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most options Traders make one fatal
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mistake without realizing it and this is
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the primary cause of their failure in
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this video snb's head of options trading
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shows you what that major error is and
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how to correct it quickly and easily I'm
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Mike B Fury and we're one of the top
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proprietary trading firms located in New
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York City since 2005 and proud to
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develop numer 7 and even eight figure
00:00:24
per year Traders watch take notes and
00:00:27
learn from a professional proprietary
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Trader on our desk so you can grow your
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trading account hi I'm Seth freberg and
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I'm the head Trad of SNB capitals
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options trading desk here in Manhattan
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and I can tell you from training
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professional Traders and working with
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thousands of retail options Traders like
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yourself from all over the world the
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absolute number one complaint that I get
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from beginning options Traders goes
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something like this they tell me it's
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hard enough for me to pick stocks that I
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think are going to go up and be right
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about it but what drives me crazy is
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that when I buy a call on that stock
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which is what I thought you were
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supposed to do when you think a Stock's
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going to go up and that stock actually
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does go up why the hell does that call
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go down most of the time in other words
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I got the Stock's direction right and I
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still lose buying a call option on that
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stock is there any way to make money
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trading options you can't imagine how
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many times I've heard this exact
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complaint and so the purpose of today's
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video is to be honest with you and tell
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you that if you keep buying calls on
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stocks that you think are going to go up
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you're most likely going to keep having
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this exact same experience which is
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going to get very frustrating but
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there's an easy way out as of this exact
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dilemma and once you implement it you're
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going to be amazed at how much your
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options trading will turn around and I
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can assure you that once you understand
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this one basic principle and you follow
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what we're teaching you in this video if
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you do get the direction right on a
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stock you will make money on the options
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trade so stick around because this is
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obviously very important for you to
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understand now before we get into the
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strategy we'll be teaching you in
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today's video if you're absolutely brand
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new to options trading and you don't
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know much about how options work we've
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put together a video for you to
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understand options Basics and if you
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click the video appearing on your screen
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right now it will lay out the groundwork
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for you to understand the options
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strategy that we'll be sharing with you
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in this video Then when you're finished
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you can come back and watch the rest of
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this video this month May of 20124 has
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had an extremely bullish start with the
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S&P 500 up 5.3% through just the first
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half of the month ending on May 17th
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last Friday which is a blistering start
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to the month with the bulls fully in
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control after a fairly mild pullback
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that took place in April and so the
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alltime high that had actually been set
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back in March of 2024 was exceeded on
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May 15 and so every day offers the
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opportunity for the Spy to break yet
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another record to the upside as the
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market remains convinced that the FED is
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going to start reducing interest rates
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without a serious slowdown in the
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economy the soft Landing that everyone
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was hoping for and whether the market is
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eventually right about this outcome or
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wrong it's been acting like that is
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exactly what's going to happen and so
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may has undoubtedly been a really
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bullish month just the kind of month
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that you'd think buying calls each day a
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few points above where the Spy is
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trading is bound to give you a winning
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outcome after all we already know it's
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been a blistering rally so far so we
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don't even have to worry about the
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direction of spy we already know it so
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let's go back and see exactly how this
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would have played out knowing ahead of
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time that spy was going to go up most of
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the days and let's assume that we have a
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$2,000 account to start with Okay so
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let's start first thing just as the
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market is opening on May 1st and with
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spy opening at
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50170 we pull up an options chain that
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expires that same day May 1st and you'll
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notice that there's a column called
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Delta that you'll see on any brokerage
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platform that supports options trading
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and so we're going to look for the call
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option which is as close as we can get
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to at least 20 deltas which in this case
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is the 506 call as you can see and we're
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going to buy five of those for a price
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of 59 cents and so to explain what's
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going on here what's known as an options
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Delta is a mathematically arrived at
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prediction of how much an options price
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is likely to move based upon how much
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the stock price moves and depending on
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how volatile the market is expected to
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be on any given day the 20 Delta call
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can be really close to where the stock
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is trading sometimes just a few points
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away
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and on other days it could be a little
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further away and so uh on this day it
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was a little more than four points above
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where the Spy opened that day okay and
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so from a cash flow standpoint what's
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happened is that the price of the calls
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were 59 cents but remember each spy call
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option represents 100 shares of stock so
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we multiply that by 100 and we bought
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five of them and so the final cost to us
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is
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$295 as you can see from the calculation
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and so so by the end of the day the Spy
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had indeed rallied off the open but then
