Shorts for a Summertime Trade

Posted on August 22, 2022 by Bill Newmiller

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Last week we bought (that is, went long on) an ITM call. This week we’ll watch what happens when we go short on an OTM call. A trader who goes short on a call can also be referred to as the writer of the option contract.

When I first began trading options, it took a while to get my head around the idea that I could write a contract to sell something I didn’t have. But there are everyday examples of people doing this outside of the option market. Some months ago, I contracted to have a house built. The builder signed a contract for its sale to me even though construction had not begun. He had obligated himself to sell a house at a certain price, and now he’s legally bound to deliver it to me, despite increased costs in material and labor. A trader who goes short on a call faces a risk similar to the risk my builder has taken on.

The buyer of an option can exercise the call at any time. As a trader who wrote the short call, you could be assigned to cough up the contracted number shares at the strike price and do so no matter how much the underlying price soars. That means that your max risk as the writer of a call is unlimited. That’s why I would never, never advise anyone to trade naked short calls. We’ll discuss more about naked shorts as time goes on.

Meanwhile, let me digress into a story. You may recall the earlier posting about the volatility of Gamestop (GME). Gamestop was a struggling company, and some professional investors thought it was a safe bet that its stock would tank. So many thought so that in aggregation they shorted more shares of GME than actually existed. When GME’s stock soared on the wings of retail traders associated with the subreddit r/WallStreetBets, it was the beginning of the end for Melvin Capital, a major investment fund that had managed twelve and half billion dollars. Read the gory details on Wikipedia. The moral of the story: before you short, make sure you have access to the shares you might need to cover your obligation.

It’s Monday morning, and I’ve made two trades with September 2, 2022, expirations. Both trades are on the SPDR S&P 500 ETF Trust (SPY). This underlying is an Exchange Traded Fund (ETF) that mirrors the S&P 500. It’s a high volume, high liquidity fund with tight bid ask spreads. These are not imaginary trades, but they are paper trades. It’s only monopoly money, but the numbers all reflect real-world conditions.

The first trade is a naked OTM call with a strike of $426. The order filled at $2.12. The analyze tab on TOS provides a profile of this trade. The x-axis is the price of the underlying and the y-axis is the profit/loss on the trade. The blue line corresponds to the value of the trade at expiration and the purple line displays the value of the trade at any intermediate day prior to expiration in a purple line. The gray shaded area of the charts marks an area within 1 standard deviation of the price of the underlying given its volatility. I have found the analyze tab to be extremely useful, and I highly recommend you learn more about its use. You should be able to find a lot about it online.

Naked Short Call

This naked short call is neutral to bearish. As long as the price of SPY stays below our strike of 426, we stand to profit $212.00–the credit we received when we opened the trade. But if the price for SPY rises above the strike, we will find ourselves in dangerous territory. This trade has an undefined risk. It could theoretically cause us to lose more money in our account. That’s why our broker has reserved $7383 of our capital to cover this trade. The broker will increase that amount should the trade move against us. If your account doesn’t have the funds to cover the amount that needs to be reserved, you will receive a margin call.

Let’s look at the second trade, which consists of two option contracts rather than one. In this trade we will also sell the 426 call, but we will define our risk by buying a 427 call. Here’s the profile:

Short Call Vertical OTM Spread

The short leg of this spread brought in a credit of $2.07, the long leg cost us $1.80. So we received a net credit of $0.27 per share. Our max profit is $27 for the trade. Our max loss is $73. Since this trade involves two contracts, our transaction fee will total $1.30. Because this trade has a defined risk, the broker has reserved only $100 of our capital.

Let’s judge the capital efficiency of our two trades by comparing how much profit can be received for each dollar the broker will reserve to cover the trade.

