A PORTFOLIO FOR ALL MARKETS: 12 OPTIONS TRADING PRINCIPLES TO PROFIT IN ALL MARKET ENVIRONMENTS by KARL DOMM

Author:KARL DOMM [DOMM, KARL]
Language: eng
Format: epub
Published: 2019-05-01T22:00:00+00:00

Keep Time On Your Side

Graph 13

Graph 13 shows the purchase of one call close to the money. The #1 red circle represents T+0 at the time of the purchase. Please notice this is a long position but has yet to show any profits or losses because it was just opened.

The #2 red circle represents the P&L IF the price does not change as we move into the future when the option expires. Please notice this will result in a loss of approximately -$4,000.

The #3 red circle represents the level the underlying price would need to be ($2,830), for the P&L to break even at the time the option expires in the future.

There are many factors that could cause the underlying to move lower or move higher, but no one can predict its direction or how quickly it will get there. The probability it will move lower is 50% and the probability it will move higher is also 50%.

There is a limited amount of time for this position to break even or to make money. The time is limited to WHEN the option expires. In this case, it will expire on April 6, 2019. Looking at Graph 13, you know that you need the price of the underlying to reach the #3 red circle or move higher than $2830 before April 6, 2019. It has a 50% chance of going higher so the odds of the underlying reaching $2830 are less than 50%. This means that the more time that passes the more the position can turn against you. In this position, time is NOT on your side. Another term for this concept is Negative Theta. When you buy premium and spend more money than you bring in or place a debit trade, time is running against you.

However, opening a Negative Theta position can come with perks. It comes with the leverage of asymmetric upside profit potential. If the underlying goes to $2980 (Circle #4), you could make $15,000 on $4000 of maximum risk. That’s a 375% return on your money.

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