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sold off in the afternoon closing at
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5.83 and so we're going to start a
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record of each of these trades through
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the first half of May and as you can see
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with the stock closing at
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5.83 the call option expires worthless
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right because no one is going to
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exercise the option to buy spy at 506
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when you can get the shares in the open
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market for 500 83 and so that call just
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expires with zero value and you lose
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your trade of course okay so let's move
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to the second day of May and with the
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stock opening up at
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[Music]
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for the rest of the day closing at
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505.01
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but our call was up at 506 and so this
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time the market rallied strongly off the
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open we bought calls at the open and we
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got nothing to show for it because the
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market closed below our call strike
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price again and so that becomes another
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loss even though we were absolutely
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right about the Market's direction that
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day and bought calls as a result and so
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updating our record record we end up
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with another loss of
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$215 now on the third day the 20 Delta
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call was $513 and we paid 285 for five
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of those but the Spy closed at 51131 and
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so even though the Spy was up
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$628 cents that day we still lost money
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on the trade okay so May 3rd was a
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Friday so the next trading day was
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Monday May 6th and so on that day the 20
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Delta call was at 5:15 for which we paid
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$165 but this time the market really
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rocketed up and closed at 5657 and so
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this one is a win because as you can see
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from the calculation the spy's closing
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price was a157 above the call strike
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price so each Call's value is $157 at
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the end of the day so we multiply that
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value times the 100 shares it gives you
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the right to buy at 515 and because you
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own five of those calls the final value
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of the calls is 785 and to determine the
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profit on the trade we subtract out the
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original cost of the options for a final
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profit of
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$620 but then as you can see we had
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another loss on May 7th and then on May
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8th something interesting happened on
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that day the 20 Delta call was 5117 and
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the Spy closed at 51719 so you think hey
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that's a good thing the Spy closed above
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our strike price by 9 C but then you
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calculate it out and you realize that
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for those five calls to require a total
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cost of $190 at the beginning of the day
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that meant each option would have been
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priced at 38 cents initially and at the
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end of the day the Spy closed 19 cents
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higher than the 517 strike price so all
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five options had a value of $95 at the
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close but we paid $190 for them meaning
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that that even though we were right
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about the market Direction and we bought
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a call that expired with value the trade
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still lost because the Spy didn't really
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rally by enough to make the option worth
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more than what we paid for it in the
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morning and so again we have a loss even
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though we were right about just about
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everything okay so at this point now so
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it's not to be too tedious we'll just
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show you the rest of the record which
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you can do for yourself if you happen to
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have options back testing software and
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as you can see other than wins on May
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9th and May 15th all of the rest of the
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trades were losses and so to summarize
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the call buying campaign resulted in
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three wins 10 losses and an overall loss
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of
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$265 which comes to a negative return of
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13% in a very bullish period for the spy
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and so at this point we have have to ask
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ourselves do options even work should we
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just bag this idea of trading options to
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express our directional predictions on a
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stock or is there another solution well
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let's try something else and we'll see
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so let's go back to May 1st again the
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same day we started our call buying
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campaign and on that morning instead of
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buying the 20 Delta call we'll go ahead
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and try something completely different
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remember put options only only have
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value if the stock closes below the put
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strike price on the day that it expires
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but if the stock price closes above the
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put strike price then the put expires
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with zero value the opposite of a call
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option so if on May 1st instead of
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buying the 20 Delta call we go ahead and
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sell five put options at the first
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strike price below a 40 Delta put which
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in this case as you can see is the 500
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put which has a Delta of
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36.67% and you'll notice that the 500
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put is actually pretty close to where
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the Market's opening up that day at
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50170 and in fact on most days the first
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strike below 40 Delta will usually be
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just a point or two below where the
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market opened and so let's go ahead and
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sell five of those and then move down
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two strikes to the 498 puts and buy five
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of those and when we do that we are
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entering into what options Traders refer
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to as a put credit spread where you sell
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put options higher up on an options
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chain and buy put options below those on
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the same options chain and so in the
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case of this strategy instead of
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spending cash to buy calls in this case
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as you can see for the calculation we're
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actually going to be receiving cash
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because the puts we sold were priced at
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$129 but the puts we bought were priced
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at 69 and so netting it down the five
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put credits spreads bring in $300 for
00:12:01
which your broker will require you to
00:12:04
have at least $700 in your account in
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order to execute this trade which is
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also the trade's worst case scenario
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loss and so moving to the end of the day
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as you'll remember spy actually closed
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lower where it opened closing at 500.
