Options Fundamentals
By Lozo Ventures
DISCLAIMER: These are my personal strategies that I use in order to
research and analyze different stocks in order to make a decision on
options trading. I am in no way giving financial advice or liable for any
gains or losses you may experience in your investing journey.
Objective
●
●
●
●
●
●
To understand the many elements of options trading
To understand the use of the necessary tools to make profitable trades
To understand the difference between calls and puts
To understand the importance of choosing the right expiration and strike price
To understand the different strategies when trading options
To understand the key terms provided
My goal is for you to take the information provided and be able to apply it
while trading options and gain personal success.
Creating an account
Robinhood:
Click here to create an account and begin trading
WeBull:
(More information and advanced tools plus TWO free stocks for signing
up!)
* I recommend using this one because they have all the tools in app.
Sign up here
Activating Options Trading
● Some new traders will not have access to options trading if you’re
deemed to have little to no experience trading stocks
● In the Robinhood app, on the bottom tab, select the person icon
on the far right
● Scroll down and select “Investing”
● Scroll down and select “ENABLE OPTIONS”
● Answer the questions accordingly and you should have gained
access to trade options. If not, email Robinhood customer support
at support@robinhood.com
Key Terms
●
ITM(In the money): When your options strike price is below the market price
●
●
OTM(Out the money): When your options strike price is above the market price
IV (Implied Volatility): The market’s forecast of a likely movement in a security’s price. Can be used
to project future moves and the supply and demand.
Contract: 1 contract is the right to buy 100 shares, 2 contracts would be 200 shares, etc.
Due Diligence (DD): Research of a potential investment
Premium: the amount of money which investors are ready to pay to purchase th stock over its par
value. Can be find by subtracting par value from the issuing price.
MACD: Moving Average Convergence Divergence, Is a technical analysis tool used to chart
momentum of a stock.
RSI: Relative Strength Index, is a technical analysis tool used to chart that measures magnitude of
recent price changes to evaluate overbought or underbought
●
●
●
●
●
What are Options?
●
●
●
●
●
Options are contracts that give the bearer the right but not the obligation to, buy or sell
an amount of some underlying stock at a predetermined price at or before the contract
expiration.
Options are usually used as a hedge against a declining stock market to limit downside
losses.
Options can be used to grow an account and generate recurring income.
Options are a great tool to use for speculation, if you know a stock is going up or down.
This is the best way to bet on it
Trading options tends to be riskier than trading stocks because someone must buy it
from you but when done right can lead to quick profits.
Calls
●
●
●
●
Calls are used when it is believed a stock will rise
Calls gives the buyer the right, but not the
obligation, to purchase 1 contract (100 shares) at a
discounted rate
If the call expires ITM, you may purchase those 100
shares at the strike price
If it expires OTM, the call will expire worthless.
Note: The price is multiplied by 100, so $0.69 for the call
would require $69 per contract. $3.69 for the call would
require $369 per contract.
Puts
●
●
●
●
●
Puts are used to bet against a stock
Puts gives the buyer the right to sell 1 contract
(100 shares) of a stock if it falls to your strike price
If you feel like the stock is about to fall, you would
“Short” the stock.
Puts will only make profit if the stock falls, if the
stock rises it will in turn lose value.
Always BUY a PUT if you want to short a stock,
NEVER Sell a Call.
NOTE: the price is multiplied by 100, so $4.53 for a put option would
require $453 per contract.
Greeks
●
Delta is used to identify
how your option is
behaving due to change in
the market. If Delta is 0.65,
you made .65/share on
your option if the stock
rises $1.
●
Theta is used to tell you
how time decay impacts
your option.
●
Further readings you can
find here
Strike Price/Expiration Date
●
●
●
Picking the right expiration date/strike price is essential
Just before this date, you can choose to exercise the option to purchase the
100 shares, sell the option before it expires or let it expire worthless if it did
not reach the strike price.
Your contract isn’t at the strike price, resulting in loss of money on your
premium.
Personally, I NEVER keep an option until the expiration date unless that contract is OTM.
I always choose the furthest out expiration that is closest to my desired strike price, this helps
me prepare for any downturn and be able to sell before it deteriorates too fast.
Implied Volatility
●
●
●
●
●
●
●
●
Implied Volatility represents how much the market anticipates that a stock will
move.
IV is a good indicator to tell where your option sits.
Typically an IV of 80 is high and a 20 is low.
As an option holder, a high IV is good for the option holder.
A low IV is bad for an option holder, good for option seller.
Essentially, you wanna sell when the IV is high and buy when it is low.
IV varies per stock and isn’t a uniform number for every stock, do some research
on the historical IV of a stock to understand what number is high for that stock.
