zeronilzilch.com

Here is how to get started trading options for beginners

If you've never heard or knew what an option is, you've come to the right place. Take a look at my other tutorial called "introduction to options" and start from there. Once you get a good grasp of the concept, look around and pick a brokerage service and signup an account.

There are lots of brokerage services out there that want your business and pick a discount brokerage service because it's cheaper. Brokerage services like Fidelity Investments, Ally Financial, Options House (was bought by E-Trade in 2016, so go to E-Trade.com), Charles Schwap, Scottrade, TD Ameritrade, Tradestation, Tastyworks, etc., or just Google around using the term "low commissions options brokers."

Make sure to read their pricing policy because some brokers charge low fees but require you to have a certain minimum amount in your account. Ally Financial, TD Ameritrade (I think) and Scottrade (I think) have no minimum. Tastyworks has a very unique pricing model--especially if you're an active trader--that they only charge you when you place an opening position trades but they don't charge you when you close your positions.

Remember that all other brokerage services charge you when you open your trade and also charge you when you close out your position. That's $10 for just one round trip--a $5 for opening position and a $5 for closing position. That's a lot of $5(s) and $10(s) to waste.

Please check the following out:

tastyworks.com

Another very good brokerage house that has zero commissions, zero options contract fees, zero deposit minimum. Please check the following out:

Webull.COM There are plenty of other brokerage services that have no minimum -- or if they do, it is very little minimum and the majority of them have a minimum of $25. Some brokers have no minimum but require their clients to keep accounts active by mean of trading. So look around.

FYI: Check out the following website for online discount brokerage services comparisons. Scroll down to the bottom of that page for more comparisons: TD Ameritrade vs Ally Invest Review.

Saving the Best For Last:

I have two favorite brokerages that I signed up for my options trading accounts and have been using both of them to this day. Here they are:

1. My favorite brokerage that I have been using for a long long time is called Robinhood and it has zero commissions, zero options contract fees, zero deposit minimum.

I strongly urging you all to signup an account with Robinhood instead of wasting time looking for a better brokerage firm. Robinhood is the best brokerage firm out there in my opinion. Options level is limited to Level 2 and you can't use multiple legs to trade options which is a hinderance if you want to maximize your profits by trading sophisticated options strategies, which I often like to do. That's why my next favorite brokerage is my other favorite brokerage to trade sophiticated options strategies.

2. This "full-fledge, all-purposes" brokerage is my other favorite brokerage because it allows me up to Level 3 trading account. I can use multi-leg sophisticated options strategies with this brokerage.

Please use this referral link so that I can get credit for referring you. Just click on the link and signup an account with them and I get the credit for referring you: SoFi Invest Financial

SoFi gives you $25 in stock of your choice when you signup an account with them. This offering applies to new account only and it is a one-time promotion to entice you to signup an account with them.

Once you signup an account with them and deposit at least $50 into your account, they prompt you (or activate a link for you) to choose one of many stocks of your choice to own for the $25 promotion.

Zero Commissions

Yes, you can trade options on SoFi Invest with $0 commissions and no contract fees. SoFi supports basic to intermediate strategies, including buying calls/puts and selling covered calls or cash-secured puts (Level 1 and 2, generally). Higher levels also available based on trading experience. Users must apply for approval, and options are available in both self-directed brokerage and IRA accounts.

Key Details About SoFi Options Trading:

Approval Required: Users must apply within the SoFi app to enable options (trading), providing details on their investment experience.

Available Strategies: Approved members can engage in buying calls, buying puts, selling covered calls, and selling cash-secured puts.

Fees: SoFi offers $0 commission trades for options, although standard regulatory fees apply to sales.

Platform Tools: The app provides in-app educational resources, real-time pricing, and an options chain.

How to Trade Options on SoFi:

Log in to the SoFi app or website.

Navigate to the Invest tab and select your self-directed account.

Search for a stock/ETF and select Trade Options.

Browse expiration dates and strike prices to select a contract.

Review the trade details and confirm the order.

Back to "Get Started" Instruction

Once you identified which brokerage service is right for you [i.e., Robinhood], go ahead and signup an account with them. They will ask for your social security # (or government-issued id # for foreign applicants), networth, and trading experience. The latter two you don't have to tell them the exact truth. For networth put something meaningful like over $100,000 even though you only have a few thousand dollars to trade.

