Sep 11, 2018
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Ho, ho, ho, here we are, back for another edition of Option Genius Podcast. I wanted to answer a question that I get from newbies, which is what should my first trade be? I remember, it was a while ago, but I kind of remember what it felt like when I first got trading, selling options. It was so exciting, it was so new, it was like a ray of hope because ... I don't know if you know my story but I had lost my job and so, I took this money that my wife had saved up. You know, she worked during college and after that, she got a job as a nurse and she saved up all of her money because she was working at home and all that so, she had a bunch of money saved up when we got married. And basically, she let me use it to try to get to my dream of being a full-time trader.
A trader where I'm paying the bills by trading. I had gotten laid off and I was like, "Baby, I can't go back to work, this is not for me. Wearing a suit and dressing up and it's choking the life out of me. Let me try to make it as a trader." So, she agreed and I went to work, I proceeded to basically lose a ton of money very quickly. Day trading, swing trading, futures trading, all kinds of different stuff, buying options. And I did sell some options too because, you know, you read articles and you watch videos and say, "Oh, this is cool. Let me try this thing." So, I was trying everything, I was learning, I was doing things. Most of it was horrible.
I would have some wins, it's not like I lost all the time but normally, if you look at it week to week basis, month to month basis, my account balances were just going lower and lower and lower but then, I reviewed all my trades, I sat back I said, "I can't do this, I'm gonna run out of money very soon. What is going on?" Going through all my stuff, doing the review, I found that there were some trades where I actually sold options that worked out in my favor and so, I was like, "Alright, let me focus on this.
Let me see if I can just pick one thing and do it and really learn about it." And the more I looked into it, the more I studied it, the more I read about it, I was fascinated, I was enthralled. I was like, "Wow, this is so cool. Why didn't I know about this before? Why didn't I do this before?" The odds are in your favor, the money is really good, it doesn't take a lot of time, there's not as much stress and I don't have to be stuck in front of my corrupter all day long. I remember there were times when I was day trading that you're in the chat rooms, like every single broker or a lot of these websites, they have chat rooms where these guys who are day trading, they hang out in these chat rooms because they're in front of the computer anyway.
And so, I remember there was this story of this one lady who she put on a trade and then she really had to go to the bathroom. I mean, really, really bad. She couldn't do it and she was a big trader. She ran to the bathroom, by the time she came back she lost $30,000 in like three minutes. And I was like, "Holy cow." And it broke her, it completely ... she had bankrupted her. I don't know if it bankrupted her but her account was like almost zeroed out, she had margin calls, she had to quit being a trader, we never saw her again in the chatroom and it was insane. That's the kind of pressure that these people are under and I don't want to have that kind of pressure.
I mean, jeez, that was crazy. How do you sleep at night? That's why they tell you when you're day trading that you always get out of your trades before the end of the day, before the market closes. Don't go into any trades overnight because that's just insane. You wouldn't be able to sleep at night, you'd be jittery all night, that's not for me. I like sleeping at night, I sleep really well at night and it's all because of the way we trade, you know?
And so really, when you think about it, you go back and you say, "Alright, if I was brand new to this, I had never sold an option before, didn't really know what it was about. I understand push and calls but what would the first trade be? What should I do to get my toe in the water? To really just try this out. I just want to see, I just want to get a feel for this." And there's two options really, I think, I wouldn't want to get into anything really complicated. I want to do something where you won't really have to understand all the mechanics behind it. You don't have to know about implied volatility, you don't have to know about the Greeks, you don't have to understand the probabilities and all this stuff.
Really, what I would say is, okay, if you have an account already and you own maybe 100 shares of stock, okay? Hopefully it's maybe an ETF, maybe it's a big company like Coca Cola or Disney or something like that. I would go ahead and just place a covered call. That would be my first trade. That would be my advice to go in, take a look at it and say, you know what, let's say Disney is trading at $100. In the next 30 days, I don't think it's gonna get to 110. That would be a 10% gain, it's not gonna get to 110. I want to go and sell the 110 call. And maybe I only get $20 for it. That's okay. This is not about how much money you can make, it's about just getting your toe wet, just doing it, popping your cherry so to speak.