Naked CallVertical Spread
Req’d Funds7383100
Max Profit21227
Profit per Dollar$0.0287$.27
Capital Efficiency

Sometimes you’ll hear the cost of an option referred to as a premium, the same as the payments on an insurance policy. In the case of the long leg on our vertical spread the comparison to insurance is totally applicable, because it dramatically reduces our risk in addition to freeing up capital to employ in other investments. Before ending this post, I should point out that some trading accounts won’t allow a naked short option.

Key take-away: don’t walk naked in the marketplace.

Morning has dawned on August 23. Overnight futures were flat and in the first half hour of trading the S&P has moved little. Yesterday, after we opened our two bearish biased trades, the S&P had one of its biggest declines of the season, losing over 2%. I’ll track these trades through to expiration, updating this post every morning around 10 o’clock and at market close. The results will appear at the end of the post, and I’ll insert a running commentary starting at this point.

The characteristic of the options that we are trying to profit from in this trade is time decay, also known as theta. The biggest risk factor is the possibility that the SPY will soar above the 426 strike we’ve sold. Because we’re doing an academic exercise, I’ve forgone the trade selection and management practices that I’d normally employ. Most important among these would be to have established at the time of the trade an exit point for taking profit and a second exit point for limiting loss should the trade turn against us. One technique we could use for establishing a profit target is to pick a percentage of our max gain and close the trade when that is achieved. A technique for stopping further loss is to close the trade when the underlying price climbs above our short strike.

8-23-22 1600. The market hardly moved today, which was good news for our trade. The gains recorded below for today are almost entirely due to time decay; that is, theta. Notice that the gain for the naked call approximated 10 times the gain for the vertical spread, even though, the buying power required for the vertical spread is only $100 vs. the $6952, which is the new reserve for the naked call. For the capital required used in the naked spread we could have bought 69 spreads. You can calculate what our profit would be on the spread by multiplying our spread profit by 69. As the equity we have in the naked call changes, we can expect to see variation in the buying power, but the capital efficiency of the spread will usually be many times greater than that of the naked call.

8-24-22 1000. Overnight futures were flat, and have continued flat so far this morning. Our gains in both trades continue to be a product of time decay. Can you think of another case when money can be made by the decrease in value of an asset over time? Where the business model itself is to make money on an asset that depreciates? Sure. That’s how car dealerships make a considerable portion of their profits. Sell a new car for $30,000. Buy it back on a trade-in for $20,000 after depreciation has had its way with it. One could argue that the recycling industry similarly earns profit. The value of an aluminum can exceeds its material cost when it seals a beverage. When empty, the can’s value to many people becomes negative, and they are happy to throw it away or give it away. But the aluminum in the can continues to have intrinsic value, which, in large quantities, can become significant.

8-24-22 1600. The changes in value for our trades reflect a movement in the underlying price as well as the shortening of time till expiration. Implied Volatility decreased slightly today, but the main factor that our trades lost value was the increasing price of the underlying. At the end of the day, the price of a share of SPY will control the lion’s share of our profit pie.

8-25-22 1000. SPY reflects the upward movement of the S&P this morning. Again we’re seeing what happens when the underlying price moves against our trade. Although our equity in these trades has decreased, if the price of SPY remains less than $426, we will achieve the maximum profit at expiration. Although, we will let these trades run through to expiration as an academic exercise, we should be interested in what our chances of success are. We can gain insight into our probabilities for success by using probability anlysis tool available on TOS’s Analyze tab.

SPY Probabilities at Expiration

The image above shows a cone that encloses an area that projects price levels into the future using a probability range of 68.27%. Recall from high school math that 68% equates to about one standard deviation on a normal distribution. The lower orange dotted horizontal line marks SPY’s current price and the upper line marks our strike price. The table below the graph displays percentages associated with the price levels marked by the orange lines and option expiration dates. From this table we see that there is a probability of 26.54% that our option will expire above the strike price. We can conclude, then that at this moment we have a 73.46% probability of achieving maximum gain on our trade. However, the chart doesn’t tell us anything about how SPY’s price might vary between now and expiration. For that we need to find out what the chances are that SPY will touch above our strike price. The analyze tab can calculate that too for us.