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183 and so even though the market closed
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below where it opened let's take a look
00:12:26
at the outcome of our put credit spread
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trade and after taking into
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consideration the $300 that we
00:12:33
originally collected the rest is pretty
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simple because both the 500 short puts
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and the 498 long puts both expired
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worthless because the Spy closed above
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both their strike prices resulting in us
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just pocketing that $300 as our trade
00:12:50
win so instead of losing our entire call
00:12:53
Premium as we did when we bought the
00:12:55
call on the open using the previous call
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buying strategy on May 1st we ended up
00:13:01
keeping our entire premium that we
00:13:04
received selling the put credit spread
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for a full win of $300 on that first
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trade and so we'll now start keeping a
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record of the put credit spreads that we
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sold located right below 40 Deltas each
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day as opposed to the call buying
00:13:19
strategy we were using earlier and so
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let's turn to this next day May 2nd and
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in this case we're selling the 502 and
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buying the 500 puts and collecting
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$260 with a worst case scenario loss of
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740 and as we saw previously the Spy
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bounced that day to 505.01 and so our
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outcome is going to be pretty much the
00:13:43
same as our first trade where both puts
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expired well below the Spy closing price
00:13:50
thus expiring worthless and again
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allowing us to pocket the initial $260
00:13:56
that we collected and so if we keep
00:13:58
going through this same exercise every
00:14:00
day through to May 17th just like we did
00:14:03
before selling the nearly 40 Delta put
00:14:07
usually just a point or two below spy's
00:14:09
opening price and buying the put two
00:14:11
points below for protection each day
00:14:14
first thing in the morning here are the
00:14:16
results that you'll see if you back test
00:14:18
this for yourself and you can see it's
00:14:21
quite a different story where we
00:14:23
literally had no losses and the only
00:14:26
thing of any note actually is that on
00:14:29
the two highlighted occasions May 13th
00:14:32
and May 16th the Spy actually closed
00:14:35
below the short puts location and so
00:14:38
right before the market closed on those
00:14:40
days once it was obvious that the Spy
00:14:42
was going to close below the puts price
00:14:45
strike price we would go ahead and just
00:14:48
buy those puts back to close the trade
00:14:51
and the cost of buying those back is
00:14:53
netted out of the profit on the trade
00:14:56
because the profit is always calculated
00:14:58
by taking the initial premium you
00:15:00
received and reducing it by any payments
00:15:03
to close the short position because that
00:15:06
is Cash outflow which resulted in lower
00:15:09
profit numbers you'll notice for those
00:15:11
two trades but those were the only two
00:15:14
trades where we even needed to do that
00:15:18
and the reason we needed to do that is
00:15:20
because in all the other cases the Spy
00:15:22
closed above the short putut so there
00:15:24
was no need to do anything but pocket
00:15:26
our initial premium whereas if the Spy
00:15:28
is about to close in the money then you
00:15:31
need to buy the puts back to close the
00:15:33
trade otherwise you'll be assigned 100
00:15:36
shares of spy at your short put strike
00:15:38
price times the number of options that
00:15:41
you have sold and that's not the purpose
00:15:44
of this exercise to actually own spy
00:15:46
shares so we just buy it back and close
