Options Trading France - Paris: An Introduction to Options
Options trading offers flexible strategies to generate consistent income. These financial derivatives grant rights to buy or sell assets at set prices within set timeframes. Understanding the four basic terms — buying, selling, calls and puts — is key to constructing a variety of options trades. This introduction covers many essentials and strategies to help you trade confidently in a dynamic market.

by Ancil Marshall

Why are we here today?
Goals of this group
Build community of traders in France
All levels of experience
Share knowledge
Small account strategies
Basics and Strategies
Puts, Calls, Buying, Selling
Cash-Secured Puts, Covered Calls, Vertical Spreads, LEAPS, Wheel, Diagonal Spreads, Iron-Condors, Reversal, Put-Ratio, Straddle, Strangle, etc
Risk management: Rolling, Stock Picks, Back-up trades, Indicators (Bollinger Bands, RSI, VIX)
Workshop is for us
Get to know each other, our experience
I'm here to share my experience and answer any and all questions
What Options Trading is Not
Let us dispel with common misconceptions
Not Gambling (When Done Right)
When selling options, you become the casino or insurance company—you collect premiums with statistical advantages on your side.
Not Day-Trading, Buy-and-Hold Investing, Swing Trading, etc
Options trading occupies a strategic middle ground—more active than passive investing, and can be done with as little or as much time as you wish.
Not a Get-Rich-Quick Scheme
Successful options traders focus on consistent income generation through high-probability strategies, not home-run trades.
The difference between buying options (gambling with low probability) and selling options (being the house with statistical edge) is crucial for sustainable success.
You Need Money to Make Money... But How Much?
Yearly earnings based on portfolio size
$120
$1,000 Portfolio
1% monthly return (~12% annually)
Matches market average
$900
$5,000 Portfolio
1.5% monthly return (~18% annually)
Beats market average
$6K
$25,000 Portfolio
2% monthly return (~24% annually)
Strong growth potential
$36K
$100,000 Portfolio
3% monthly return (~36% annually)
Early retirement territory
Start with earning enough for a cup of coffee!
My monthly earnings are 3% to 4%
1
2023
getting my feet wet
2
2024
learning and mistakes
3
2025
mentorship new strategies
Hurdles and Mindset in Options Trading
Embrace Calculated Losses
Be willing to take small, strategic losses that free up capital for more profitable opportunities. Good stock selection minimizes downside while maximizing recovery potential.
Manage Your Emotions
Learning to process losses without emotional decision-making is critical. Paper trading won't teach you this—you need real skin in the game to develop emotional resilience.
Master the Mechanics
Studying strategies, risk-management, and understanding how to generate income in all market conditions creates true trading confidence.
Once I learned about rolling, time-decay, margin and when to take profit, I was unstoppable.
Goal of the Options Trading France is to help beginners with small accounts learn and grow their portfolios
Put Options are like Car Insurance
Contract Terms
Insurance company discus terms
Coverage and Premium
Car is worth $30,000, and you agree to insure your car for $25,000 for a year. To buy this contract, you pay the insurance company $1000.
Accident happens
If you get into an accident, the value of your car falls below the agreed insurance contract price.
Put Car back to Insurance
You PUT car in the insurance company’s parking lot, and they buy it for $25,000.
No accident
You don’t get into an accident in a year, then your insurance company keeps the premium.
Car is the asset
When you sell a PUT option, you are the insurance company, and instead of a car, you are insuring shares of stock.
Options Terms: Car Insurance vs Cash-Secured Put
Cash-Secured Put: Simplified Graphic
Visualization of a Put
The strike price as a floor I want to stock price to stay above.
Winning the trade
If price stays above strike price, seller keeps premium. Pick a strike low so that you have a high probability of winning.
Losing the trade
If price goes below strike price, then either close for a loss, or risk mitigate, such as rolling (future class)
Market Direction
Sellers think the market will go up, or stay the same. This is a Bullish strategy.
Cash-Secured Put: Slightly More Complex Chart
Cash-Secured Put: Options Chain Example on Robinhood
Cash-Secured Puts: Options Data and Greeks
The Greeks
Expanding one price shows more data - statistics and the Greeks (future class)
Profit and Loss Chart
Robinhood shows interactive P/L chart. Stock price is on x-axis and you can mouse over to see how P/L changes at expiration.