And so, that's what my advice would be to be for that. Your first trade, if you have some stock, never done this before, covered call, it's easy to get approved for. Almost nobody gets rejected when you apply to add options trading to your account if you just say, "Hey, I just want to do covered calls." Because that's the one that the brokers for some reason, they really think that's the safest one even though it has as much risk as a naked put on the risk graph. That's another story, we can get into that later so, if you have some shares and you want to just do it and you just want to get a taste of it, what option selling is all about, go ahead and sell one call above where your stock is trading at right now. We don't want to lose your stock, we don't want anything to happen with your stock, we want this option to expire and we want to take that money that we get, right?
So, let's say we sell 10% above the price. So, if your stock is trading at 100, we sell 10% above that so at 110, we sell that 110 call option, do it for about a month, maybe a month to 45 days away and whatever you get. Maybe you get $15, maybe you get 30, $40, whatever you get, that money goes into your account. That's yours. No matter what happens, that money is yours, you never have to give it back. And then for the rest of the time, until that option expires, I just want you to watch it. I just want you to look at it and be like, "Okay, I sold it and I got $30 for it," let's say for example. Let's say you got 30 cents for it, which is $30 credit to you so, you got $30 and every day, that option goes down in value.
Little bit, by little bit, by little bit, by little bit, it's gonna go down, down, down in value until hopefully, it will expire worthless and you'll still have your stock, you'll still have any dividends that you've gotten from the stock but you've also gotten the $30 that you got from the call option. So, that will give you a nice taste of what option selling is all about. It's very basic, it's the simplest trade you can do and if you hone the stock, you can do that. Now, if you do not own stock you can do that. Now, if you do not own stock already or if you have a small account then covered calls might not be the best for you.
There is something that I'll call the, "Poor man's covered call," but that's a little bit more complicated. We're not gonna get into that right now. What I would say if you don't have any stock and you still want to do your first option trade. I would say probably you do something that at our company, we call, "The layup spread." Now, the layup spread is a credit spread with some twists to it.
The criteria for getting in and if you want to learn how we do layup spreads, then you can go to simonsaysoptions.com/layupguide and get the guide. It's really cheap and it walks you through exactly how do you pick a trade, how does a trade work and what are you looking for, okay? So if you need, if you've never done it then pickup the guide, it's really cheap and it will go step by step tell you how to do everything. Now, the reason that we call it, "The layup spread," is because in basketball, the easiest trade you can make for most people is the layup, right? You're standing really close to the basket, you just jump up, bank the ball and just throw it into the net and percentage wise, that's the most made shot.
So, the other shot ... we were thinking about calling it, "The dunk spread," because if you go for a slam dunk, that's kind of easy, right? That's probably the easiest ... that might be easier than the layup but for myself and for Simon, Simon is the one who wrote the guide and who does these, we really have never dunked in our life and so for us, a dunk is not the easiest trade or not the easiest shot in basketball because we have never done one, we couldn't do one if our lives depended on it and so for us, it wasn't the dunk that was the easiest, it's the layup that's the easiest and so, we called it, "The layup spread," because it's probably the easiest trade you can make and so, that's why we call it that.
It's a spread, meaning it has two options, you sell one and then you buy another one but really it's something simple and basically what you do is you find a stock that you like, you want it to be ... for your first trade, you want to find something that's really big. Like an ETF, you can take a look at SPY, that's the S&P 500 ETF, that's a good one. Or find a large company, maybe Apple, Facebook, Google, any one of these large tech companies or just ... those would be good to work with and you see the chart. Now, you don't want to find a chart that's just moving up and down, up and down all over the place, you want to find a stock that's moving in one direction, smoothly. So, relatively if it's going up, you want it to go on your screen, if you look at the chart, you want it to go from the lower left to the top right and you want it to go up slowly, slowly, slowly, not have really, really big moves but small moves and just generally going up, up, up. Or if you want one going down, you do the other way but you don't want it to have big jumps and big movements.