Probability of Touching

Using the probability of touching image reveals that there is a 49.09% chance that sometime in the next 8 days that SPY may reach our strike price. We’ll see what happens.

8-25-2022 1600. The SPY soared this afternoon, and our trades continued to suffer.

8-26-2022 1000. SPY gave back a little bit of yesterday’s gains. It’s still trading at a level that promises a good gain on both of our trades. Next week as time decay wraps up, we should begin to see profitability in both trades, provided SPY continues to trade at or below its current level. As I’m composing this, the Fed Chair has just made an announcement that the market is interpreting as hawkish, and SPY is falling in response. If this decline continues throughout the day, we can expect to see gains at market close.

8-26-2022 1600. The S&P suffered its biggest one-day drop since mid-June, and the value of our trades soared. If this were a real trade, I would close both trades and take the profit, but we will hold out for the last pennies of profit just to see what happens. Ordinarily, if a trade returns 80% of its max profit, I’ll close. Other traders have different criteria that they use. Recall the max risk we began with for these trades. That risk is now elevated by our unrealized gains. For the spread, that means we are now risking $100 to make another $2. It doesn’t seem worth it. The market lost 3.3% today. That was enough to scare a lot of people into selling. Over the weekend some cooling of the passions that spurred this selling might embolden some to pick up bargains when the market reopens on Monday, especially if after hours trading this weekend shows upward movement.

8-29-2022 1000. SPY seems to have stalled just above 400 and may be reversing. The value of our trades continues to climb. There’s very little extra profit that we could wring from them. Holding onto them at this point offers almost nothing but continued risk. But we’ll take these trades all the way.

8-29-20220 1600. Little movement in the market. No change in the value of our trades, because they have very little growth potential.

8-30-2022 1000. Our trades remain static, will continue on so unless SPY pops higher.

Change of plan. I know I said we’d stay with these trades to the bitter end, but given that we’ve wrung out almost all of the profit potential, I just don’t see the purpose of locking up capital for very little potential gain.

DateTimeMarkNaked Call P/LVertical Spread P/L
8-23-221000413.88656
8-23-221600412.519810
8-24-221000412.3911812
8-24-221600413.6411410
8-25-221000416.46664
8-25-221600419.438-4
8-26-221000418.5524-1
8-26-221600405.1420025
8-29-221000402.9620626
8–29-221600402.6320626
8-30-221000402.2420626
8-30-22Trade closed due its success
Trade P/L Status


Below is an analysis of our trades’ successes. In both cases, we see very respectable gains that benefitted greatly from the leverage that options provide. The defined risk and capital efficiency of the vertical spread makes it my favorite. Keep in mind, though, that had the SPY moved decisively in the other direction, both of these sweet trades would have quickly soured. Our next post will more extensively explore factors that contributed to their success.

Naked ShortBear Call Vertical
Buying Power Used7383100
Max RiskInfinite73
Max Gain21226
Realized Gain20626
Contract Fees1.302.60
Net Gain204.7023.40
Capital Efficiency2.77%23.4%
Length of Trade8 days8 days
Approxiate Annualized Return on Capital126%1067%
Trade Analysis
Posted in Basic Trading Skills, Trade Demonstration, Trade Management | Leave a comment

Extrinsic Value: Nailing Jelly to a Wall

Posted on August 21, 2022 by Bill Newmiller

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Keeping up with the value of an option can be challenging. You’ve got the intrinsic value, which changes as the stock’s market value changes, and you have extrinsic value, which at first seems to change mysteriously and unpredictably. In this post, we’re going to get into the weeds and try to demystify the changes you see in extrinsic value by looking at the factors that affect extrinsic value: time until expiration, price of the underlying, and volatility. First, let’s look at the option chain for a contract expiring on Friday of this week. We’ll look at Amazon this time and our chart now displays a different set of columns, because we will focus on the Theo Price:

AMZN 26 August 2022 Option Chain captured on 8-21-22

The Theo (short for theoretical) Price is a tool we can use to estimate how changes in time until expiration, underlying price, and volatility will affect the market price of an option contract. Because the settings for Theo Price are all set to the current date of this writing, the current price of the underlying, and the current volatility, the Theo Price is simply the average of the bid and ask prices.

