important to that you choose the right online
trading course.
There are plenty of options trading courses that make empty promises and
set unrealistic expectations.
Avoid courses that promise to make you a millionaire in a short period of
time or offer a “shortcut to success.”
One of the best option strategies to make money can be found at
BestStockStrategy.com, where I offer a comprehensive online options
trading course.
In 12 lessons, I provide you with the best strategy to trade options. The
course is comprehensive and is ideal for traders of all experience levels.
I have taught more than 1,500 students how to trade options at
BestStockStrategy.com.
Can you Make Money on Options Trading by Following Trade
Alerts?

In addition to my online course, I offer real-time trade alerts and options

trading signals.
Students can follow my trades so that they can learn from my trading style.
These trade alerts help you learn how to trade successfully and profitably.
Traders who follow my trade alerts can win up to 98% of their trades. The
alerts are ideal for traders of all skill levels (beginner through advanced).
Why Don't Some Options Traders Make Money?
The best way to make money by trading options is by selling options and
collecting option premium.
Having a personal commitment to constant improvement is very important,
whether you're new to options trading or a seasoned pro.
One of the primary reasons that traders lose money is by trading too many
contracts, trading too often, opening trades that they shouldn't, assuming too
much risk and trading the wrong strategy.
How to Be a Consistently Profitable Option Trader
Here are some core principals to help guide you when it comes to option
trading:
a. Limit your information sources
We live in the information age. People consume tons of information, and
while it may be entertaining, it's not helping you accomplish your goals.
One of the primary reasons why we trade large capitalization market leaders
is so that we don't have to read the news, since virtually all the available
public information is already reflected in the current market price.
b. Trade based upon your account size
If you have an account size below $15,000, you want to have a watch list
with five – ten securities.
At any one time, you will have a maximum of four or five trades on,
preferably less.
Even with an account size of $1,000,000+, I would recommend having
trades on no more than 5 underlyings at one time.
You can have multiple positions in one underlying. For example, you can
have 3 positions, each with multiple contracts and expirations, for Amazon.
Overall, I've found that having positions on more than 5 underlyings at once
leads to unnecessary complications.
You also want to make sure to allocate capital only to the best opportunities.
You don't need to spread your trading capital equally among the 4 – 5
positions.
Instead, if you believe that one opportunity is better than another, then it's
best to allocate more of your capital to those better opportunities.
While I understand that portfolio concentration runs counter to what many
investment professionals recommend (they usually recommend
diversification), I am simply sharing my thoughts based upon my
experience.
c. Use your capital efficiently
Selling naked options reduces your risk, but you also have to use your
capital efficiently.
If you sold a naked option with an expiration of six weeks out, I like to
immediately place a buy to close order to close out that position once it hits
a specific profit target (usually 50% or 60%).
Let's say you sold a put option on Facebook when it was trading at $330,
and Facebook goes up to $360 two weeks later, that put option that you sold
is going to show a large profit.
There is no point waiting an additional four weeks to claim the remaining
premium on that option when you can close out that position for a large
gain and reallocate that capital.
If Facebook was trading at $330 and you sold a $290 put option and
collected $1 per share in premium, now that Facebook's share price has
appreciated, that option may be selling for 30 cents.
You can close out that position for a 70% gain despite having only stayed in
that position for 1/3 of the time (duration of 6 weeks and bought back after
2 weeks).
Three Trading Hard Truths about Trading Options
#1 Truth: You should target a return of 40% a year when trading
options
Feel disappointed? I know how you feel, but if you try to make more, then
you'll likely end up losing money.
I want to make as much money as possible as well, however the fact is that
the more aggressive you are, the higher likelihood of experiencing a
significant loss.
Stop believing instructors who tell you that you can earn ~2% a day (or
more).
When selling options your goal should be to make around 40%, depending
on your options trading strategy.
As I mentioned, if you try to make significantly more than that, then you
may end up losing money because you'd end up entering trades that you
shouldn't and you'll likely trade too large, too aggressively and too often.
When trading too large, too often or too aggressively you'll end up winning
~80% of your trades but you'll have losing trades which may end up wiping
out all the gains from your winning trades.
#2 Truth - Bigger Accounts Earn More Money
The second truth is that if you have a smaller account (under $15,000), it
will be difficult for you to earn a lot of money because you need to manage
your capital well.
You will mostly sell vertical credit spreads and you can manage your capital
by closing out these trades at a 50% profit.
I prefer trading and selling naked options when the VIX is trading over 20,
and vertical credit spreads when the VIX is under 20.
I prefer to trade spreads when the VIX is under 20. When the VIX is under
20, there is a higher risk of volatility expansion. As a result, buying the long
option provides protection against a volatility expansion event. Also,
buying that protective option is also less expensive when the VIX is under
20.
Selling spreads is also more capital efficient and it reduces your buying