Max Profit and Max Loss
Max profit is the premium, while max loss is theoretically what you would lose if the stock goes to zero after you get assigned.
Cash-Secured Puts: Entering price and ROI
Enter Limit Price
Choose between bid and ask price
Likelihood of Accepting Limit Price
Middle of the bid-ask spread typically accepted. Robinhood shows likelihood
Collateral
Next page shows how much cash or shares will be needed as collateral
1% Return on Investment
Since collateral is $20,000 and premium is $220, that's 1% return in one week!
Cash-Secured Puts: Summary
Identify Target Stock
Select a stock you're willing to purchase
Secure Cash
Reserve funds to cover potential stock purchase
Sell Put Option
Write a put at your desired purchase price
Cash-secured puts offer a strategic approach to acquiring stocks at below-market prices. By selling a put option, you commit to buying shares at the strike price if the stock falls below that level before expiration. The key advantage is that you collect premium whether or not you ultimately purchase the shares.
This strategy requires sufficient cash in your account to cover the potential share purchase (100 shares per contract at the strike price). It's essentially getting paid to place a limit order, making it an attractive strategy for investors looking to build positions in quality stocks at favorable prices. Hedge funds and large institutional investors do this (i.e. Warren Buffet)
Covered-Call Options are like vouchers or coupons
Get a Coupon
Pay/Spend $2 at pizza store for a coupon
Coupon Terms
Pizza is worth $10 today, and you get a coupon for a $15 pizza valid till end of the month.
Pizza Prices Increases
Prices of pizzas increases to $20 before end of month.
Call away pizza
At pizza shop, you Call away pizza. The owner of the pizza has to sell it to you for $15 instead of the current price.
Pizza Prices are flat
If pizzas are worth $13, which is less than coupon price, you do nothing. Pizza owner keeps his pizza and the $2.
Pizza is the underlying asset
When you sell a Call option, you are the owner, and instead of a pizza, you are owner of shares of stock.
Options Terms: Coupons vs Covered Calls
Covered Call: Simplified Graphic
Visualization of a Call
The strike price as a ceiling for stock price to stay below.
Winning the trade
If price stays below strike price, seller keeps premium. Pick a strike high so that you have a high probability of winning.
Losing the trade
If price goes above strike price, then either close for a loss, or risk mitigate, such as rolling (future class)
Market Direction
Sellers think the Market will go down, or stay the same. This is a Bearish strategy
Covered Calls Strategy: Summary
Own 100+ Shares
Start with ownership of at least 100 shares of stock
Sell Call Option
Write a call against your shares at a strike price above current price
Collect Premium
Receive immediate income from the option sale
Wait for Expiration
Let time decay work in your favor as expiration approaches
Covered calls represent one of the most conservative options strategies, making them ideal for beginners. By selling call options against stock you already own, you generate additional income through premium collection. This strategy effectively reduces your cost basis in the underlying shares while providing modest downside protection.
The primary tradeoff is limited upside potential, as you're obligated to sell your shares at the strike price if the stock rises above that level. Nevertheless, covered calls enhance returns on existing investments and can be particularly effective in sideways or slightly bullish markets.
Abundantly Erica's Covered Call Variations
See Erica's YouTube Video on How I made $400K in 2024. See her channel for more on Covered Calls, and join her mentorship program!
My 2025 Earnings by strategy
Covered Calls is a winning strategy. 51% of total premiums.
Covered Calls worked well during downturns. Worked well for Apple stock.
Some Covered Calls took losses when the marked reversed, but I was ok taking these losses and not be too greedy.
Call Credit Spreads were 12.2% .
LEAPS were 10% which is not bad.
Put & Put Credits were 17.8%.
Understanding Options Basics
Contract Structure
Options contracts represent the right, but not obligation, to buy or sell an underlying asset at a specified price (strike price) before a certain date (expiration date). Each contract typically controls 100 shares of the underlying asset.
Position Types
Buyers (holders) have rights and pay premiums, while sellers (writers) have obligations and collect premiums. Understanding this dynamic is crucial for risk management and strategic positioning.
Broker Requirements
Most brokerages require approval for options trading, with different levels (1-4) determining which strategies you can employ. More complex strategies typically require higher approval levels and margin accounts.
Before engaging in options trading, conduct thorough risk assessment to understand potential outcomes. Unlike stocks, options have expiration dates, making timing a critical factor in your trading strategy. The price of an option, is influenced by numerous factors including volatility, time to expiration, and the relationship between current and strike prices.