First, let’s experiment with the time till expiration by moving the calendar one day, to 8/22/2022.

Theo Price 8-22-22

Check out the 137 strike. The Theo Price on 21 August was $3.28. One day later, it is 2.97. The table below lists the Theo Price for each day of the coming week:

DateTheo PriceChange From
Previous Day		% Change
8-222.97-0.32-9.75
8-232.63-0.34-11.45
8-242.24-0.39-14.83
8-251.21-1.03-45.98
8-260.92-0.92-76.03
Change in Theo Price Over Time

The Theo price changes increasingly rapidly as expiration approaches. This is what traders are talking about when they speak of time decay. Another term they will often use is theta (Θ), the Greek letter which equates with the Latin letter ‘T.’

Next, let’s see how changes in volatility affect option prices. We’ll use today’s date and price, but contrast how increases and decreases in volatility affect the Theo Price. I’ll not post a screen capture. If you’re still interested in options, you might want to download a trading platform and try to learn how to perform this sort of analysis yourself.

Volatility ChangeTheo Price
+1%$3.34
-1%$3.21
+5%$3.60
-5%$2.95
+10%$3,93
-10%$2.62
Changes in Volatility and Theo Price

We will discuss volatility at length in future posts. We will defer on discussing how we might use changes in the underlying price to help in trade selection and management. For now, the take-away is that option prices fall as volatility falls and as expiration approaches.

Posted in Basic Trading Skills, Option Pricing | Tagged | Leave a comment

Telling the Future

Posted on August 20, 2022 by Bill Newmiller

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Last week we tracked an imaginary ITM long call at a strike price of 170 with a DTE of 19 AUG 22. In trader shorthand we might identify the contract as .AAPL220819C170. That’s the symbol we used at the end of the previous post to track how the option’s price moved. Here’s a reposting of that chart:

.AAPL220819C170 Y-axis starts at 6/1/22, ends at 8/19/22
The candles show daily movement and the purple line tracks the price of the underlying (AAPL)

At expiration the call was ITM (in the money) because the underlying stock’s price was greater than the strike price. When the price of the underlying exceeds the strike price of a call, we can say that the call has intrinsic value. If the strike price of a call is greater than the price of the underlying, the call has no intrinsic value. Our imaginary trade last week still had some intrinsic value (and only intrinsic value), which is what we would have realized when it was automatically exercised. Unfortunately, the price we paid for the contract exceeded its residual intrinsic value at expiration.

Prior to expiration the contract held extrinsic value as well as intrinsic value. Intrinsic value varies as the underlying price changes. Extrinsic value varies as multiple other factors change. Primary among those other factors is time until expiration. Extrinsic value decreases at an increasingly rapid rate as the expiration date approaches. You might recall last week, that if our imaginary trade were a real trade, I’d have closed the call on Wednesday or Thursday morning and taken a profit. Knowing how quickly extrinsic value erodes in the days just prior to expiration strongly informed the timing of my decision to close the trade.

A little more about intrinsic and extrinsic value. If the price of an underlying stock remains the same, its intrinsic value will also remain the same. Examine this capture of the option chain for Amazon (AMZN) and note that the intrinsic value of the options remains constant across all of the expiration dates listed:

Intrinsic and Extrinsic Values of Options

Unlike the intrinsic values, the extrinsic values are greater for options that are further into the future. You’ll hear people say that you can’t predict the stock market, but there’s a major exception to this rule: as sure as the amount of daylight decreases between the summer solstice and the winter solstice, so too will extrinsic value decrease. This is a simple truth that successful traders use to great advantage.