00:15:50
the trade before that happens and so
00:15:52
what's interesting is that you'll notice
00:15:54
that while spy closed lower than where
00:15:57
it was when we entered on those two
00:15:59
occasions highlighted in yellow we still
00:16:02
made money on the trade which of course
00:16:04
is essentially a bullish trade where you
00:16:07
were hoping the Spy rallies as much as
00:16:09
possible which will then cause our
00:16:11
options to expire with no value allowing
00:16:15
us to pocket the initial cash we
00:16:17
received at the outside of the trade and
00:16:20
we're pointing this out to emphasize
00:16:22
just how powerful the put credit spread
00:16:24
trade is that even if the stock goes
00:16:27
down after we enter the trade we still
00:16:29
have an opportunity to win this
00:16:32
otherwise bullish trade it's amazing and
00:16:35
so when we summarize the outcome of this
00:16:37
trade winning all of them with a profit
00:16:40
of
00:16:42
2,685 and a return of well over 100%
00:16:45
it's obviously no contest in A bullish
00:16:48
month like the first half of May this
00:16:51
year and just to drive home how
00:16:53
dramatically different this outcome is
00:16:55
take a look at this comparison between
00:16:56
the two approaches and in this scenario
00:16:59
there's obviously no contest with
00:17:01
selling put credit spreads being far
00:17:04
superior in every single category and so
00:17:08
what I'd like you to take away from
00:17:09
today's video is not that put credit
00:17:12
spreads will always perform better than
00:17:14
buying calls because they actually won't
00:17:16
in certain conditions but rather that if
00:17:19
you are bullish and you're right that
00:17:23
selling slightly out of the money put
00:17:26
credit spreads will always win on a day
00:17:28
where the market closes higher than it
00:17:30
opens while on the other hand buying
00:17:33
calls as we saw from this example will
00:17:36
fail and fail a lot only winning a few
00:17:40
times in this case even though on most
00:17:42
days we were absolutely right about the
00:17:45
direction of spy but not by enough for
00:17:48
the calls to close with any value at all
00:17:52
and even when they did close with value
00:17:55
we still lost one and even if the stock
00:17:58
does matter manage to exceed the strike
00:18:00
price of the call that still doesn't
00:18:02
guarantee that you'll win the trade
00:18:04
because you still need to recover the
00:18:06
premium you paid for the call and so the
00:18:08
break even for a long call is actually
00:18:11
higher than the Call's strike price and
00:18:14
so that's why you keep losing so often
00:18:17
when you try to buy relatively
00:18:19
inexpensive calls if you're bullish and
00:18:22
that's because buying calls have this
00:18:24
huge hurdle the stock has to get first
00:18:26
of all Beyond a strike price for you to
00:18:29
make any money at all on the trade
00:18:31
whereas with the out of the- money put
00:18:33
credit spreads if the stock closes up
00:18:36
flat or even down a little compared to
00:18:40
where it was at the open you will make
00:18:42
money in all of those cases which as you
00:18:45
can see from this example has a huge
00:18:47
effect on the win rate which in turn
00:18:50
drives profitability and return in
00:18:53
almost all cases let alone the way that
00:18:56
it builds your confidence as a Trader so
00:18:59
now you know what you've been doing
00:19:01
wrong and why your options trading has
00:19:04
been so inconsistent and now you know
00:19:07
easily how to turn things around to
00:19:09
dramatically increase your win rate on
00:19:12
options trades if you're even a little
00:19:14
right on a stocks Direction Pro options
00:19:18
Traders are well aware of the edge
00:19:20
embedded in put credit spreads and love
00:19:23
to trade them as a result now if you'd
00:19:24
like to learn three more option
00:19:26
strategies that are prot trade Traders
00:19:29
used including the unique options trick
00:19:32
that allows you to make money while you
00:19:34
wait to buy stocks or ETFs at the price
00:19:36
you want and the options income strategy
00:19:40
that allows you to make consistent money
00:19:42
whether the market goes up or down or
00:19:45
sideways and how to make money on a
00:19:47
stock or index trade even if you're
00:19:50
wrong on the direction then click the
00:19:52
link that's appearing right now at the
00:19:55
top right hand corner of your screen
00:19:57
that will open up the free Workshop
00:19:59
registration page in a new window so
00:20:02
don't worry you won't lose this video or
00:20:04
you can register directly for free at
00:20:07
options.com
