A short primer onto wheeling US stock options and making your money work for you.

Updated: Sep 4

Options are basically contracts with two things written in that allows PARTY A to buy/sell a stock from/to PARTY B from now to the expiry date of the option contract.

A simple quick-starter for US stock options

SEVEN main things in every option contract you have to understand before trying

1) Buying / Selling of said option

2) Price of option execution (The agreed price of the stock u want to sell/buy at)


3) Premium of Contract (In essence the time value / THETA)


4) Expiry date (When it becomes completely worthless unless exercised/used)


5) The volatility of the underlying stock

(How much the value of the stock changes from day to day / VEGA)

(The more volatile the stock the more expensive the contract)


6) Each option = 100 shares of the underlying stock (Buy/Sell 1 option = 100 shares)


7)Options can be exercised any time at the cost of wasting its entire "Time value"

There are a few ways to trade options

1) Buying a CALL OPTION - aka. Buying a gambling ticket in the hopes of a big win


2) Selling a CALL OPTION - aka. Selling gamblers their ticket with your own stock


3) Buying a PUT OPTION - aka. Buying "insurance" against the fall in value of your portfolio


4) Selling a PUT OPTION - aka. Selling said "insurance"


The premise behind the strategy is as follows.


1) You sell a "PUT option" by pledging your money into a contract that allows the counter party to sell their shares to you at a specific price point on a specific date.


Example 1: A monthly expiration PUT of a volatile stock


Current date 29/11/2021


I Sell Dec 26 200 PUT with a price of $23


This basically means that i will


Pledge my money to buy 100 shares of GME at $200 by Dec 03 2021 from the buyer of said "PUT" contract and getting paid $11 for the "insurance"


Math as follows :


I will tie up S$200*100*1.3718 = $24736

(cost of shares) * (options are 100 shares) * (forex)


I get paid S$23*100*1.3718 = $3155.14

(premium) * (options are 100 shares) * (forex)


Return = (3155.14 / 24736) * 100 = 12.75% over 20 trading days

OR

Return = 3155.14 / 20 = $157.76 Per day

TOO GOOD TO BE TRUE? YES(Sometimes...)


Risk of failure?

The Price ranges from ( $150 - $250 generally)

You can absolutely get stock holding a meme stock and relying on the price cycle persisting to not completely fail at this


What now?


Lets say it fell to $180 one month later you will have a make a decision.

1) Close the contract and eat your losses ($180-200+$11)*1.3718 = $1234 total


2) Start selling call options to people betting the stock will go back up

Example 2: A monthly expiration CALL of a volatile stock


Current date 23/12/2021 (One month later)


I now Sell January 21 200 CALL with a price of $16.5


This basically means that i will now


Pledge my SHARES to sell those same 100 shares of the stock i now hold at $200 to another guy.

Remember the cost basis of my shares was

$200(contract price) minus $23 (Premium collected) = $177 (still a profit of $3 per share!!)


I get paid S$16.5*100*1.3718 = $2263.47

(premium) * (options are 100 shares) * (forex)


Return = (2263.47 / 24736) * 100 = 9.15% over 20 trading days

OR

Return = 2263.47 / 20 = $113.17 Per day


If price stays below $200.

I repeat Step 2(Selling more calls)

with the new cost basis of my shares now at ($177-16.5 = $160.5)

with enough time, you can slowly grind your cost basis down to zero or even negative


If price rises above $200.

I collect, earning both premiums of $2263.47 and $3155.14 over two months of work


and basically restart the strategy


REPEAT AD Infinitum....hopefully

Just remember two important things, pick a stock that you actually WANT to hold and stay disciplined!

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