power reduction for each trade that you make.
Additionally, spreads provide tail risk protection in the event of a market
crash like we experienced in March 2020.
For naked options, I sometimes like that the buying power reduction for
naked options is higher, therefore inhibiting me from trading too large.
Additionally, if a position is challenged, then it becomes easier to roll and
manage a naked position than a vertical credit spread.
However, selling spreads protects you from tail risk and large crashes (since
you have the long put option as protection).
Even if you have a small account, selling option premium is the best way
for retail traders to be consistently profitable. As a result, it’s better to
establish good habits and earn around 30% on a small account than it is to
adopt a bad strategy and lose money.
Many options trading for beginners strategies encourage traders to use
vertical credit spreads.
I think that trading spreads is a great options trading strategy, as long as you
are disciplined.
As mentioned previously, credit spreads permit better capital efficiency.
However, I have seen many students trade too many contracts when selling
credit spreads.
As always, it is important to be disciplined.
#3 Truth: You need to manage your buying power extremely well
Let's keep this simple. If you have an account with a net liquidation value of
$10,000 then, you should not have less than $4,000 as cash available to
withdraw if you're trading naked options.
If you have an account with a net liquidation value of $100,000 then, you
should not have less than $40,000 as cash available to withdraw if trading
naked options.
This does NOT mean that you should always be fully invested and, at all
times, use 60% of your account.
If there aren't great opportunities, then it's okay to use 20% of your account
and wait for better opportunities.
Especially during periods of low volatility, when the VIX is trading below
20, it's best to use ~20% or 30% of your trading account.
However, even during the best trading environment, you should not have
less than 40% of your account available to withdraw if you're trading naked
options.
The reason for this is that during a large sell-off and volatility expansion
event, your available buying power can significantly decline and force you
into a margin call.
Leaving 40% of your account as available to withdrawn will provide a
safety net and you can use that available 40% to manage / roll your
existing positions.
If you're trading spreads, then you can use up to 80% of your account and
leave 20% of your account as cash available to withdraw.
Trading spreads protects against volatility expansion and your available
buying power will not change significantly when using defined risk trades
(or spreads).
#4 Truth: Assignment is not a bad thing (although I'm rarely assigned)
Assignment is not something to be scared of, and it rarely happens.
You'll know if you're in danger of assignment when the extrinsic premium
on the option is close to 0.
You can calculate the extrinsic value of the option by taking the different
between the current market price of the underlying stock less the strike
price.
If that number is very similar to the current market price of the option, then
you're in danger of being assigned.
For example, if Facebook is trading at $300 and you're short a $315 put and
the current market price on the option is $15.05, then there's only 5 cents of
extrinsic premium on that option.
With only 5 cents of extrinsic, that option is in danger of being assigned.
Usually if an option has more than 10 cents of extrinsic premium on it, it's
not in danger of being assigned.
The reason for this is that if there's significant extrinsic premium left on an
option, then you'll receive free money if you're assigned by simply selling
the shares and re-selling the option.
One of the biggest fears (which I believe is an exaggeration) is that many
traders are scared of being assigned.
I recommend NOT getting assigned and always trying to roll your positions
out of the money (because owning stock is not capital efficient – owning
stock uses up about ~3x more buying power than being short naked puts).
But, if you're assigned, your broker usually provides you with an
opportunity to close that position (usually 1 – 2 days).
Some people actually prefer to get assigned. They sell OTM options and
then, if assigned, sell covered calls (or puts) on the assigned stock (this is
called the Wheel Strategy).
Remember that if you're assigned, you can also close out the stock and
resell the same option at a different expiration if you choose.
Even so, we prefer to roll and manage positions so that we're not in danger
of getting assigned – however, the big takeaway from this section is that
assignment is not something to be feared.
You will likely never be surprised by an assignment and you can almost
always avoid it.
#5 Truth: Trade Later in the Day
This is always a big struggle for me.
You should try to place your trades LATER in the day (last 30 minutes of
the trading day) – especially during periods of rising volatility and high
uncertainty.
The reason is that oftentimes you'll sell a put, or a call, in the beginning of
the day because you think the stock is oversold or overbought, but you'll
oftentimes be able to get a better entry later in the day (and you'll have been
better off waiting).
This rule is based upon my experience with ~30,000+ options trades and I
strongly believe that placing trades later in the day will help improve your
overall performance.
Will you end up missing out on some trades if you wait until later in the
day? Yes, definitely.
But when taken in totality, after tens of thousands of options trades, I'd
have been better off waiting to place all my trades in the last hour of
trading.
During a rising market, with high levels of complacency, I've found that it's
okay to place trades earlier in the day.
However, especially during times of high uncertainty and high volatility, it's
best to wait until later in the day.