The Anatomy of Options Pricing
Premium Components
Options premium = Intrinsic Value + Extrinsic Value (Time Value)
Intrinsic Value
The real value of an option if exercised immediately.
For calls: Stock Price - Strike Price
For puts: Strike Price - Stock Price
Extrinsic Value
The extra value beyond intrinsic value:
  • Time remaining until expiration
  • Implied volatility
  • Interest rates and dividends
Time Decay (Theta)
Options lose value as expiration approaches, with decay accelerating in final weeks. This benefits option sellers and works against buyers.
Implied Volatility (IV)
Higher IV = higher premiums. IV often rises before earnings or major announcements. Then there's IV crush which sellers utilize for gains
When selecting options strategies, understanding these pricing components helps you identify opportunities and avoid overpriced contracts. Options pricing is dynamic, with premiums constantly adjusting to market conditions.
Getting Started with Options
Assess Financial Readiness
Evaluate your risk tolerance, account size, and financial goals before trading options. Only use capital you can afford to risk.
Choose a Suitable Broker
Select a broker with strong options trading tools, reasonable fees, and educational resources for beginners.
Complete Options Approval
Submit application for options trading privileges. Be truthful about experience and financial situation to receive appropriate approval level.
Develop Trading Plan
Create a comprehensive plan with clear objectives, risk parameters, and strategies aligned with your goals.
Understanding tax implications is also essential when trading options. Different strategies may trigger various tax treatments, including short-term and long-term capital gains. Consider consulting with a tax professional to optimize your trading approach from a tax perspective.
Key Takeaways from our Options Workshop on July 9th, 2025
Real-Time Market Insights
Utilize news alerts from Market Watch and CNBC for timely market event awareness.
Real-time Data Access
Note that Interactive Brokers (IBRK) requires a subscription for live options prices.
Exploring New Strategies
Consider 0 DTE (zero days to expiration) options on micro index funds.
Future Discussion
We will continue to explore PUT LEAPS as an effective hedging strategy.
What is a Cash-Secured Put?
1
A contract where a Put is sold and backed up by cash as collateral
2
A contract where a Put is sold and backed up by 100 shares of stock as collateral
3
A contract where you buy shares and hold long-term
Which direction do I want the stock price to go when I sell a Cash-Secured Put? Pick all correct answers
1
I want the stock to go up.
2
I want the stock to remain the same.
3
I want the stock to go down.
Which direction do I want the stock price to go when I sell a Covered-Call? Pick all correct answers
1
I want the stock to go up.
2
I want the stock to remain the same.
3
I want the stock to go down.
Every Options Contract has the following properties
1
Underlying Asset, Strike Price, Premium, Expiration Date
2
Strike Price, Acquisition Date, Profit, Earnings
3
Buyer, Seller, Strike Price, Underlying Price
Put Credit Spreads are Re-Insurance for Car Insurance
Contract Terms
Insurance company discus terms
Coverage and Premium
Car is worth $30,000, and you agree to insure your car for $25,000 for a year. To buy this contract, you pay the insurance company $1000.
Accident happens
If you get into an accident, the value of your car falls below the agreed insurance contract price.
Put Car back to Insurance
You PUT car in the insurance company’s parking lot, and they buy it for $25,000.
Re-Insurance
The Car Insurance company bought its own insurance to help mitigate the cost of a claim
Spreads and Risk
A Put Credit Spread then has a defined risk or a maximum loss. Consists of two options, i.e. two legs.
Put Credit Spread: Simplified Graphic
Visualization of a Put Credit Spread
The top strike price is a floor for stock price to stay above.
Setting up the trade
Sell a Put at one strike price, then
Buy a Put at a lower strike price for same expiration
Pros
Defines the risk, i.e. the maximum loss on a trade.
Requires much less collateral. Great for small accounts.
Cons
This is a Bullish trade. Need to get direction right.
No exchange of stock assets. You either win cash or lose cash.
Put Credit Spread: Profit/Loss Graphic
Key: Green - Receive Premium. Red - Pay Premium
Profit/Loss of a Put Credit Spread
If stock price is above Sell Put, Max Profit achieved
If stock prices falls below Buy Put, Max Loss achieved
Break Even Point
As stock goes below Sell Put, starts to loose profit.
