Thread by @HappyGTrades

📚💥EDUCATIONAL THREAD💥📚

topic recommended by @MullinsMomentum :

how do you know which options contract to take? (+greeks explanation)

i’ll be going over what i do to choose the correct contract whether it’s a scalp, longer day trade or swing trade

i’ll keep it SIMPLE!

the greeks: important to know how contracts move and what different factors go into them. i will define them as simply as possible

DELTA:
-the amount your contract increases in value for a $1 move of the stock

-the further in the money you are, the higher delta will be

GAMMA:
-the rate of change for delta for a $1 move in the stock

-as the stock moves, the delta value moves..how much will the delta move based on a $1 stock movement though? gamma tells you this

-gamma is highest at the money and decreases as you go further out or in the money

THETA:
-the time decay

-shows how much value will the contract lose for 1 day of time

-for at the money contracts it increases as your contract approaches expiration, meaning as time goes on you lose more money

continued....

-for at the money or out of money contracts, as time goes on theta DECREASES

-means as time goes on, you’ll still lose money, but lose less and less each time

-the further out expiration you pick, the less time decay there will be

➡️further expiration = safer

VEGA:

-measures how the price of an option changes based on the stocks volatility

-higher vega = more expensive contract because it’s volatile

Scalping Contracts: Strike price

when i scalp i want to take an at the money or an in the money contract

based on what we know about the greeks, why?

the delta value is higher, so every $1 increase in the stock, you make more money than you would an atm contract

since you’re quick in and out for a scalp you want the most bang for your buck

this would be taking atm or itm contracts

they’re more expensive, but if you’re scalping a 30¢ move you’ll make more money with atm or itm as opposed to otm

Scalping Contracts: expiration

weekly contracts are much more volatile than monthly contracts

weekly expires that friday and monthly expires the 3rd friday of every month

weekly contracts are much more volatile than monthly contracts

since i want more bang for my buck when scalping, i’ll take a weekly contract since it moves more and i can be in and out

**note** it is risky holding a weekly contract overnight especially on thurs and fri

Day trade: strike price

what i mean by this is you plan to ride the trend for a little, whether all day or an hour...a trade longer than a scalp

usually i’ll take the atm contract or i’ll take the strike price closest to my next intraday level

if a stock is $18 and the next intraday level up is $18.40 then i will usually take a strike price of $18 or $18.50

i also look at how the stock is moving, if it is a “snail” and moves slow i will likely take at the money

ex: $DIS, $F, $ZNGA, $GE

if it’s moving fast i will likely take the the $18.50 strike or maybe even the $19 strike in that example above

ex: $ABNB, $PLBY, $PTON

a larger, more volatile move, yields bigger % gains with otm contracts than atm/itm, so if it’s a fast moving stock i might go more otm

a stock is $50 and it breaks out in a day to $55

if you buy 1 atm contract, lets say the $51 call, for $200 then it will probably be worth about $500 when the stock hits $55

if you buy 1 otm contract, the $55 call for $40 then it will probably be worth about $200

when stock price hits $55⬆️

$51 call: goes $200 to $500 = 150% gain

$55 call: goes $40 to $200 = 400%

otm is cheaper but you can buy more and possibly get higher % gains as seen above, however it is more risky to go otm

Day trade: Expiration

usually i will go weekly for this since i want to catch a nice volatile move in ONE DAY

pullbacks hurt a lot on weeklies so it’s more risky

if you rly want to mitigate risk take monthly contract

if you plan to hold o/n prob be better to take monthly too

Swing trade: strike price

my PERSONAL strike choosing technique is pretty simple

since otm pays a higher % but is more risky, i’ll find a medium between atm and otm

first i will set my price target based on weekly or daily chart

then i’ll take the strike in the middle of current price and the target price

ex: if a stock is currently $180 and my price target is $200, then i will take the $190 strike

if i think the swing is perhaps a bit riskier (then honestly i shouldn’t even take it)

but then i will take closer to the money

Swing trade: expiration

i do not swing weekly contracts, it’s too risky and too hard emotionally with the volatility

if i think the swing will take 3+ weeks or a month then i will likely take 2 months out exp

expected move in under 3 weeks i will take the first monthly there

SUMMARY:

SCALP

strike: atm or itm
expiration: weekly

DAY TRADE

strike: atm or slightly otm
expiration: weekly or monthly

SWING

strike: atm or halfway b/t current price and target
expiration: always monthly

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