Stocks are looking to close the week on a 4-day winning streak.
I wrote this to you five days ago:
“Remember, selloffs could create some buying opportunities. Whether you like it or not, chances are the stocks you’re watching will be affected by market selloffs. For example, when the market is down over 2% like it was today… traders get panicky and end up selling their long positions in stocks… even though there may not have been any stock-specific catalysts.”
And you better believe I took my own advice…
Catalyst trades worked…
(I’ve averaged over $1M in trading profits the last four years, if you’d like to receive my FDA Insider Alerts, click here to get started)
And so did option trades…
(If you are interested in trade ideas that have explosive profit potential then you should check out my options service, click here to get started)
You see, the more “profit buckets” you have… the better the odds of finding winning trades…regardless of the market conditions.
That said, I’d like to talk to you about a bullish options strategy that I like to use from time to time. Believe it or not, it involves put options.
Now, when you buy a put option it’s a bearish options bet. However, when you sell a put option it is actually a bullish bet.
For example, I recently closed a trade in NIO using the strategy:
“ I also sold to open (shorted) the NIO May 17 $4.50 puts at .17 to collect about $5,000. I want the stock to hold $4.50 by next Friday”
And yesterday I bought those options back for $0.03
(You don’t have to buy calls to be bullish sometimes selling puts can be just as effective, if you don’t have my option alerts and would like to receive them in real-time, click here to get started)
Now, if you’d like to learn how the put sale strategy works… continue reading.
Table of Contents
Difference Between Buying and Selling to Open Options
I’ve been getting a lot of questions about how to trade options. Now, the question I’ve been getting the most is: What’s the difference between buying to open and selling to open?
It’s pretty similar to buying and shorting a stock. For example, if you buy a call option… you’re betting the stock will run higher. On the other hand, if you buy a put option… you’re betting the stock will fall.
Buying to Open Options
That said, when you buy a call or put option… you’re buying to open.
Now, when you buy to open calls or puts… your maximum loss is limited to the amount you paid for the premium. When you buy call options, your maximum profit is theoretically unlimited. Conversely, when you buy put options, your maximum profit is limited to the strike price (if the stock goes to $0).
Just to refresh your memory, here’s a look at the risk profile (profit and loss (PnL) diagram) of a long call option.
Here’s a look at the PnL diagram of the long put option.
Now, if you need a refresher on buying options… as well as everything you need to get started, make sure to check out 30 Days to Options Trading.
As opposed to buying to open, we have selling to open options… which gives you the exact opposite risk profiles.
That said, let’s take a look at what selling to open options means.
Selling to Open Calls and Puts
Similar to stocks, there are buyers and sellers in options. With options, when you’re buying, you pay a premium… and the seller collects that premium. Now, naked short selling options (selling to open options) could be very risky, if you don’t know what you’re doing.
Now, selling to open basically means you’re opening a short position in an options trade.
If you don’t already know, when you short sell a stock, you’re betting that the stock will drop. However, when you’re selling to open options… you’re betting the stock will either drop or rise, depending on which options you sell.
For example, when you sell to open a call option, you’re betting that the stock will drop. However, this is a very risky strategy. You see, theoretically, your risk is unlimited when you short call options.
You might be thinking, “Why is my risk unlimited when you short sell call options?”
Well, theoretically, we don’t know where could run up to. In other words, a stock can theoretically run to infinity (we’ve never seen that before, and we probably never will).
That in mind, I don’t really sell call options.
However, I do sell to open put options.
When you sell to open put options, you’re simply betting the stock will rise. You see, buyers of put options are betting the stock will fall… so when you’re selling to open put options, you’re selling the right to short the stock at the strike price of those options. In other words, you have the obligation to buy the stock at the strike price if the option is exercised (or closes in the money on the expiration date).
So if you’re fine with owning shares of a stock at a specific price, like a support level, then the short put option could become one of your profit buckets.
Here’s a look at the risk profile of a short put option.
Now, notice the profit and loss diagram for the short put option? It’s the exact opposite of the long put option. You simply want the stock to stay above your strike price, or even run up… because you would be able to collect all the premium.
Selling to Open Options on E*Trade
You’re probably wondering, “Well Kyle, how do I actually sell to open put options?”
Well, on E*Trade, it’s really simple.
Once you’ve found the options contract you want to bet against, you simply pull up the order box… and you’ll see something like this:
All I had to do is put the price I want to short those options and press “Sell Open”.
Now, what happens if I want to cover (or close out the short put options)?
All I have to do is put the number of contracts I sold short, put the price I want to cover (remember, we want to cover these options below where we sold to open)… and press “Buy Close”.
That’s exactly how I did that for the Nio Inc (NIO) short put options trade.
(If you want to collect cash consistently and receive trade alerts like these in real time, click here to get started.)
Remember, when I’m selling to open put options, I’m staying in relatively small in relation to my account size. I’m not putting all my eggs into one basket with short put option trades… and you probably don’t want to do that as well.[Ed.note: Kyle Dennis runs BiotechBreakouts.com. He is an event-based trader, who prefers low-priced and small-cap biotech stocks.
Source: BiotechBreakouts.com | Original Link