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CHAPTER 4: Options Trading Example: How To
Look for Trades

I usually have trades on 3 - 5 securities at once.

My watch list contains about 15 stocks and I get comfortable with the
recent trading range of each one.
The recent trading range is defined as where the stock has spent ~80% of its
time over the past ~3 weeks.
For Facebook, which at the time of writing this, is trading around $330, the
recent trading range over the past 3 weeks is $290 - $340.
As a result, I would wait for Facebook to fall to around $300 and then I
would sell an out of the money put option with a strike price of around
$270.
If I were doing this trade as a spread, then I would sell the $270 and buy the
$250.
These numbers are not absolute. Meaning that based on the available
premium, volatility, or my feelings about the market, I may choose to sell
the $275 strike instead of the $270.
Even so, the example above provides a good approximation for the strikes
that I would select.
Some other important factors to keep in mind include:
a) Trade from your phone – I make all trades from my phone and have
never used any charting software. It's best to keep things simple because if
you complicate things, it will negatively impact your returns.
b) Modify your trade structure based upon volatility – As discussed
earlier, if the VIX is trading over 20, then it's best to trade naked options.
However, if the VIX is trading below 20, then it's best to trade vertical
credit spreads.
When the VIX is low, the long options that you buy for protection are
relatively inexpensive.
Additionally, when selling spreads with a low VIX , you'll be protected
from volatility expansion.
c) Sign up for trade alerts and option signals – Receive real-time trade
alerts and follow my trades so that you can optimize your trading strategy
and improve your skills. The 7 day trial is only $19 at
https://beststockstrategy.com/memberships

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CHAPTER 5: What Is A Naked Option?
Some options traders prefer trading naked options instead of spreads. Naked
options, also called uncovered options, allow traders to take a long (or
short) position while collecting maximum premium. For traders who do not
shy away from risk or those with significant trading experience, trading
naked options is a successful options trading strategy to consider.
While there are better options trading strategies for beginners, selling naked
options is an attractive, high-risk, high-reward strategy.
So, what are naked options, and would you trade this strategy?
Naked Options Explained
When a trader sells options without owning an accompanying long option
position then they are trading naked options. If you sell a call but do not
own a higher-priced call option as insurance, you are writing a naked call.
Selling a naked call has unlimited risk because the underlying stock price
can increase indefinitely.
On the put side, selling naked puts carries maximum risk if the underlying
stock falls to zero.
Traders may sell a naked call position if they anticipate the stock price to
trade below the strike price when the option expires.
A trader can achieve maximum gain (keep 100% of the premium collected
when selling an option) by having their short option expire worthless.
In general, I do not recommend holding options through expiration because
closing trades early will typically lead to less risk and greater overall
returns.
Naked Options: Risk vs. Reward