You want it to be [inaudible 00:11:48] have a decent slope going up but smooth. We don't want it to look like big hills and have gaps in the middle and what not. So, you go through some charts, find one that you like and then what you do is you want to sell away from the direction. So, if it's going up then we want to sell some puts. So you take a look at the chart and say, "Okay, in the next month of so, I don't think it's gonna drop more than 15% in price," and I can't go through all the mechanics here. If you want to know in detail, then you have to get the guide but the answer to the question is what I'm trying to get to here.
So basically, how it works is if the stock is going up, we think it's gonna keep going up, we don't think it's gonna drop but if it drops a little bit, it's okay. We're gonna pick a point where we do not think the stock is gonna go so, if it's training at $100 and it's just been going up, up, up, up, we don't think it's gonna go all the way down to 90 or 04 or 85 or even 80 so, we pick a number or we pick a price where we do not think the stock is gonna go in our timeframe. Maybe 30 days or 60 days, however long we want to sell the option for and then, that's the option that we sell. That is the put option that we sell and then we buy another put option right below it, the next put option there. And you can get into this trade for as little as $100. The average trade is probably gonna be around $500, sometimes ... you do that, that's the spread you have. The probability's in your favor, probably 80 to 90% probability of that working out and you can make 5%, 8%, 10, 12% in that short timeframe of a month or so.
So, I think it's a very good strategy because it's less risk, it's very calm. Basically, you're just selling some options, have the odds in your favor, the trend is also in your favor, which is a good thing and then you just sit back and you just watch it and you just let it expire. In this particular strategy though, you have to know when you're gonna get out. So, you can say, "I'm not gonna do anything. I'm not gonna adjust it, I'm not gonna change it. And so, if I'm risking $100, I have an opportunity to make $10 but I'm gonna risk $100 so if I lose it, I lose it." So, in this case if you're putting up $100 as your margin, you're gonna lose $100 if you don't do anything and the trade totally goes against you, 100% against you if it goes. If it doesn't, the other option you have is that you can get out if you're down a little bit or if you can learn to adjust, you can do that. There are different ways to play the trade in the beginning.
If this is your first ever trade, I would probably put up 100 bucks and just not do anything, I would just watch it. That's it. See how it goes, see how it feels. If you lose the 100 bucks, see how that feels. That's a learning experience right then and there. You know? It's like, "Oh man, I just sat here, I didn't do anything. I lost 100 bucks, this is horrible, I don't like this. I'm not gonna do this anymore." But if you understand how it works, most of the time it's gonna be profitable so, if it's something that you enjoy doing, then you can look into it further. Because for some people, selling options might just be too boring. Putting on a trade and just waiting for it for a month, man, that sucks. I don't want to do that. I want to be a gunslinger and I'm gonna be a better, I'm a poker player. I want to just, bet, bet, bet and hopefully I'll hit the lottery. If that's you, then option selling is not for you and this is not the Podcast for you anyway.
But if this is your first trade, like I said, if you have 100 shares, covered call would be good. If you don't have 100 shares, the layup spread is something that is right up your alley. Now, of course, you could do other things. You could be selling naked puts, you could be doing condors, butterflies, straddles or something. That is pretty popular, strangles and straddles are good for people but I think if this is your first ever trade, you're just looking to get in, you're just looking to get your toe wet, get an experience of what it's really like, covered calls or layup spreads.
And again, covered calls are really simple. You can get more information on our website and credit spreads are ... the layup spread is a credit spread with a little bit of the twist and the twist is how Simon actually chooses the trades that he does because you can go into any stock and say, "Okay, I'm gonna do a credit right on this trade, on this stock." But to really get maximum gain out of it, to make sure you win on most of your trades, you're gonna have to do a little bit of digging, you're gonna have to look at the chart, you're gonna have to look at what stocks should you be trading and what stocks you should not be trading and so, Simon actually goes through that in the guide, in the layup guide and you can pick that up if you want to.
It just puts more odds in your favor, so to speak, those are the two things I would recommend. Again, if you wanted to learn about covered calls, you can go www.optiongenius.com/covered calls, we'll put the link in the show notes and then, if you want to learn about the layup guides, you can pick it up at at www.simonsaysoptions.com/layupguide. Alright? If you have any questions, please let me know and remember, trade with the odds in your favor.
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