Break even is Sell Put Strike minus the net credit.
Implied Volatility (IV) Factor
Higher the IV, the better.
Around Earnings, or High VIX, High Fear
When to Close
When at 50% to 70% max profit
Put Credit Spread Example
Receive a Credit
The sold Put has a higher premium ($380) than the bought Put ($175). This a net credit ($205).
Width of the Spread
The difference between the strike prices is the width of the spread. Here it is $1000.
Max-Loss
Max loss is width-credit = $795
Return on Investment
Collateral is only $1,000, vs $20,000 for Cash-Secured Put. The ROI is based on max loss, so $205/$795 × 100 = 25.8%
Put Credit Spreads: Summary
Sell Put Option
Sell put at higher strike price
Buy Put Option
Buy put at lower strike price
Collect Net Credit
Receive difference between premiums
Profit Zone
Profit when stock stays above higher strike
Put credit spreads represent a defined-risk strategy that allows traders to benefit from time decay while maintaining limited downside exposure. By simultaneously selling a put option at a higher strike price and buying a put option at a lower strike price (with the same expiration date), you create a position with both capped risk and profit potential.
This strategy is particularly effective when you have a neutral to bullish outlook on a stock. The maximum loss is limited to the difference between strike prices minus the net credit received. Put credit spreads benefit from the passage of time as both options lose value approaching expiration.
What is a Put Credit Spread?
1
A contract where a Put is sold and a Call is sold at the same time
2
A contract where a Put is sold at one strike price and a Put is bought at a lower strike for same expiration.
3
A contract a Put is sold at one strike price and a Put is bought at a lower strike price at a later expiration.
Why is a Put Credit Spread a "Vertical" Spread?
1
The expiration dates are the same
2
The strike prices are the same
3
The premiums are the same
What is the max loss of a Put Credit Spread: $200 upper leg, $190 lower leg and credit of $2?
1
$1000
2
$200
3
$800
What is the traders market outlook when entering a Put Credit Spread?
1
Bearish
2
Neutral to Bullish
3
Works for all market outlooks
Call Credit Spread
Strategy Structure
A call credit spread involves selling a call option at a lower strike price and simultaneously buying a call option at a higher strike price, both with the same expiration date. This creates a net credit position where the premium collected from the sold call exceeds the premium paid for the purchased call.
This defined-risk strategy caps both potential profit and loss, making it suitable for risk-conscious traders with a bearish or neutral market outlook.
Risk/Reward Profile
Maximum profit equals the net premium received when entering the trade. This profit is realized if the stock price remains below the lower strike price at expiration. Maximum loss is calculated as the difference between strike prices minus the initial credit received.
The strategy benefits from time decay (theta) and decreasing volatility (vega), making it effective in sideways or declining markets.
Call credit spreads offer a strategic advantage when you anticipate a stock will remain below a certain price level. They provide more defined risk than naked call selling while still allowing you to benefit from bearish or range-bound market conditions.
Call Credit Spread: Simplified Graphic
Visualization of a Call Credit Spread
The bottom strike price is a ceiling for stock price to stay below.
Setting up the trade
Sell a Call at one strike price, then
Buy a Call at a high strike price for same expiration
Pros
Defines the risk, i.e. the maximum loss on a trade.
Requires much less collateral. Great for small accounts.
Cons
This is a Bearish trade. Need to get direction right.
No exchange of stock assets. You either win cash or lose cash.
Call Credit Spread: Profit/Loss Graphic
Key: Green - Receive Premium. Red - Pay Premium
Profit/Loss of a Call Credit Spread
If stock price is below Sell Call, Max Profit achieved
If stock prices goes above Buy Call, Max Loss achieved
Break Even Point
As stock goes above Sell Call, starts to loose profit.
Break even is Sell Call Strike plus the net credit.
Implied Volatility (IV) Factor
Higher the IV, the better.
Around Earnings, or High VIX, High Fear
When to Close
When at 50% to 70% max profit
Call Credit Spread Example
Receive a Credit
Sold Call has a higher premium ($545) than the bought Call ($236). This a net credit ($309).
Width of the Spread
The difference between the strike prices is the width of the spread. Here it is $1000.