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Calling All Traders

Posted on August 19, 2022 by Bill Newmiller

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In option trading, a call is a type of contract. Traders can buy calls, which give them the right for a specified amount of time to buy stock at a specified price. The price specified for the stock is the strike price. The time that the contract is in force is described by its expiration date or DTE. The published cost of buying the call contract is the Ask price. The image below is a screen capture of the option chain for Apple (AAPL) made on Sunday afternoon, August 14, 2022, which is when I began composing this post. At the time of the capture the last trade price for AAPL during normal trading hours was $172.10 per share. However, there had been some afterhours trading that sent the bid and ask prices for the stock (not the options) to $171.85 and $171.90 respectively. This information can be retrieved by looking at the area enclosed by a red rectangle. Further below in the image you’ll see a green rectangle that contains information about a call contract with a strike price of $170 and an expiration date of August 19, 2022. The two rightmost columns display the bid and ask prices for this option contract. The ask price is the cost per share associated with this contract. The contract itself bundles 100 shares, so the price of the contract would be $335. Depending on your broker, a fee will be added. TD Ameritrade charges 65 cents per contract, so the total price of the trade would be $335.65. We’re going to do a little thought experiment now and see what might happen if we bought the 170 call, and then we’ll compare those results with what might happen had we simply invested in AAPL stock directly. I’ll use actual data and complete composing this post over the life of the option.

AAPL Sunday, August 14, 2022
Captured from Thinkorswim

Now take a look at AAPL’s option chain at mid-day Wednesday, August 17,2022, which is when I wrote the following section of this post.

AAPL Wednesday August 17, 2022
Captured from Thinkorswim

Mid-day on Wednesday AAPL’s bid price (what it can be sold for is now $173.38. We also see that its high so far on Wednesday is $174.45. The bid price for the 170 strike has risen to $3.80.

Let’s consider a couple scenarios for our imaginary trade. If we closed the trade by selling the $170 option for $3.80, we’d realize a profit of $0.45 per share. Since the contract was for 100 shares, our total profit would be $45 minus fees of $1.30 (65 cents for each of our two transactions). Net profit would be $43.70).

Let’s analyze our resulting profit a bit more. The total risk we assumed before applying fees was $335. If we divide our gain before applying fees by this amount we have: 45 / 335 = .1343 or 13.43%. We earned this gain over three days. Anualized, the gain would approximate 1634%, a stunning return.

Now, let’s examine a second scenario. Say we simply bought a hundred shares of AAPL for $171.90 per share, when that was its price. We would be investing (i.e. risking) $17,190. If we sold that stock on Wednesday at $174.45 per share, we would be paid 17,445 for that sale, a profit of $190.00. How can we measure the percentage return on risk in a stock purchase like this one? By convention, we’d divide our return (190) by our purchase price ($17,190) and be happy with 1.1% return over the three-day period. Realistically, we know, though, that our risk was really much less than $17,190 because the likelihood that AAPL shares would fall to zero is infinitismally small. We can, however, estimate our risk by looking at how AAPL share prices vary in the past. There are many statistical ways to make this estimate, and as new traders become old traders, they develop preferences for how they make such estimates.

An important take-away: Options can be a very efficient use of capital.

