Options Comprehensive Guide

Not financial advice. For informational and entertainment purposes only.

This is a comprehensive options education series. Each section includes a written guide and a video walkthrough on X. Use the table of contents below to jump to the topic you need.

Table of Contents

1. Before Deciding to Sell Options — Do They Meet Your Goals?
2. Cash Secured Puts
3. Covered Calls
4. Buy a Call
5. Buy a Put
6. The Wheel — My Basic Option Selling Strategy
7. Option Greeks
8. Spreads
9. Buying Shares on Margin vs Buying LEAPS
10. Poor Man’s Covered Calls (PMCC)
11. Option Seller’s Guide to Buying Calls
12. Option Management — When to Close or Roll Early

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Before Deciding to Sell Options — Do They Meet Your Goals?

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Align expectations for selling options.

Video chapters:

• 01:30 Generate Income
• 05:26 Other reasons — Improve entry and exit positions, reduce cost basis for improved chance of success, the perfect optimized trade
• 09:05 Improve entry and exit positions
• 17:30 Reduce cost basis for improved chance of success
• 21:00 Outperform buy and hodl
• 37:25 After deciding that selling options meet your goals, then choose a method using optimal mechanics
• 40:15 Do you enjoy trading this way? Does it fit into your schedule?
• 44:45 Chats.

Be good yall.

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Cash Secured Puts

A cash secured put is selling a put option while holding enough cash to purchase the shares if assigned. It’s a bullish strategy that generates income while waiting to buy shares at a price you choose.

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Covered Calls

Selling a call option against shares you already own. Generates income from the premium while capping your upside at the strike price. The foundation of many income-generating options strategies.

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Buy a Call

Buying a call option gives you the right to purchase shares at the strike price. A bullish bet with defined risk — you can’t lose more than the premium paid.

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Buy a Put

Buying a put option gives you the right to sell shares at the strike price. Used as a bearish bet or as portfolio insurance to protect against downside.

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The Wheel — My Basic Option Selling Strategy

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My version of the wheel option selling strategy.

“Resetting the room.”

I’ve done so many videos that I can barely remember what I covered when and where. Plus I ramble so I basically cover everything everywhere all at once.

The wheel (NFA): Sell a put at the price you’d be willing to own the shares. I target 7DTE for at the money puts usually. Tasty Trade research recommends approximately 1SD (standard deviation) out of the money strikes at 45DTE. This will be around the 0.16 delta strike. In that case, you would attempt to roll the option every 2-3 weeks, collecting half the premium each time. I don’t routinely do this so I didn’t cover it in this video. In either case your strike is breached then instead of rolling you can just wait for expiration and accept assignment of 100 shares at the strike price. This concludes step 1.

I don’t sell ATM 45DTE puts or far OTM weeklies because the theta decay curve is different for 7DTE and 45DTE.

Step 2 is to sell a covered call against your newly acquired 100 shares. Selling anywhere above cost basis ensures that no loss is possible. Occasionally, the price of the stock may drop so much that you are forced to decide whether to baghold (sell no covered calls until the price rallies) or else risk selling shares at a loss by choosing a strike price below cost basis.

Do what is comfortable for you. I don’t baghold. If the price has dropped that far then I feel like it’s too late to fix the mistake, and I don’t let previous events stop me from making money in the present. But if the idea of losing money on a trade keeps you up at night then don’t risk it.

When I sell a cc I choose a strike above the underlying share price (and preferably above cost basis). I choose a strike that is a balance between how much premium to collect vs how much call away value potential to build in in case the stock rallies. Whatever the premium collected then I use the profit to buy additional shares or else long calls (if I’m extremely bullish).

At this point in time I’m only excited about bitcoin, MSTR, TSLA, and mining stocks in that order.

I sell a covered call against the shares until my strikes are breached and the shares are called away. Then go back to step 1, rinse and repeat.

However, if short term capital gains is a worry then sometimes I will simply pay to roll the covered call so my shares aren’t called away. Not tax advice, either. This keeps me on step 2 of the wheel for as long as I want to stay there.

That’s it, that’s the wheel. And that’s how I roll.

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Video chapters:

• 00:00 Intro to the wheel
• 02:00 Sell a put (and why it’s better than selling a limit order to purchase shares)
• 05:25 Sell a covered call
• 08:25 Reinvesting the profits to buy more shares or long calls

Be good yall.

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Option Greeks

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Option Greeks for the Mega Thread.

Video chapters:

• 00:00 Delta
• 08:20 Gamma. 0.7199 + 0.0025 = 0.7224 (not 0.8224 like I said in the recording🫤)
• 13:10 Theta (I said $18, but it was $13 on the 135 strike 45 DTE call)
• 28:25 Vega
• 31:45 Recap

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Spreads

Orange Pill Investor ep (Spreads Thread)

Up against the wall and spread em.

That’s right, this is a spread thread.

How to set up credit spreads, put credit spreads (bullish) and call credit spreads (bearish) and short iron condors (neutral). Also the debit spreads, put debit spreads (bearish) and call debit spreads (bullish).