Max-Loss
Max loss is width-credit = $691
Return on Investment
Collateral is only $1,000, vs $20,860 for 100 shares. The ROI is based on width, so $309/$1000 × 100 = 30.9%
LEAPS (Long-Term Equity Anticipation Securities)
Extended Time Horizon
LEAPS expire in over one year, up to three years, greatly reducing early time decay compared to standard options.
Capital Efficiency
They cost a fraction of shares, letting traders control the same stock amount with less capital and potential for greater returns.
Strategic Applications
Used for long-term bullish plays, LEAPS support complex strategies like diagonal spreads or act as insurance via protective puts.
Though requiring less capital than stocks, LEAPS carry higher risk as they can expire worthless, but allow leveraging long-term trends with less time decay pressure. This capital efficiency can lead to much higher percentage returns. This is a powerful strategy to grow a portfolio, and can also be used for small accounts.
When to Enter
Stock is low on Bollinger band, and RSI is low. Also when IV is low and/or VIX is high. Pick a Delta of 0.7 or above.
When to Close
Can close at 20-50% profit (or more if desired). Close at least 3 months before expiration and before Theta kicks in to work against you.
Risk Management
Limit to 10% maximum of your portfolio to buying LEAPS. Can also use Covered Calls to offset decreases in value of a LEAPS.
LEAPS vs. Shares: Capital Efficiency
Buying Shares
Capital Required
To control 100 shares of a $100 stock: $10,000
Stock Price Increase
Stock moves from $100 to $110 (+10%)
Total Value
100 shares x $110 = $11,000
Profit
$11,000 - $10,000 = $1,000
Return on Investment
($1,000 / $10,000) * 100 = 10%
Buying a LEAPS Call Option
Capital Required
To control 100 shares (e.g., $100 strike LEAPS call premium): $1,500
Stock Price Increase
Stock moves from $100 to $110 (+10%)
Estimated Option Value
Option value increases to approximately $2,500 (intrinsic + remaining extrinsic value)
Profit
$2,500 - $1,500 = $1,000
Return on Investment
($1,000 / $1,500) * 100 = 66.7%
LEAPS: Profit/Loss Graphic
Key: Green - Receive Premium. Red - Pay Premium
Profit/Loss of LEAPS
Max profit is infinite since stock price can go as high as possible. Max loss is always the premium paid.
Break Even Point
Just the stock price + the premium paid. Does not matter too much because strategy is to sell the option at a desired profit.
Implied Volatility (IV) Factor
Lower the volatility the better to enter the trade. Increase in IV works well of long dated options.
When to Close
When at 20 to 50% return on investment
LEAPS Example
Pay a Debit (or Premium)
Buy the $35 call 400 days out. Costs $1045. This is 30% of the cost to buy 100 shares!
Effect of Delta
Delta = 0.77. A $1 change in price increases option by $0.77. For 100 shares, that's $77.
Effect of Theta
Theta decay is small (-0.0083) since expiration is far. Option looses $0.83 per day.
Return on Investment
As much as you want per your exit plan. Can reduce cost basis with other strategies for even more ROI (future lecture on PMCC)
LEAPS: Entry Point
Look out for times where price is low on the Bollinger band, RSI is low, and the thesis is the stock is bullish.
LEAPS: Entry Point Recent Example
Identified good entry on August 19th, 2025. Market dropped due to high Producer Price Index: Red day, RSI fell to 43, lower half of Bollinger Band. Open a 1 year LEAPS on PLTR: Bought the $140 Call expiring Sept 18th 2026 (395 days out) for $4896. Goal is to earn 20% return.
On Sept 8th, PLTR was $156, and LEAPS down to $4515, or loss of $381. Because we have over a year out till expiration, time is on our side. Being patient.
On Sept 18th, day after Fed announced rate cuts, stock rallied to $175. LEAPS increased to $5855, so closed out for 19% gain, ~$959 in profit, meeting our Goal.
My LEAPS Examples
Palantir
Earned 38% and 82%
Bought 2 LEAPS in Dec 2024
Stock rallied
Sold one early Feb before Earnings for 82% ROI ($2.4K)
Sold 2nd late Feb for 38% ROI ($1.2K)
Walmart
Earned $200.
Opened in March for $1,515
Stock fell, but then increased weeks before August Earnings.
Set a sell order at $1715 which closed automatically
Sound Hound
Loser!
Bought $15 LEAPS in Dec 2024
Cost was $1.2K.
Stock crashed and hasn't recovered.
Currently down $1K!