Now, it’s Thursday. About 24 hours has passed since my last update to this post. It’s 11:34 ET. Last price for AAPL is $174.66. The 170 strike can be sold for $4.70. You know how to do the math to calculate our profit/loss depending on whether we exercise the option or close it. Tomorrow is the expiration date for our option. So far, we haven’t considered what will happen at expiration. That depends entirely on what AAPL is trading at when trades are settled after the market closes. If the the closing price of AAPL is less than $170, the option will expire worthless. You will have lost your opportunity to close the trade at a profit. If AAPL trades above 170, it will automatically be excercised unless you tell your broker ahead of time that you don’t want it exercised. When the option is automatically excercised, you have just bought 100 shares of AAPL for $170 a share. If you don’t have $17,000 available in your account, you’ll have to free up that amount either by liquidating other holdings or depositing more money. You can also sell your stock after the market reopens on Monday for whatever the trading price is then. You might win some money or you might lose some money. The vast majority of traders will close their option trades before expiration to avoid the uncertainties associated with expiration. We will explore these uncertainties in greater detail in later posts.

So what should be done today? Nothing? Exercise? Close the trade with a $90 profit? I’m not going to recommend a path, but I’ll tell you what I would do and why I would do it. I’d close the trade and be satisfied with the profit. I would not excersize the option because I don’t want to tie up $17,000 in AAPL stock. I would be happy to have $90 by closing the trade and eliminating the worry going into tomorrow.

Today is Friday, August 19, 2022. When the market closes this afternoon, those holding this trade will have no more control over it. The value of our option contract will go to zero. If AAPL remains above $170, we will become the owners of 100 shares of the stock. Our total cost for those shares will be 17,000 plus the $335 we paid for the option contract plus the 65 cent fee we paid to open the contract: $17,335.65. Last night AAPL closed at $173.75. At 10:56 ET this morning it’s trading at $171.86. We could buy back our option contract for $355, a loss of $20 for the trade. To break even on excercising the option (without considering the 65 cent fee for opening the contract), AAPL would have to trade at 173.35 (170 + 3.35).

Not to be smug, I would have closed the option yesterday, and walked away with 90 dollars. We should think seriously about getting out of the trade before it expires, else we cast our fate to the wind. I’ll report AAPL’s close after market tonight.

August 19, 2022, after market close. AAPL closed out the week at $171.55. Had we kept our trade open through expiration, we would expect our option to be automatically exercised for $170 a share (17,000). We could sell those one hundred shares after the market reopens next week. We don’t know for sure what the price of AAPL will be then. If it stays put, we will have lost $180.65:

Cost of 170 call option$335.00
Transaction fee$000.65
Value of 100 shares at expiration$17155.00
Net-$180.65
Calculating P/L

Finallly, let’s look at the chart that records the option’s price swings.

AAPL220819C170
Y-axis is day starting at 6/1/22, ending at 8/19/22
The candles show daily movement, and the purple line tracks the price of the underlying (AAPL)

The chart was captured at closing, so the rightmost candle’s closing price is composed only of intrinsic value; that is, the difference between the strike price and the price of the underlying stock. In a future post we’ll examine in greater detail both intrinsic value and this chart.

Posted in Basic Trading Skills, Trade Demonstration | 2 Comments

Understand Stocks Before Buying Options

Posted on August 19, 2022 by Bill Newmiller

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Options are a type of derivative. That is, their value derives from another financial instrument. If you buy an option on AAPL stock, for example, the value of the option depends primarily on the price of AAPL stock. Many, maybe most, option traders begin their careers by buying stock. A strong understanding of the stock market in invaluable to the option trader. When you buy a stock, you actually own a piece of something, typically a share in a business, though you could also buy into a fund (an ETF) that contains a collection of stocks. When you buy shares in a company, you tie a part of your financial well-being to the fortunes of that company. You hope that the company is profitable, and you expect that your investment will appreciate as the company moves forward. But you also know that businesses have to assume certain risks that have the potential to depress the market price of their shares. The market price of a share of a company reflects the consensus judgment of a company’s value made by investors who consider a variety of factors. Just a few of these are the company’s profitability, its growth potential, its product line, the talent pool it draws on, its record on paying dividends, and external factors. The market price reflects a crowd-sourced opinion of what the company is worth. When you buy a share of AAPL, you are acting on an opinion that the current market consensus on the price of its stock is low and you expect it to rise. When you sell your shares, you are acting on an opinion that the market has over-valued the stock and that its price is likely to fall. The gain you can achieve by holding stock depends on the dividends you receive and any increase in the share price. Your risk is equal to the equity you hold in the stock. The worst case is if the stock price were to descend to 0. That’s unlikely, but individual stock issues can become highly volatile and experience considerable gains and losses. An extreme example of volatility can be seen in Gamestop (GME). The chart of its pricing between early 2021 and summer 2022 tells its story.