Video chapters:

• 00:00 Liquidity is the 2nd most important aspect (position size is always #1)
• 03:55 When does it make sense to sell a spread? Two ways to win. Guess the direction correctly. Or, sell when implied volatility is high and buy back cheaper as implied vol reverts to the mean.
• 06:15 Implied volatility can increase leading up to earnings. Then it can collapse after earnings, called earnings crush or IV crush. This is why it’s usually a bad idea to buy options before earnings. Even if you guess correctly, you can lose money due to IV crush.
• 09:20 Put credit spread
• 12:40 Using Kelly Criterion to determine if the credit received outweighs the potential loss
• 15:50 Managing early if price goes in your favor
• 18:25 Brain starts to short circuit figuring out the wins and losses, but I get through it.😅
• 20:30 Call credit spread
• 21:55 Short Iron Condor
• 25:00 Misclicked the Buy button and bumfuggled it. Should have noticed immediately it said “Custom” instead of Short Iron Condor. I knew damn well collecting $10 on that spread was not right.
• 28:00 Debit put spread
• 29:30 Debit call spread

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Buying Shares on Margin vs Buying LEAPS — ROI and Risks

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Two episodes in one day?!?

Almost like buying double the shares of MSTR on margin for the same $.

And what a coincidence, today I’ll be comparing the roi between buying shares on margin vs buying LEAPS.

Either shares or a deep ITM LEAPS can be used as collateral for covered calls. The shares are the “safe” option, NFA. The LEAPS, if the Poor Man’s Covered Call is constructed correctly, is also a defined risk trade since you’ll be able to exercise the long call to protect against infinite losses in the short call.

So which gets you more bang for your buck?

It’s about the same.

If the margin requirement is 50% that is. If your exchange has more or less then that could change things big time.

So the real trade offs are in the risks.

Buying on margin has…margin call risk, duh.

If the stock price falls below the margin requirement you can actually owe more than your invested amount because you take the loss on the price AND you still owe the money you borrowed from the exchange. This is the dreaded margin call. And the exchange can change the margin requirement at any time.

I got a margin call right before earnings even though the price hadn’t changed. They (TastyTrade) increase the margin requirement a few days before earnings just in case the price goes south. That was a bit of a nasty surprise I hadn’t anticipated.

LEAPS have leverage risk just like margin, but you can’t lose more than you paid. However, options have expiration dates so you can’t just hold forever. The price has to appreciate faster than the value is draining out of the option price (measured in theta). You can hodl shares on margin basically forever (paying the interest), but that’s not the case with LEAPS.

I use both strategies, but in cash only accounts like IRA’s, it’s not possible to borrow with margin so it’s either pay full price for shares or pay about half price for LEAPS. I have a mix of both in my IRA.

So buying on margin has margin risk, the potential to be completely liquidated and owe more than you started with, and LEAPS have time risk in addition to the leverage risk because if the stock price trades sideways then LEAPS will lose money over time.

“There are no solutions. Only trade-offs.” -Thomas Sowell

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Video chapters:

• 00:00 Cost and returns of the $100 strike MSTR LEAPS
• 02:50 Cost of 100 shares of MSTR on margin
• 04:35 Profits end up about the same for each
• 05:15 Margin risk
• 07:50 LEAPS risk

Be good yall.

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Poor Man's Covered Calls (PMCC)

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Poor man’s covered calls for the Mega Thread.

This is how I set up my PMCC’s.

Unlike a traditional covered call where you own 100 shares, and you can sell any dang strike you please because the shares fully insure the short calls, a PMCC must be structured “safely.” I accomplish that by following a formula I found at The Blue Collar Investor - link in the comments below.

You take the strike from the LEAPS and subtract that from the short cc strike. Adding this to the premium collected on the covered call should be greater than the cost of the LEAPS. If this is accomplished then it should be well protected from a massive rally.

While this protects against infinite losses, if the buyer of your short call exercises too early then you still lose all of the extrinsic value left in the option. So it’s a defined risk trade, but this is a somewhat hidden risk not often discussed.

NFA, but extreme caution should be taken with PMCC, and position size should be taken very seriously. If it’s a large percent of the portfolio then if the stocks decline it will result in devastating losses.

However, in a bull market, PMCC will allow the trader to trade double the contracts compared to owning shares in a cash account. Number go up, twice the returns. Number go down, twice the losses. Trade-offs.

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Video chapters:

• 00:00 Intro
• 02:10 The traditional covered call overview
• 04:50 The PMCC set up
• 11:00 Danger of early exercise
• 17:45 Managing the PMCC
• 19:15 How PMCC gets destroyed in a bearish market

Be good yall.

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Option Seller's Guide to Buying Calls

Orange Pill Investor ep 231

Option seller’s guide to buying calls.

For the Mega Thread.

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Video chapters:

• 00:00 How I sell options
• 05:40 As a buyer I do the opposite
• 16:00 Reverse thinking

Be good yall.

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Option Management — When to Close or Roll Early

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Option management — When to close or roll early.

The main question I ask is “Is there enough extrinsic value remaining to justify leaving the trade on?”

I don’t worry about the covered call being in the money. If I have a long term investment like MSTR that I don’t want called away I’ll roll, but not at the first sniff of a rally. I’ll wait until Thursday before expiration most of the time. I’m not panicking the day after I open the trade on a sudden move.

NFA, but I always have my plan BEFORE I open the trade. I know what I will do if the price goes up, down, or stays the same. It can only do one of those 3 things so it’s not asking too much to formulate a plan for each.

tldr Don’t be scurred!

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Be good yall.

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This guide is part of Soleil’s ongoing Options Comprehensive Mega Thread on X. New sections are added over time. Follow @nithusezni on X for updates.