LEAPS can bring big wins, small quick wins, or losers! Reason to limit allocation to 10% of portfolio. Other advice I've seen is to pay for LEAPS by using premiums earned (before or over time in future), or through writing Calls against the LEAPS (aka, the Poor Man's Covered Call)
My Other Recent LEAPS Examples
Google
Earned 25%
Opened 1 LEAPS in Feb 2025
But then market crashed
In Sept, stock up due to good news
Sold in Sept 2025 for 25% ROI ($1K)
Hims
Earned 20%.
Stock down in August due to news Met LEAPS entry criteria
Good court ruling caused rally
Took profits of 20% ($420) in 3 weeks!
PLTR
Still Waiting
Bought $140 LEAPS in Aug 2024
Cost of $4.9K.
Stock is trading sideways.
Currently being patient!
Being patient to enter LEAPS is critical. For HIMS and PLTR, followed entry rules. Took profit on HIMS after stock rallied since 20% is good enough and avoids FOMO since stock could drop.
Could have opened a LEAPS on HOOD and would have been up $1K. But decided to be safe and open a Put Credit Spread. Earn $325. Avoid FOMO. This is risk management.
What is a LEAPS option?
1
A contract where a Put is sold and a Call is sold at the same time
2
A contract where a Call is bought with an expiration date a year or more out.
3
A contract a Put is sold at a strike price and cash is held as collateral equivalent to 100 times the strike price.
Where are LEAPS so powerful compared to stocks?
1
You can never loose money, it always goes up in profit!
2
Because it pays you more premium than a Cash Secured Put.
3
It is cost-efficient, and can imitate shares but costs less for same return, therefore higher ROI.
What does Delta 0.7 mean?
1
If the stock prices increases by $1, the contract increases by $0.70
2
If the stock prices increase by $1, the contract increase by $70.
3
Every day the contract decreases by $0.70.
Why are LEAPS expiration dates a year or more?
1
To earn more premium.
2
Have more time to be right, and low theta-decay.
3
It's for traders with a busy schedule.
Poor Man's Covered Call (PMCC)
The Poor Man's Covered Call, also known as a Synthetic Covered Call, is an advanced options strategy that allows traders to replicate the income-generating benefits of a traditional covered call using significantly less capital.
This strategy leverages a long-term option position (LEAPS call) as a substitute for owning 100 shares of stock, enabling you to "cover" a short call position and generate recurring income.
Acquire a LEAPS Call
Purchase an in-the-money (ITM) LEAPS call option with a long expiration date (typically 1-2 years out). This acts as your stand-in for 100 shares of the underlying stock.
Sell a Short-Term Call
Against your LEAPS, sell a short-term, out-of-the-money (OTM) call option. You collect premium from this sale, generating income.
Capital Efficiency
The initial cost of the LEAPS is far less than buying 100 shares, freeing up capital while still allowing you to generate income similar to a traditional covered call.
Bullish Outlook
This strategy is best suited for stocks you expect to rise moderately or stay range-bound, allowing both the LEAPS and the short call premium to benefit you.
The PMCC allows for a higher percentage return on capital compared to a traditional covered call, while still defining your risk.
Poor Man's Covered Call Management
PMCC is like investing in rental property.
  • The LEAPS leg is the house/mortgage.
  • The covered call is the renter (without clogging up the toilet).
  • Can use the rent to pay off the mortgage early or lower initial cost.
  • Can profit is LEAPS increases over time.
Diagonal Spreads are flexible.
  • Lower leg can be ITM or OTM. Schematic shown is ITM or high delta.
  • The higher the lower leg, the lower the cost and the faster can pay off using Covered Calls.
  • The upper leg can even be lower than the lower leg (as long as stays above the strike price).
Entry of PMCC
Best in Low IV environment, low on Bollinger Band
Can enter both legs at same time or lower leg first then wait for stock to rise to enter upper leg
If Stock Goes Up
The LEAPS increases in value while the covered call portion increase.
But theta-positive. Theta decay helps lower the increase in upper leg over time.
If Stock Goes down
Both legs decrease value. But IV may go up so the lower leg does not decrease as much.
The CC acts as an hedge.
4
Management
If stocks go up, can still close for a profit even though the upper leg looks like it's losing money.
Can buy 100 shares to cover, turn upper leg in CC. Enjoy LEAPS run up.
