In this episode of How To Trade It, Dan Sheridan joins us to share the basics of options trading. We talk about his long history in the industry, the 3 typical categories traders fall into, and some of his option trading strategies.
Dan is the CEO and founder of Sheridan Options Mentoring—a company geared towards helping new traders learn the skills necessary to be successful. With over 20 years in options trading—including training at Mercury and CBOE—he’s one of the pioneers in his industry. Don’t miss this informative episode full of tips and strategies to help you become a better options trader.In this episode of How To Trade It, learn #OptionsTrading basics from expert @Sheridanoptions. #stocks #trading #StockMarket #Investing #DayTrading #StockPicks Click To Tweet
You’ll want to hear this episode if you are interested in…
- [2:58] Dan Sheridan’s background in trading.
- [8:55] What’s changed in the industry.
- [10:47] Trading Options is a craft to be mastered.
- [14:52] The three categories of traders.
- [22:38] Options Trading: A risk management tool.
- [25:30] Options basics: ‘Selling a Call’.
- [27:08] The basics of ‘Selling a Put’.
- [35:05] Dan’s ‘Cash Secured Put Alternative’.
- [37:14] How to connect with Dan.
Options trading is a craft that must be learned
Dan points out that the great thing about trading is that anyone can open a brokerage account and start trading. Other than the capital necessary to trade, zero overhead is needed. It’s a mobile profession that you can do almost anywhere—your home, on a beach, or while traveling. It holds the allure of easy money. However, Dan notes that most people who start trading on a whim quickly become discouraged.
You’re playing with real money—you’ll win some and you’ll lose some during the learning process. But it’s important to build a foundation by learning the basics of trading the right way and develop a framework to follow. Then you move on and focus on mastering two or three strategies. You need to treat it like a business and focus on learning the craft.
According to Dan: “The only way you become a craftsman with these individual strategies is doing it 15, 20, 30 40, or 50 times—but doing them the right way. Practice does not make perfect, correct practice makes perfect.”
Learn how to refine your options trading with this guide to paper trading options.
Trades usually fall into 3 distinct categories
Dan mentions the idea of buckets and that you need to decide which category you fall into. He shares what those categories look like:
- The Investor: someone who looks at the long-term stock options; wants to make money over time.
- The Speculator: Someone looking for short-term gains in the market (hourly, daily, monthly, etc.)
- Range-bound strategies: Based on range-bound probabilities and time decay more after the example of an insurance company.
You want to get your big picture perspective of what category you fall into, then learn 2-3 great strategies for your chosen method.Traders usually fall into 3 distinct categories. What are they? @Sheridanoptions shares his thoughts in this episode of How To Trade It. #stocks #trading #StockMarket #Investing #DayTrading #StockPicks Click To Tweet
Does Options Trading come with additional risks?
Dan points out that the stock market may be easier to conceptually understand, but options trading was created to be a risk management tool. This means options are inherently less risky than buying in the stock market. Think about it—with the most recent recession, stocks plummeted down 30% from the yearly high. It makes you worry about your retirement plans and the risks you’ve taken.
If you’re purchasing a fairly stable stock that doesn’t have much fluctuation, you’re not going to see a lot of gains. Dan shares an example of how the concept of ‘selling a call’ is less risky:
Apple stock is at $250. You’d set a strike price above the stock price at $270. You would sell a $270 call at $2. The duration of the call is 30 days. So if in the next 30 days the stock stays at $250 and does not go through that $270 strike, you collect your premium and make an easy $200.
Read more about call vs put options.
Options Trading Basics: Selling a put
Selling a put is setting a strike option lower than the stock average. Dan’s example is of a stock that’s $100 a share. You’ve chosen one that’s pretty stable and not likely to fall below $90, so you set the strike at $90. Every month you sell a $90 put for $1 and make an income over a long period of time.
So what’s the catch? If the stock does hit that $90 put you are obligating yourself to buy that stock. The upside is you’re getting the stock 7-10% lower than its normal price. But if you’d normally buy the stock at $100 a share, you’d definitely buy it at $89, right? If for some reason, the stock does hit the $90 price and you don’t have the capital in place to purchase the stock, there’s a way to handle the financial burden: A cash-secured put alternative.
According to Dan, a cash-secured put alternative is buying a put against your $90 strike. So, for example, you buy an $80 put for $0.20 and create a put credit spread. So he sells the $90 and brings in $80. His risk becomes the difference in strikes. So instead of putting up $25,000 of his account to purchase the stock at his strike price of $90, his maximum capital is now $920.
To learn more about Dan’s options trading strategies, listen to the whole episode! Check out my Options Trading Strategy guide for a deep-dive into my favorite strategy.Learn some #OptionsTrading Basics in this episode of How To Trade It—Selling a put, Selling a Call, and more! #stocks #trading #StockMarket #Investing #DayTrading #StockPicks Click To Tweet
Resources & People Mentioned
- Cboe Global Markets, Inc.
- Mercury Trading Company
- The Intelligent Investor by Benjamin Graham
Connect with Dan Sheridan
- Dan on LinkedIn
- Dan on YouTube
- Dan on Twitter
- Sheridan Options Mentoring
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