Because options tend to expire worthless, trading naked options is a good

way to maximize the amount of premium you collect.
Traders can experience considerable success when trading naked options
while having significantly more winning trades than losing ones.
However, the risks associated with naked options come into play during
major market crashes and large volatility expansion events.
In March 2020, when the S&P 500 fell 36% in 33 days, many traders who
were short naked puts ended up experiencing massive losses.
One bad trade has the potential to blow up an account or outweigh years of
small wins.
The complete imbalance of risk versus reward makes it difficult to
recommend naked options as a core trading strategy if you're an aggressive
trader.
While I do trade naked options when the VIX is high, I, overall, prefer to
trade vertical credit spreads due to the added protection it provides.
To manage your risk when trading, naked options are best used sparingly.
There are five main reasons why you would choose to sell naked options:
a) selling naked options maximizes the amount of premium you receive.
b) It is easier to roll / manage a naked position than a credit spread.
c) selling naked options inherently protects you against trading too many
contracts (the biggest reason options traders fail is that they trade too many
contracts)
d) if you need to increase buying power or reduce risk, you can buy options
and turn your naked position into a credit spread.
e) You will pay lower commissions when trading naked options relative to
spreads
The primary reasons why I believe trading credit spreads are superior to
naked options are:
a) Trading credit spreads are more capital efficient and use significantly less
buying power than naked options
b) Spreads are defined risk trades and provide protection against black swan
events and provide tail risk protection.
Due to the 2 reasons above, I believe that trading spreads is better than
naked options (especially during periods of low volatility when volatility
can rapidly expand).
Remember that the primary reason options sellers get into trouble is that
they trade too large during times when the actual move is more than the
expected move. By trading spreads, you're inherently protected against
large movements because your risk is defined. Also, because your
brokerage will reduce your buying power by your maximum loss (less the
credit received), it's more difficult to trade too large when trading spreads.
During periods of low volatility, buying protective options (long calls or
long puts) are inexpensive.
Additionally, during periods of low volatility, there is greater risk of a
volatility expansion, and selling vertical credit spreads will provide
protection against volatility expansion.
Naked Call Options: Controlling Risk
Traders that trade naked options can implement some strategies to mitigate
their risk.
Option sellers rely on time decay (theta) and the fact that actual volatility is
usually less than expected volatility.
One way to mitigate risk is by selling options that are significantly out-of-
the-money (“OTM”).
By trading OTM options, you increase your probability of profit while also
providing yourself with an opportunity to roll / manage positions more
easily if the strike price is challenged because you'll have a substantial
safety net between the current market price and the strike price.
Remember that stocks tend to increase in price slower than they fall.
It is similar to the old saying that the “bull takes the stairs up, but the bear
jumps out the window.”
As a result, when selling naked calls, traders are oftentimes able to roll and
manage a challenged position easier than they would when selling a naked
put.
Naked Put Options: Controlling Risk
Like naked call options, naked put options carry considerable risk.
Investors use a naked put option when they anticipate that a stock will trade
above the strike price at expiration.
If the stock trades above the strike price and expires worthless, the investor
keeps the entire premium.
The risk of selling naked puts comes into play when the underlying stock
falls below the strike price.
A few times a year, it is common for stocks to fall very violently, and when
they do, there is correlation risk because many of your put options may
become in-the-money (potentially leading to a margin call).
While it is irrational to fear a large-cap stock like Amazon going bankrupt,
there is a substantial risk with black swan events where stocks become
oversold and traders experience many of their short put positions becoming
in-the-money (or showing a loss due to the volatility expansion).
Oftentimes, what happens in this scenario is that traders will be forced to
close out their positions for a large loss (only to see the stocks rebound
shortly thereafter).
The best way to protect yourself against this is by selling far OTM put
options and by trading spreads (where you buy an option as insurance) –
especially during periods of low volatility (when the VIX is under 20) or
during periods when you feel that the market is overbought.
While we will discuss this later in more detail, as a rule of thumb, traders
should also leave at least 40% of their net liquidation value, or live account
value, as a safety net to protect against large swings in their buying power
when trading naked options.
For example, if you have a $100,000 account, then when you're fully
invested, you should never trade beyond a point where you have less than
$40,000 (or 40%) of your account available as cash to withdraw – you can
use this 40% of your account to roll / manage existing positions that
become challenged.
Naked Option vs. Vertical Credit Spreads
Traders can decrease the risk associated with an option by covering the
position with a long option.
By purchasing the offsetting option of the underlying stock, the option is no
longer naked.
In general, I prefer to trade credit spreads because of the greater capital
efficiency and the protection against violent sell-offs.
Naked options are attractive to some traders because they permit traders to
maximize the amount of premium they receive, while also being relatively
easy to manage / roll.
However, naked options also leave you more vulnerable, and it is essential
to consider the risks involved when deciding between naked options and
vertical credit spreads.
Quick Note on Covered Calls
If traders are assigned, they can always write covered calls (or covered
puts), or simply liquidate the position and re-sell the option.
With covered calls, traders can make money when the price goes up, goes
down, or moves sideways.
A covered call allows you to collect additional premium and can improve
your returns by about 5% - 10% a year.
The only downsides are that you have to own the underlying stock, which is
not capital efficient.
Also, by selling covered calls, you're sacrificing some of the upside
potential because if the underlying stock increases in price more rapidly
than you expect, then the stock will get called away from you and you'll be
unable to participate in the stock's upside above the covered call strike
price.

