Start the Journey Here - Trading 101
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Options trading can be intimidating, but we're here to make it easier for you.
We've developed a series of articles to help you get up to speed quickly and confidently. Additionally, we host a weekly Friday session to help newer traders feel part of the Sheridan community.
Our goal is to get you trading and profitable as soon as possible. We're here to provide tools, tuition, and answer all your questions so that you can move one step closer to financial independence.
Let's begin!
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What are Options?
What are Options
Options are financial contracts that give the holder the right to buy or sell a financial instrument at a specific price for a certain period of time. Options are available for numerous financial products, such as stocks, funds, commodities, and indexes. Like most other asset classes, options can be purchased with brokerage investment accounts.
Options trading may seem overwhelming at first, but it’s easy to understand if you know a few key points. Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.
There are three key features of options:
Options trading may seem overwhelming at first, but it’s easy to understand if you know a few key points. Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, exchange-traded funds (ETFs), and mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.
There are three key features of options:
- Strike price: This is the price at which an option can be exercised.
- Expiration date: This is the date at which an option expires and becomes worthless.
- Option premium: This is the price at which an option is purchased.
What is a Call Option
A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right, not the obligation, to exercise the call and purchase the stocks. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer.
What is a Put Option
A put option (or “put”) is a contract giving the option buyer the right, but not the obligation, to sell—or sell short—a specified amount of an underlying security at a predetermined price within a specified time frame. This predetermined price at which the buyer of the put option can sell the underlying security is called the strike price.
What is an Option Spread
An options spread is an options trading strategy in which a trader will buy and sell multiple options of the same type – either call or put – with the same underlying asset. These options are similar, but typically vary in terms of strike price, expiry date, or both.
There are three main types of options spread strategy: vertical, horizontal and diagonal.
A vertical spread strategy – sometimes known as a money spread – uses two options with identical expiry dates but different strike prices. A vertical spread strategy enables traders to limit their downside risk, but in doing so, they also cap their upside potential. This is explained in the example below.
A horizontal spread strategy – also called a calendar spread – uses long and short options with identical strike prices but different expiry dates. The primary aim of a calendar spread is to profit from the effects of time decay on two different expiry options. Time decay – or theta – is a measure of how much an option’s price declines over time.
A diagonal spread strategy involves simultaneously entering into long and short positions with two options of the same type, but with different strike prices and expiries. Diagonal spreads make use of time decay like a horizontal spread, but they also benefit from any movements in an option’s price for every point of movement in the underlying market – known as delta.
There are three main types of options spread strategy: vertical, horizontal and diagonal.
A vertical spread strategy – sometimes known as a money spread – uses two options with identical expiry dates but different strike prices. A vertical spread strategy enables traders to limit their downside risk, but in doing so, they also cap their upside potential. This is explained in the example below.
A horizontal spread strategy – also called a calendar spread – uses long and short options with identical strike prices but different expiry dates. The primary aim of a calendar spread is to profit from the effects of time decay on two different expiry options. Time decay – or theta – is a measure of how much an option’s price declines over time.
This is because options that are nearing their expiry date are more susceptible to time decay than longer-term options. As a result, in a horizontal spread strategy a trader can use a long-term option to offset any losses incurred if a short-term option is looking likely to expire worthless, and potentially still profit from the longer-term option.
A diagonal spread strategy involves simultaneously entering into long and short positions with two options of the same type, but with different strike prices and expiries. Diagonal spreads make use of time decay like a horizontal spread, but they also benefit from any movements in an option’s price for every point of movement in the underlying market – known as delta.
What are "The Greeks"
An option's price can be influenced by a number of factors that can either help or hurt traders depending on the positions they take. Successful traders understand the factors that influence options pricing, which include the so-called Greeks. They are a set of risk measures named after the Greek letters that denote them, which indicate how sensitive an option is to time-value decay, changes in implied volatility, and movements in the price of its underlying security.
These four primary Greek risk measures are known as an option's delta, gamma, theta, and vega.
- Delta is a measure of the change in an option's price or premium resulting from a change in the underlying asset, while theta measures its price decay as time passes.
These four primary Greek risk measures are known as an option's delta, gamma, theta, and vega.
- Delta is a measure of the change in an option's price or premium resulting from a change in the underlying asset, while theta measures its price decay as time passes.
- Gamma measures the delta's rate of change over time, as well as the rate of change in the underlying asset, and helps forecast price moves in the underlying asset.
