Picking the Perfect Option
- We’ve been discussing the basics of buying options for the past two weeks.
- Today we’ll show you how to put it all together into an options trade.
- We break down options symbols and exactly how to trade an option with your broker.
So you have a stock, you have the direction you expect it to move, now it’s time to pick the perfect option to capitalize on it.
This is the simplified process of trading options.
Today, I want to show you a simple way to pick the perfect option.
And it’s the approach I use in my premium research service, Quick Hit Profits.
Let me show you…
The Trick of an Options Symbol
Options symbols can look like Greek at first. But once you break them down, they become easy to understand.
Here’s an example of what an option symbol looks like: AAPL181116C00200000
Don’t be intimidated, I’m going to break down exactly how to read it. But I’m also going to tell you a secret: When it comes to trading options — you don’t even need to know the actual symbol.
That’s because the information contained in the symbol is already all the details of the option itself, which you would select through your brokerage account. Most online platforms don’t even use option symbols. Meaning, they don’t let you type them in.
You just type in the stock symbol, then use the correct drop downs to get to the option you want.
Take the symbol above, AAPL181116C00200000.
Here’s how it breaks down:
The first few letters are simply the ticker symbol of the stock “AAPL,” in this case Apple Inc. (Nasdaq: AAPL).
The next six digits “181116” are the expiration date by year, month and day — each in two digits — November 16, 2018.
Then the last eight digits are the strike price.
It only looks confusing because it has the price in the middle of the zeros and not on the right-hand side. For example, the “00200000” is just a strike price of $200. There are extra zeros in case the option has decimals or is a larger number. Options symbols are standardized, so they need to leave room for higher and lower numbers. The last three digits in this case represent the cents after a decimal.
This symbol is from an actual recommendation on Apple from back in 2018 based on my Quick Hit Profits Profit Trigger.
This is why I chose the option that I did so you can see a real trade.
A 124% Gain in the Making
Apple is the stock we expected to climb higher after it hit the profit trigger I use in Quick Hit Profits.
I already knew the move in the stock I wanted to capitalize on. I was expecting a 10% climb higher in the stock over the next two months. That meant I wanted to buy a call expiring at least two months from now.
If I were making this trade as an investor, I’d go to my online brokerage account and type in the stock symbol “AAPL” to select Apple.
Depending on your broker, at this point you can either select call options for the option type, to only show those or you can start with picking the expiration date.
So let’s select calls as the option type because we expect the stock to go higher over the next two months. It’s the “C” in the options symbol.
Now let’s pick the right expiration date.
Options have an expiration date, a date when they’re no longer valid. You want the move you expect to have enough time to play out before the option expires.
This series of dates on your brokerage account can seem overwhelming.
The goal here is to ignore almost all of them.
For our trade on Apple, I wanted to let it play out over at least two months. I recommended the trade around August 1.
I wanted my option expiration date to give me plenty of time to see the rally play out.
That lead us to the November 16, 2018 expiration date.
After selecting the expiration date you want, you will now be ready to pick the strike price for the option.
With so many different option and strike prices to choose from, how can you choose the right one?
The easiest way is to not overthink it.
When you are buying options, simply select a strike price that is as close as possible to where the stock is currently trading at.
Apple was trading at $200. That was the closest strike price at the time of my alert. I could ignore all the other strike prices listed on the options chain and just select the one I want to keep it simple.
That’s all you need to find the perfect option. And this option on AAPL gave us a shot at triple-digit gains in three months.
These are simple steps that direct you in exactly what to select. Once you know the stock and expected move, the rest just falls into place.
We have a few more basics on options we want to break down before we get into more detailed trading insights that you can take advantage of. But we want everyone to feel comfortable with options — that’s my No. 1 goal.
I’ve heard from many of you: Don, who’s a veteran options trader, Staci who “loved it” and Ken, Bernard, John, Tracy and others who are ready to get into the nitty-gritty with options — how to spot the right stocks, manage options and profit from them.
We are going to get into all of that and more in the coming weeks, but if you have anything specific you want us to cover in my Weekly Options Corner, you can send us an email at WinningInvestor@BanyanHill.com.
Chad Shoop, CMT
Editor, Quick Hit Profits