OceanofPDF.com
CHAPTER 6: Online Stock Trading: Getting Started
Trading can be stressful. Despite winning up to 98% of trades, there will be
times when trades go against you.
It is important to see the big picture., even the best traders experience
volatility.
You can target a return of ~3% a month by selling premium.
The most important action to take is to get started: Open a brokerage
account, request the ability to sell options using margin, read necessary
blog posts from https://BestStockStrategy.com/blog, sign up for the trade
alerts or take the education course at
https://beststockstrategy.com/memberships, learn a skill and get started!
Online Option Trading Key Points

a) You need at least $2,000 to trade options with an online trading account
b) I recommend TastyWorks for accounts under $20,000 and E*Trade or
any other brokerage that provides sign up promotions, for accounts over
$20,000
You can check some recent online bonuses here:
https://www.hustlermoneyblog.com/best-brokerage-bonuses/
c) You should request the ability to trade naked options.
d) Accounts with $100,000+ should request portfolio margin (different
brokerages have different minimums for Portfolio Margin, but it's usually
between $100,000 and $175,000)
If you choose to enroll in Tastyworks, you can use this link and receive a
free week of my trade alerts (be sure to email me once you've used my
referral code so that I can match your name against the list that Tastyworks
sends me):
https://start.tastyworks.com/#/login?referralCode=7R6QHPKFNC
Best Online Brokerage for Beginners
Regardless of which broker you choose, your returns will likely not change
much because almost all of the brokerages these days are very similar.
As a result, I recommend doing 20 minutes of research and then simply
getting started.
Choosing an online stock broker can be very stressful and it seems that
everyone has an opinion on the best trading platform and which one is best
for beginning option traders.
The good news is that there are no substantial differences between the top
online brokers.
I use the Power E*Trade Android App mostly because I am comfortable
with it and see no reason to switch.
I negotiated my commission structure with E*Trade and I currently pay
only 10 cents per contract.
I make every trade using their Android app and cannot recall ever using
their website or desktop software to place a trade, neither have I used
advanced charts, analyst research or any other “premium” product that
online brokers offer.
Choosing the Best Online Brokerage
Prior to selecting E*Trade, I tried Interactive Brokers, Fidelity and
Tastyworks. I found Interactive Brokers difficult to use and I always got
charged monthly fees by them.
Interactive Brokers is currently used by many of my European and Asian
students.
Fidelity is decent, but it felt more antiquated and less flexible (I have not
used it since 2014 though).
I have also used TastyWorks (and still maintain a small account with them).
I find Tastyworks to be the best online stock broker for beginners. However,
that does not make it perfect, as I found TastyWorks to be incredibly slow
when entering new trades.
Tastyworks relies too much on a visual interface and it takes me five times
more effort to enter orders than it takes with E*Trade.
Regarding pricing, TastyWorks is competitive, however at $1 pet contract
(even with no closing commissions) it is still much more expensive than
what I usually pay (10 cents a contract). Additionally, Tastyworks passes on
all exchange fees (about 14 cents per contract) - that is about six times more
than I pay with E*Trade.
I have also had students tell me that Tastyworks is unnecessarily aggressive
in closing out their positions.
Their risk team assesses a position and can then close out a position without
notice. The client did not have a margin call, instead Tastyworks pro
actively closed out a customer's position which resulted in the client losing
thousands of dollars unnecessarily.
Even so, if you have a small account, Tastyworks is a good choice;
primarily because it permits its users to easily get approved for selling
naked options by selecting “The Works” option when opening a new
account.
However, as I said earlier, the TastyWorks’ user interface is extremely slow
and tedious when I enter trades..
In my opinion, RobinHood is not a great online brokerage. It's also been
fined by the SEC for violations.
While RobinHood and WeBull are decent for new traders with small
accounts, I do not trust them.
Overall, my students use virtually every online brokerage firm and their
returns are not impacted by their choice.
It is best to go with a brokerage that offers a sign up bonus and allows you
to trade naked options using margin.
Your best online brokerage depends on your account size.
If you have an account between $2,000 and $20,000 then I would
recommend TastyWorks.
If you have an account over $20,000 then I would choose whichever
legitimate brokerage that's providing the highest sign up bonus at the time.
Important Online Brokerage Reminders
a) You should call and request the ability to sell naked calls and puts (with
margin) when opening a new account.
b) Some brokers will ask you a series of questions or ask you to take a quiz
before approving you.
c) Accounts with $100,000+ should always request portfolio margin.
d) It's oftentimes possible to negotiate commissions with your broker.
Asking for a reduction in commissions over the phone, or via chat, is
usually successful (depending upon your account size).

