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Track 'n Trade Options

Track 'n Trade Futures Live - Advanced Options Strategies

Video Transcript

In this video, we’re going to go into greater depth on setting up options strategies within Track ‘n Trade.

In the previous video, we performed the simplest of option trades.

We purchased a call option, which is what we would do in anticipation of a rising market, and we purchased a put option, which is what we would do in anticipation of a falling market.

These are the two most common and simple methods of using options to take advantage of rising and falling prices.

But, let’s think about the other side of the coin.

When you buy an option, who are you buying it from? You’re the holder, therefore there must be a writer. The writer is the trader on the other side of your position, the guy who is actually selling you your option.

In this example, we’re going to be that guy. We’re going to be the writer of an option, and we’re going to sell some options to guys on the other side, who want to buy.

To sell, or to write an option, the action within Track n Trade is exactly the same as buying, only we click the sell call, or the sell put button, and we drag our order onto the screen, either above the market price, out of the money, at the money, or in the money.

The idea behind selling, or writing options is simple, it’s to collect the premium.

Now here’s the strategy. You want to take a look at the current market price, you want to figure out, by putting all your technical analysis skills to work for you, Fibonacci projections, Gann Fan’s, Elliott Wave theories, oscillating indicators and the such, so you figure you know, or have a good idea where you think the market is headed next.

Loaded with that information, you can sell someone an option, and collect the premium for yourself. If your right in your technical analysis, and the underlying market never reaches your option strike price before expiration, you get to keep the premium.

But of course, if you’re wrong in your analysis, you will have to possibly give back some of your hard earned premium, and if you’re really wrong, you may end up having to give back more than just the premium you earned.

Because you see, when you buy an option, your risk is limited to the amount of premium you paid, that’s the maximum amount of money you can lose, but if you’re right, your profit potential is basically unlimited.

But, what if you’re the option writer, or seller? It’s just the opposite.

As the option seller, your profit potential is limited to the premium you received for the option that you wrote, yet your risk is basically unlimited.

So why would anyone ever sell an option?

Because it’s said, that 80% of all options expire worthless, and if that’s the case, any option that expires worthless, whoever wrote the option, or sold it, gets to keep the premium.

But, we’re smarter than all that, as option traders, we use combination of options, or option strategies, known as strangles, straddles, butterflies, and the such to reduce our risk, and increase our odds of success.

Let’s go ahead and build ourselves a quick Butterfly strategy. A butterfly is a strategy where we both buy and sell options in an effort to cut our losers short, and let our winners run, but we’re doing this with options.

We can build this butterfly strategy based on the current trends of the market, which we can visually see as we drag ‘n drop our orders on the chart.

Let’s first buy a call just above the market

Let’s now buy a put just below the market.

At this point, we can see that we have the market bracketed, and the premium of the call option will increase in value if the market rises, and the put option will increase in value if the market falls. This option strategy is called a straddle, and is a very popular strategy as is.

With this strategy, the maximum amount of money we can lose is the premium amount we paid for the options, yet the profit potential is basically unlimited.

Now let’s reduce the amount of money we paid for this strategy by adding wings to it, which will turn it into a butterfly.

Let’s first sell a call option above the trend, and sell a put option below the trend. This way, the outer wings of the butterfly strategy are helping us collect premium to pay for the cost of the options we purchased.

By using traditional technical analysis we can better determine how and when, is the right time to apply this type of option strategy to our trading plan.