- Vega measures the risk of changes in implied volatility or the forward-looking expected volatility of the underlying asset price.
- Theta measures time decay in the value of an option or its premium.
As your journey continues - you will have an intimate relationship with all of the above.
As your journey continues - you will have an intimate relationship with all of the above.
Which Broker should I use?
Our Preference...
ThinkorSwim (TOS)
Quite simply the gold standard in Option trading.
What we use here at Sheridan Risk Management in the sessions and what you will see most of our members using.
They also have a free service where you can book a time with the support team for a free one-on-one session to orientate yourself with the platform.
What we use here at Sheridan Risk Management in the sessions and what you will see most of our members using.
They also have a free service where you can book a time with the support team for a free one-on-one session to orientate yourself with the platform.
Tastytrade
A very good and fast alternative to TOS, made by the same people in a more slim footprint.
Wonderful support, excellent training videos and available in more countries than TOS.
Much easier to sign up for than TOS and margin requirements are usually less.
Wonderful support, excellent training videos and available in more countries than TOS.
Much easier to sign up for than TOS and margin requirements are usually less.
Interactive Brokers (IKBR)
If you are in a country that has neither TOS or Tastytrade then IKBR may be your best alternative.
Available is almost every country on the planet but does have a more "clunky" interface than the other brokerages.
Competitive pricing and many webinars to get you started.
Available is almost every country on the planet but does have a more "clunky" interface than the other brokerages.
Competitive pricing and many webinars to get you started.
Robinhood and similar free trading platforms are not mature enough for "adult" option trading.
As mentioned by a good friend of the community,
As mentioned by a good friend of the community,
"Friends don't let friend's trade on Robinhood"
How many $$$$ do i need to Start ?
Set your goals !
The wonderful thing about option trading is that you can start with very little money. Most of us all started with $2000-$5000 in a trading account and refined our skills to grow the account.
As a new trader - your goal should be to "Learn the Craft", because that is what this is. This is a Craft.
Imagine walking into a hardware store and buying $4000 worth of super expensive lumber so you can go home and build yourself a dining room table with little to no woodworking experience. Surely you will just destroy the expensive lumber with power tools and be left with something unusable because it is really hard to perform carpentry if you have never done it before.
The same goes with trading, You learn the craft with the smallest amount of money you can then as you get more profitable, experienced and confident, you can bump up your trade size.
A lot of the community have a "long" portfolio of stocks and we dedicate a small amount of that portfolio to Option trading. This may also be an option for you.
So start with a small account, hone those skills with real but small trades and enjoy the process.
This is your way to financial freedom.
As a new trader - your goal should be to "Learn the Craft", because that is what this is. This is a Craft.
Imagine walking into a hardware store and buying $4000 worth of super expensive lumber so you can go home and build yourself a dining room table with little to no woodworking experience. Surely you will just destroy the expensive lumber with power tools and be left with something unusable because it is really hard to perform carpentry if you have never done it before.
The same goes with trading, You learn the craft with the smallest amount of money you can then as you get more profitable, experienced and confident, you can bump up your trade size.
A lot of the community have a "long" portfolio of stocks and we dedicate a small amount of that portfolio to Option trading. This may also be an option for you.
So start with a small account, hone those skills with real but small trades and enjoy the process.
This is your way to financial freedom.
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Can i work 9-5 and be Profitable ?
Absolutely !
A vast majority in our community already do exactly this.
It is a simple matter of matching your trading practices and strategy to match your lifestyle.
We will teach you many different strategies as we have different sessions each week for every type of portfolio.
A 9-5 job is not a problem for an active trader, Sometimes as a beginner - it can be a benefit and you wont over trade !
It is a simple matter of matching your trading practices and strategy to match your lifestyle.
We will teach you many different strategies as we have different sessions each week for every type of portfolio.
A 9-5 job is not a problem for an active trader, Sometimes as a beginner - it can be a benefit and you wont over trade !
Write your awesome label here.
The Option Traders Language
Yes !
if you spend any time with an Options or Derivative trader of any kind - they will sound like a mixture of a kids TV show and a Spanish auctioneer.
It all sounds rather daunting.. but in reality - there are about 6-8 words you need to know and the rest are all just variations on a theme.
It takes a few days or maybe a week to understand, but once you start - you will sound exactly the same !
It all sounds rather daunting.. but in reality - there are about 6-8 words you need to know and the rest are all just variations on a theme.
It takes a few days or maybe a week to understand, but once you start - you will sound exactly the same !
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New Trader Checklist !