CHAPTER 7: Trading Mistakes: Biggest Reason

Why Traders Lose Money
Many traders lose money because they make mistakes that they could have
easily avoided. Some of these popular trading mistakes include: trading too
large, getting greedy, having a bad trading strategy and a lack of discipline.
Being a successful trader is about having a consistent strategy that can be
replicated in all market environments, and then protecting yourself during
large outlier moves like March 2020.
One of the biggest trading mistakes that I see traders make is that they make
trades that have a low probability of success while also trading too often.
Buying options, especially during periods of high volatility (when options
prices are high) is an example of a low probability trade with a negative
expected outcome.
Sometimes it's profitable to buy options, however, with enough
occurrences, buying options is not a good investment because you're paying
for volatility that oftentimes will not be realized.
When trading options, patience and discipline are also extremely important.
It's important to not confuse luck and skill. There are people who win
money at a casino, however the more they play, the higher the likelihood is
that they will lose money.
It's also important to realize that knowing when NOT to trade is vital. Many
people trade often and are uncomfortable waiting and being patient – they
become addicted to the action of placing trades. I've seen many of these
types of traders lose money.
In general, when fully invested, traders should leave 40% of their account
available to withdraw (or 20% when only trading spreads).
So if they have a $100,000 account, then when you're fully invested, you
should be able to withdraw a minimum of $40,000 (or $20,000 when
trading spreads).
It's also important for traders to be patient and try to trade later in the day.
By doing this, you're usually able to reduce risk and maximize the amount
of premium received.
Finally, it's very important to always fear the market and not try to trade too
many contracts.
You can win up to 98% of your trades yet still lose money during a large
volatility expansion event.
The primary reason traders lose money when selling options and trading our
strategy is that they become overconfident and trade too many contracts.
Then, during a large sell-off, they are forced into a margin call and are
forced to close their positions at a large loss – yet if they weren't forced to
close the position and had been able to hold onto the position, that same
position would have shown them a profit just a few weeks later once the
market stabilized.
Why Do Most Traders Fail?
Successful traders make decisions based upon assessing the future
likelihood of an outcome, and then they take action.
Many losing traders enter trades that they are not confident in but they feel
compelled to be active, and then they lose money once the trade goes
against them.
Even worse, losing traders gamble and, if they win a few trades, they think
that they have found a consistently profitable strategy.
It's important to find a strategy that has a positive expected outcome, then
find the weaknesses of that strategy and try to mitigate them.
One of the weaknesses of selling options is that during large volatility
expansion events, or “black swan” events, the strategy will lose money.
It's important to always protect yourself against these large outlier
moves.
The best way to do that is:
1) Trade spreads when the VIX is below 20.
2) Always trade high-liquidity underlyings with strong brands
3) Sell options that are far OTM
4) Roll your positions early
5) Close out your winning trades at 50% for spreads and ~65% for naked
options
6) Trade small and be patient so that you reduce risk: when trading, it is
best to trade small and be patient so that you optimize your trade entries.
Try to trade during the last hour of trading so that you reduce risk.
How to Avoid Trading Mistakes
One thing that you can do when trading is ask yourself: “Is this result based
on luck or is it based upon a a high probability outcome that can be
replicated?”
If you engage in low-probability trades then, in essence, you're gambling.
Sure, you may get lucky and win some money. But, over time, the more you
trade, the greater the chance that you'll lose.
I understand the argument that you can lose more than you win as long as
the magnitude of your winners exceed your losers, however, from
experience, I've always found that engaging in low-probability trades and
paying for extrinsic premium is a risky way of trading.
While some people make money by engaging in trading activities that have
a negative expected outcome (such as buying options), I believe that buying
options should be used as a secondary strategy, using low amounts of
capital, and when the market conditions are in your favor.
For example, you may want to allocate a small amount (5% or less) or your
account to buying call or put options when you feel that a particular stock is
trading at a price extreme (overbought or oversold) and when the VIX is
low (trading around 15).
When we sell option premium, we have a very high probability of profit,
yet a small payoff.
In essence, we hit singles and we do not try to hit home runs.
When selling option premium, it is important to always limit your downside
risk.
As long as you don't trade too large and you're able to eliminate large
trading losses during black swan events, then you should make money
when selling premium.
Options traders, especially new traders, frequently lack patience.
They trade too often!
Below is a YouTube video that will help you learn how to avoid trading
mistakes.
https://www.youtube.com/watch?v=mCUZsIjOirw