GME weekly chart 3-29-20 through 8-15-22

I know young traders who made and then lost tens of thousands of dollars buying and selling Gamestop. Many bought at precisely the wrong time, and never regained their full loss. Others, of course, sold at the top and walked away with fortunes. What motivated those who bought at the top and those who sold at the top? Let me suggest that retail traders who bought at the top were motivated by greed. Those who sold were motivated by fear–fear of losing gains they’d achieved. All traders experience greed and fear. Successful traders need to be able to rationalize those emotions; that is, they need to unemotionally consider data that can justify actions to satisfy greed, or to respond sensibly to fear. Such data can also come from the price chart. Earlier I wrote that market price reflects a consensus of what a share is worth. Individual traders may think the stock is worth more, others less, but the market at large makes the final judgment. You may have noticed that as we closed in on 2022, Gamestop’s price began to vary between $20 and $50 per share. That’s still a pretty broad range, but these parameters tell us something about those trading GME. When they see the price heading towards $50, as a group, they become fearful and begin to sell their holdings. Conversely, when shares fall towards $20, they see an attractive price offering a good opportunity for profit. These levels of support and resistence can become objective data that inform your decisions on buying or selling stock. They will also play an important role in option trading.

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The Moving Parts

Posted on August 14, 2022 by Bill Newmiller

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A profit machine for trading options has a lot of moving parts. The first challenge new traders face is getting their heads around the fundamentals of how option contracts work. You can find a lot of places online that explain the basics of calls and puts, option spreads, and how options are priced. A lot of it will seem impenetrable. I found that the best written and most accurate information was available online through my brokerage account. Although I’m not going to recommend any particular brokerage firm or information source, I will share the sources that helped me get the basics, and I will list them in the sidebar of this blog. I opened an account at TD Ameritrade, where I continue to explore lessons, articles, and webcasts. Even without a TD Ameritrade account, you can view their webcasts. I used $50 dollars to open an account there, and gained access to a lot more–data, interactive courses, and their trading platform Thinkorswim(TOS). I loaded TOS on my PC, and discovered a bewildering, but powerful, application that supports live trading with real money as well as pretend trading, which they call a paper account. Although I’ve used TOS for over a year, I still learn new things about what it can do. Learning to use a trading platform is important, but there’s a lot more to trading options than just pointing and clicking. Still pointing and clicking is where I began. Another resource I used was Investopedia, which has many understandable articles on various aspects of trading. I also learned from Option Alpha, which offers a very specific approach to trading options that is worth consideration. In the end though, as I learned more about how option pricing works and became more knowledgeable about the underlying stocks and exchanges traded funds (ETFs), I developed my own unique approach.

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The Journey Begins

Posted on August 13, 2022 by Bill Newmiller

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I’m not ready to stop learning. So here I am, an old dog trying to learn new tricks. The tricks that engage me these days are trading tricks, specifically trading stock options. I began my study in earnest at the beginning of 2022. The S&P 500 was at an all-time high. We didn’t know that it would begin a significant decline, that inflation fears would coalesce, that the bears would soon be snarling. I knew that options trading could be profitable in down- as well up-trending markets, and I was transfixed at the thought that I could be successful no matter what direction the market took. Here, in this blog, I’ll write about what I’ve learned, my successes, and my failures in the path I’ve taken to learn how to trade options successfully.

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