Profiting from Weekly Options

Generate consistent income with a smart weekly options strategy

Profiting From Weekly Options is a clear, practical guide to earning consistent income from trading options. Rather than confuse readers with complex math formulas, this book concentrates on the process of consistently profiting from weekly option serials by utilizing a series of simple trades. Backed by the author's thirty years of experience as a professional option trader and market maker, these ideas and techniques allow active individual traders and investors to generate regular income while mitigating risk. Readers will learn the fundamental mechanisms that drive weekly options, the market forces that affect them, and the analysis techniques that help them manage trades.

Weekly options are structured like conventional monthly options, but they expire each week. Interest has surged since their inception three years ago, and currently accounts for up to thirty percent of total option volume, traded on all major indices as well as high volume stocks and ETFs. This book is a guide to using weekly options efficiently and effectively as income-generating investments, with practical guidance and expert advice on strategy and implementation.

• Discover the cycles and market dynamics at work
• Learn essential fundamental and technical analysis techniques
• Understand the option trading lexicon and lifecycle
• Gain confidence in managing trades and mitigating risk

Weekly options can be integrated with any existing options strategy, but they are particularly conducive to credit spread strategies and short-term trades based on technical patterns. For investors looking for an easy-in/easy-out method of generating consistent income, Profiting From Weekly Options provides the wisdom of experience with practical, actionable advice.

Foreword xiii
Todd ‘‘Bubba’’ Horwitz

Preface xv

Acknowledgments xvii

Chapter 1 Market Psychology: The Mind-Set of a Trader 1

The Herd Mentality: Bubbles 2

The South Sea Bubble 1711–1721: Trade, War, and Government Collusion 2

The Cotton Panic of 1837: Land, Commodities, and Government 4

The Panic of 1893: Railroads Have No Upper Limit 6

September 11, 2001: Price Can Never Go Up Again 7

The Commodity Bubble of 2008: Price Can Never Go Down Again 8

Bitcoin 2009 to Present: Crypto-Currency Meets Greed 10

Lessons to Be Learned 11

Chapter 1 Quiz 12

Chapter 2 Modern Markets 15

Equity Markets 15

Liquidity 16

Flow of Funds 17

Futures Markets: Origins 18

Calculating Future Contract Values 18

Tick Size 19

Margin 20

Stock Index Futures 20

Index Futures versus Stock 21

Forex: Currencies 22

Options 22

Summary 23

Chapter 2 Quiz 23

Chapter 3 Technical versus Fundamental Price Analysis 27

Summary 29

Chapter 3 Quiz 29

Chapter 4 Phases of the Market 31

Congestion 31

Breakout to the Trend 33

Blowoff 35

Summary 37

Chapter 4 Quiz 37

Chapter 5 The Relationship of Time and Price 41

Summary 47

Chapter 5 Quiz 48

Chapter 6 Introduction to Options 51

Basic Option Glossary 51

Working Option Vocabulary 56

Summary 58

Chapter 6 Quiz 58

Chapter 7 The Option Model 63

Games of Chance 63

Air in the Balloon 66

Summary 67

Chapter 7 Quiz 67

Chapter 8 The Option Chain 71

Summary 80

Chapter 8 Quiz 80

Chapter 9 Option Trading Strategies 83

Why Selling Naked Options is Always Wrong! 83

Suitable Option Trades 85

The Credit Spread 91

Summary 99

Chapter 9 Quiz 100

Chapter 10 Why Trade Weekly Options? 105

Buying a Call or a Put Outright 110

Summary 112

Chapter 10 Quiz 113

Chapter 11 Midterm Review 115

Psychology 116

Liquidity 116

Market Pricing 116

Phases of the Market 117

Relationship of Time and Price 117

Option Vocabulary 117

Summary 118

Test for Chapters 1–10 119

Chapter 12 Standard Deviation—The Mathematics of the Price Cycle 127

Summary 131

Chapter 12 Quiz 131

Chapter 13 Trading in a Congestion Phase of the Market 133

Trade One: Buying an Outright Option 136

Trade Two: Credit Spreads 139

Trade Three: Risk Reversals 143

Trade Four: Backspread (1 × 2 for Even) 146

Summary 150

Chapter 13 Quiz 151

Chapter 14 Trading in a Trending Phase of the Market 155

Trade One: Buying an Outright Option 156

Trade Two: Credit Spreads 160

Trade Three: Risk Reversals 163

Trade Four: Backspread (1 × 2 for Even) 165

Summary 167

Chapter 14 Quiz 168

Chapter 15 Trading in the Blowoff Phase of the Market 173

Trade One: Buying an Outright Option 175

Trade Two: Credit Spreads 177

Trade Three: Risk Reversals 180

Trade Four: Backspread (1 × 2 for Even) 182

Summary 183

Chapter 15 Quiz 183

Chapter 16 Selecting a Portfolio to Trade 187

Liquidity 188

Volatility 190

Diversification by Product 190

Diversification by Dollar Risk 191

Summary 192

Chapter 16 Quiz 193

Chapter 17 Managing Your Equity 197

Risk of Ruin 197

Risk Capital 198

Volatility 199

Win Rate 199

Starting Capital 200

Summary 200

Chapter 17 Quiz 201

Chapter 18 Organizing Trades and FAQs 203

Step One: Observing Your Portfolio 203

Step Two: Observing the Major Trend and Making a Trade 204

Step Three: The Amount of Equity Needed to Trade Each Strategy 204

Frequently Asked Questions 205

Summary 207

Final Exam: 100 Questions 207

Appendix I: Answers to the Chapter Quizzes 222

Appendix II: Days until Expiration Straddle Values 235

Glossary of Option Terms 237

About the Author 247

Index 249

ROBERT J. SEIFERT is an independent options trader with over 38 years in the securities industry. He has published articles in Barron's and the Wall Street Journal describing his unique and highly regarded trading model.

Tired of sitting on the sidelines while others make a bundle in the options market? Profiting from Weekly Options offers any trader the information and strategies needed to learn the skills necessary to tap into the power of the competitive options marketplace. Written by Robert J. Seifert—a noted expert in the securities industry—this hands-on resource is designed to empower any level of option trader, from the novice to successful professionals.

To get started, Seifert reveals the market-place psychology that is designed to help traders understand "the other side of the trade." Next, he explains that underlying asset groups have different characteristics and demonstrates how each type of asset can be traded. Profiting from Weekly Options explores the ideal markets for trading options (and points out which ones to avoid), shows how to study markets to spot patterns, and illustrates what it takes to communicate in the distinct vocabulary that brokers demand.

The author outlines a unique option model and includes simple mathematical examples to help adjust your vision of markets to the viewpoint of a skilled option trader. He then introduces the option chain and explains how comprehension of this vehicle will be all-important to your trading success.

To give your trading ability a boost, Seifert explains four simple trades that you can continuously make. He explains when and how the trades should be initiated, what market conditions give you the best chance for the individual trade to succeed, and how to manage the trade once it is in place.

In the final section, Profiting from Weekly Options demonstrates how to manage your greatest asset: cash. The author illuminates how to use your capital in order to ensure that you don't risk ruin when the inevitable capital drawdown occurs, and he identifies which trades can be employed using your available capital levels.

A quiz at the end of each chapter tests your knowledge of the information and techniques presented. If you achieve a score of ninety percent or better, you should be ready to tackle the big players in the option market!