CHAPTER 8: Options Trading Strategies

While people are oftentimes scared of “black swan” events and market
crashes, you can easily protect yourself against a stock market collapse by
trading small and also selling options with a strike price that’s 10% - 15%
out of the money.
In general, there are usually 2 – 3 violent selloffs every year; because of
this, the risk to option sellers is typically on the put side.
When selling calls, your call options will get challenged more frequently,
but the risk of large losses is relatively small because, with time, you're able
to roll and manage the position until it's profitable.
When selling puts, it's possible that during a black swan event, the market
will fall 36% in 33 days like it did in March 2020.
During these times, as long as you were trading small and using vertical
credit spreads, then you should be able to profit from these situations
(once the market stabilizes) by collecting large premiums due to heightened
implied volatility while also being protected by the long option that you
purchased as insurance.
Trading Examples of Naked Puts and Spreads

Naked puts: Lets say that Facebook is currently trading at $320. We can
sell a put contract with a strike price of $280 that expires four weeks in the
future. In exchange for agreeing to buy Facebook, if it falls below $280, we
receive a credit (“option premium” or “premium”) of $3 / share.
Remember that 1 contract equals 100 shares, so for every contract we sell,
we will receive $300 (1 contract x $3 credit/share).
If Facebook trades above $280 at the time of expiration, our option expires
worthless and we keep the entire $300.
In this trade, our break-even point is $277 (excluding commissions), and as
long as Facebook stays above $277 then this trade will be profitable.
Vertical credit spreads: Imagine Facebook is currently trading at $320. We
can sell a contract with a strike price of $280 that expires four weeks in the
future. In exchange for assuming the risk of buying Facebook at $280, we
receive a credit of $3 / share. This is very similar to the sale of the naked
put.
To make this trade a spread, we also buy a contract with a strike price of
$265 that expires four weeks in the future (same expiration as the short
put). In exchange, we pay $1 / share.
In total, we have sold a $280 put, bought a $265 put, and receive $2 / share
net credit (receive $3 for selling the put and we paid $1 for buying the put).
The advantage of the vertical credit spread is that we now have a defined
risk trade, meaning that instead of our maximum loss being $280 (if
Facebook were to go bankrupt) less the credit received of $3, now our
maximum loss is $15 ($280 - $265) less the $2 of net credit that we
received. As a result, our total maximum loss of this theoretical trade, as a
vertical credit spread, is $13 per contract.
The other advantage of trading vertical credit spreads is that they are much
more capital efficient.
Even using Regulation T margin requirements, a naked option reduces your
available buying power by ~15% of your maximum loss.
As a result, in the example above, your buying power would be reduced by
approximately $4,200 for every naked option of Facebook that you sell.
When selling a vertical credit spread, your buying power is reduced by your
maximum loss, less the credit received.
As a result, your buying power reduction, when selling a spread, would
only be ~$1,300.
In this example, when trading a spread, your buying power is reduced by
~3x more when trading a naked option when compared to using a vertical
credit spread.
In general, vertical credit spreads are one of my favorite options
trading strategies.
In my opinion, the most successful options strategy is to sell put credit
spreads during a bull market (and call credit spreads during a bear market)
when the VIX is low (below 20) – that way you're protected against a large
volatility expansion event.