$TSLA for example typically is always above $80 so the metric is different
compared to a smaller stock such as $CCL
Premiums
●
●
●
●
●
●
Premium is the price that is paid for the contract.
Premium itself is essentially the value of the stock from when it was
purchased.
When it comes to options, someone must buy the contract from you. The
price paid is the premium.
If you paid $500 for a contract and the stock rises, the premium may rise as
well, if it goes down so does the premium.
The goal is to collect the higher premium, I personally do not exercise
contracts.
GET IN, GET GREEN, GET OUT!
Strategies
●
●
●
●
●
Straddles: Buying a call and a put with the same expiration and strike price. This strategy is
only profitable when the stock rises or falls more than the premium paid.
Covered call: Buying 1 contract of a stock while also selling 1 contract. The main goal of the
covered call is to collect income via option premiums by selling calls against a stock that you
already own. Assuming the stock doesn't move above the strike price, you collect the
premium and maintain your stock position.
Earnings Play: When a company is scheduled to report their financials for the quarter, if they
beat expectations sometimes the stock goes up and vice versa.
Married Put: Buying shares as well as a put to cover in case of a sharp decline in the stock
price. (This isn’t a strategy I use myself)
Debit spread: Buying two contracts of the same stock, one long and one short, with different
strike price or expiration dates. Buy the option closer ITM, sell the option OTM. Limits the
amount you can lose but also limits the amount you can earn.
Lozo’s Trading Commandments
●
●
●
●
●
●
●
●
●
DON’T TRADE WITH EMOTION! Never revenge trade.
Only invest what you can afford to lose
Always DD a stock for yourself before entering any positions
Have a plan and stick to it
Don’t chase
Buy the rumor, sell the news
Don’t get caught bag holding
No trade is better than a bad trade
Doesn’t matter what stock you buy, only matters when you buy.
Choose your entry and exits wisely.
● Get in, Get green, Get out.
Stock Evaluation
●
●
●
●
●
Know the company.
Pay attention to the volume.
Follow the news circulating the stock.
Learn how to chart, this site has been updated and has a great rundown of basic chart
info, how to identify the typical chart patterns.
I use MACD, RSI, and watch current events for my own stocks. Download CHART
VIDEO where I show you how to find and read those tools from Gumroad as well.
DISCLAIMER: These are my personal strategies that I use in order to research and analyze different
stocks in order to make a decision on options trading. I am in no way giving financial advice or
liable for any gains or losses you may experience in your investing journey.
How I choose my options
●
●
●
●
●
The goal is to get in, get green, and get out while avoiding the time decay of an option.
Know your strike price based on the historical price movement of a stock.
○
Ex. If $BA has moved 3% over the last few months, aim for a strike price in that range. Typically, no more than
a 10% strike price difference. This varies by stock but generally buy OTM. Buy the call that fits the dollar
amount you believe the stock to reach if you were to hold it until it’s expiration date, don’t just buy the
cheapest one available.
○
Unless you are doing a lotto play, in which you buy a call WAY out the money and hope the stock runs
rampant.
Choose an expiration date, one week minimum, from when you anticipate selling the call/put.
○
This helps fight the decay and allow you to sell for a higher premium. If you think you reach your strike price
by 9/1, choose 9/8 strike price just in case.
Know your exit price. The goal is to hold the stock and sell once the premium rises. I wouldn’t hold a contract through
it’s expiration or even into the week it expires, unless need be.
○
I aim for a 30% return. Once i’m up 30% on a contract, I decide to either sell it and collect profit or if it’s
running, I will allow it to run but monitor it closely. I usually buy 2 contracts to sell one at 30% and let the rest
run for maximum profits.
As the stock moves closer to your strike price, the premium goes up. The contract is now ITM and is worth more. I
now sell it to collect the higher premium.
●
DISCLAIMER: These are my personal strategies that I use in order to
research and analyze different stocks in order to make a decision on
options trading. I am in no way giving financial advice or liable for any gains
or losses you may experience in your investing journey.
Trading Group
● Click Here to join our Discord group chat
where we go over stock tips, discuss stocks,
answer questions, share trade ideas, and
chart stocks on Sundays at 6PM.
Additional Resources
●
●
●
●
●
●
Follow me on Twitter @lozolifestyle
stockcharts.com
Stock Order Types
MACD explained
RSI Indicator explained
Debit Spreads Explained
Great books to read
●
●
●
●
●
Option Strategies: A Quick Guide
Options Trading for Dummies
12 Simple Technical Indicators
The New Trading for a Living, my favorite on understand all the fundamental
of the stock market as a whole.
These are the ones I think are good, if you’re interested in more feel free to
reach out.