Poor Man's Covered Call - Schematic
Alternative View of PMCC
Graphic shows the different expiration dates of the two legs of the PMCC. Because strike prices are also different, this sets up a diagonal spread.
Cost of LEAPS and LEAPS Delta
The LEAPS is expensive (but still not as expensive as 100 shares). The Delta is high, which means it better tracks the price action of the shares.
Collateral Needed
The LEAPS leg is lower than the strike price, and in-the- money. There is no cash collateral needed. (Will become clearer in next slide on Diagonal Spread)
Diagonal Spread - Schematic
Diagonal Spread
Can also buy a LEAPS that is higher than the share price, with a cheaper cost. The Delta is lower, which means there is less movement in the LEAPS as the share price moves.
Collateral Needed
Collateral is equal to the difference between the LEAPS and the Call. This is because it costs more to buy 100 shares at the LEAPS' strike, than to sell at the Call's price.
Collateral Example
LEAPS strike price is $300. Call's strike is $200. Then $10,000 collateral is set aside This is an opportunity cost, but since the LEAPS is cheaper, we can pay for this with a few calls. Then additional calls produce "free" money.
Diagonal Spreads
Optimized Returns
Balance capital efficiency with income generation
Time Management
Harness different time decay rates across expirations
Strategic Foundation
Long LEAPS combined with short-term option sales
Diagonal spreads combine a long-term options position (typically a LEAPS call or put) with the periodic selling of shorter-term options against it. This sophisticated strategy allows traders to maintain a long-term market outlook while generating regular income through premium collection from the short-term options.
The strategy derives its name from the "diagonal" relationship between the different strike prices and expiration dates used. For example, you might purchase a LEAPS call option with a 12-month expiration, then sell shorter-term calls against it monthly or quarterly. This approach reduces your cost basis in the long-term option while potentially benefiting from time decay differences between the options.
Successful implementation requires active management of the short-term positions, including rolling or adjusting them as market conditions change. The strategy works best when the underlying asset trades within a predictable range, allowing for consistent premium collection without threatening the long-term position.
The Wheel Strategy
Sell Cash-Secured Puts
Begin by selling puts on stocks you're willing to own. Collect premium while waiting to potentially purchase shares at your chosen strike price. If the stock price stays above the strike, the put expires worthless and you keep the premium.
Take Stock Ownership
When assigned, you purchase shares at the strike price. Your effective cost basis is lower than the strike price due to the premium collected. At this point, you own the underlying stock and can proceed to the next phase.
Sell Covered Calls
With stock in hand, sell covered calls at a strike price above your cost basis. This generates additional premium income. If the stock price remains below the strike, the call expires worthless and you keep the premium. You can then sell another covered call.
Repeat the Process
If your shares are called away, you've sold the stock at a profit and can return to step one. This systematic approach creates a continuous cycle of premium collection, potentially enhancing returns beyond simple buy-and-hold strategies.
The Wheel Strategy represents a methodical approach to options trading that combines the benefits of cash-secured puts and covered calls. This systematic method generates consistent income through premium collection while gradually reducing your cost basis in quality stocks.
Wheel Strategy: How it works over time
Sell Cash Secured Put
Collect premium. Then at expiration, the stock price is below the strike price. Get assigned and but 100 shares at the strike price.
Sell Covered Call
Wait for stock to rebound (since you chose a good stock) and then sell a Covered Call above the cost basis with some built in capital gain. Collect premium. At expiration, the share price is above the strike price, so get assigned and sell 100 shares.
Repeat
Now repeat the process by selling a Cash Secured Put.
Good Entries for the Wheel Strategy
When to Sell the Cash Secured Put (CSP)
Low in Bollinger Band
Lower half (ideally at the bottom) of the Bollinger band
Low RSI
RSI should be 40-50 (or ideally below)
High Implied Volatility
Higher Volatility like on a red day, or around earnings.
3 Weeks (or more) Expiration
Collects more premium.
When to Sell the Covered Call (CC)
High in Bollinger Band
Upper half (ideally at the top) of the Bollinger band.
High RSI
RSI should be 60-70 (or ideally above)
Wait Until Stock Rebounds
Pick a strike price with some built in capital gain.
High Volatility
Higher Volatility like on a green day, or around earnings.
1 Week Expiration
If stock rises quickly, can roll, get assigned and restart wheel, or repurchase shares if it drops a little. Avoids leaving money on the table.