When the VIX is above 20, then selling naked options is best because
you're able to be more conservative and sell options that are further OTM
while still collecting substantial premium, also when the VIX is high, you
want to avoid buying overpriced options.
Plus, having the VIX increase from 25 to 35 will likely not significantly
affect your existing positions, but having the VIX increase from 13 to 35
will likely have a significant negative affect on your existing positions.

Trading During a Bear Market

During a bear market, you want to be patient!
Wait until later in the day to trade.
Also, sell call options on underlying stocks that you believe are overbought.
By doing this, you're “fading a rally”.
If you decide to sell puts, I would recommend selling vertical credit spreads
with short a expiration on underlyings that you believe are more oversold
than their peers.
You can sell options that are farther OTM during a bear market because the
VIX will be high and option prices will be elevated (meaning you'll receive
substantially more premium for selling options during a bear market than
during a bull market).
In general, the same principles for selling premium apply in ALL market
conditions.
Meaning that the same principles of being patient, selling OTM options,
trading liquid underlyings, etc. apply in all market conditions.
The biggest changes / modification are that, when we're in a bear market:
1) You must be extra patient and try to only place new trades during the last
2 hours of the trading day
2) When selling puts, try to use vertical credit spreads (even if the VIX is
over 20), or choose strikes that are extremely far OTM – and if you sell
puts, sell options that have an expiration within 14 days.
3) You'll primarily switch to selling calls on stocks that you believe are
overbought, whereas when we're in a bull market, we primarily sell puts on
stocks that we believe are oversold.
Should I be fully invested at all time?
No, you shouldn't. I'm usually only fully invested about 30% of the time
(using 60% of my available buying power when trading naked options or
using 80% of my available buying power when trading spreads).
During the remaining 70% of the time, I are using about 35% of my
available buying power.
I don't like to force trades.
And if there aren't good opportunities available, then I'm okay with being
conservative and waiting.
Despite not being aggressive, and not being fully invested at all times, we
still have a target return when using our strategy of around 3% to 3.5% per
month.
I also believe it's important to allocate capital only to the best opportunities.
So if there are 2 stocks on your watch list that are great opportunities, then I
would tend to allocate almost all of my trading capital to selling options on
those 2 stocks.
From my experience, trading options on too many stocks just to be
diversified has been inferior to when I was concentrated only in the best
opportunities.
Rolling / managing positions:
Rolling and managing positions is covered, in detail, in the Education
Course at https://beststockstrategy.com/memberships

Conclusion
This guide has provided a Beginner's Guide to Options Trading.
While options trading provides a high probability of profit, you must
always possess fear and respect for the market.
Options traders who trade too large and get too greedy end up losing
money.
Trading profitably requires constant repetition and practice.
You will improve with practice.
If you want to learn more in-depth and comprehensive lessons about
options trading, then I encourage you to enroll in the Education Course at
https://beststockstrategy.com/memberships
Additionally, to practice what you learned and reinforce what you learned in
this book, I highly encourage you to follow my trades and enroll in the
Option Trade Alerts / Signals 7 day trial for only $19, also available at
https://beststockstrategy.com/memberships
OceanofPDF.com