A Side Note: Welcome to the 21st century and beyond, world! You are now can participate in options no matter where you are in the corner of the world, as long as you have internet connection, a government-issued id # (for foreign), and most importantly, money, and you can signup an account with one of the many online brokerages and trade stocks, options, bonds, etfs, and many other investment instruments at the tip of your fingers. This is the modern day Silk Road.

Networth is what you're worth at the present time and that includes your house, stock/bond holdings, savings, IRAs/401k, and other valuable assets that you can quantify. Also, in the application, it will ask how much of your current networth is liquid -- meaning, usable cash or can be easily turned into cash in a moment of notice. Again, you don't have to tell them the truth. Just put something like $20,000 or $30,000.

Notice that if you have IRAs/401k they are considered as liquid assets because you can withdraw or borrow from your accounts. Other notable liquid assets are bank accounts (checking/savings/preferred), CDs, money market accounts, stocks, tradable bonds, notes, account receivables, etc.

As for experience, one of the questions in the new-account application will ask is, how many years you have been trading and how many trades you have made or expect to make per year? Put something like intermediate (or a few years) because you have me as your mentor and that counts as experience (in my mind).

Most brokerage services establish a minimum experience criterio in which the number of years multiplied by the number of trades must be greater than 100. Most brokerage services consider this minimum experience criterio "liberally" that includes both real trades and simulated practice trades. Yes, you heard it right: your practice sessions count as experience and it makes a lot of sense.

So if you're not sure if you should go ahead and open a real trading account, you should consider applying for a paper trading account and see for yourself if it's what you're looking for. This way, once you are comfortable of what you're doing, you can apply for a real trading account.

Just inquire about them! They will be eager to help you because once you know how to trade options, they'll know that you'll most likely open a real trading account with them and giving them your business.

Let me tell you this: trading options is a lot easier than it sounds. Trading options is very simple--simple enough that even if you never knew what an option was [before reading my articles on options and] can start trading options in a very short amount of time.

Most brokerage services have a great paper trading simulator to get you comfortable if you specifically inquire about them for the purpose of paper trading before applying for a real trading account. Investopedia has a very good trading simulator for free for anyone that signup a free account for just the purpose of learning how to trade. Check this out:
Investopedia Free Account Signup After you've signed up, login to your free account and begin your trading simulator. Investopedia calls this trading simulator a "game" because it's like a game you play for "fun." You can select a variety of trading games, such as trading games for beginners (meaning beginner options traders) by selecting and putting a checkmark on "Beginners" options and click on "Join Selected Games" to go to the trading simulator page. On that page on the left side sidebar, you can find trading simulators: simulate trading of stocks, options, futures, and other trading games. There is a well-documented "how-to" guide to help you get started as well.

In addition, you may want to signup for a free account at Yahoo Finance where you can get access to all kinds of investing information. Once you have a free account, you can create as many portfolios as you want, say, one portfolio contains certain stocks or a group of industry stocks, and another contains certain investing tastes, such as income verses growth stocks.

Another very good website is called investing.com where you can signup for a free account and get access to all kinds of investing information, such as charts, technical and fundamental analysis, stocks screener, news alert on stocks, stock watch, etc.

Also, another very good website is called finviz.com where you can signup for a free account and get access to all kinds of investing information, particularly charts. Technical chart analysis in particular is very powerful and a must read if you are swing trading, looking to make quick profits using stock channels where stocks often move in a range bound, say, stocks that move between the resistance and support levels more frequently.

For those of you who are eager to apply for a real trading acccount, just put some experience, say, a few years and about 30 to 50 trades per year to get your account approved. You don't need experience for the types of trades you'll be doing. Hey, you have to start somewhere and right here is the best place for you to get started.

In the brokerage services application, it offers a variety of account types for you to choose. The following lists the account types you can open:

Individual (Individual, Joint, and Retirement Account). This is a regular account for individual single person, married joint account, or a retirement account such as for an investment club.

Individual (Trust and UGMA/UTMA). This is an account for a trust or for accounts setup for your minors for their retirement investment account.

IRA (Individual Retirement Account). This is an account setup for an IRA/401k retirement account.

Single Fund. This is an account setup as a managed fund such as an investment fund, a hedge fund or a mutual fund that has only one type of fund under management, e.g., a long term growth fund.

Multiple Funds. This is an account setup as a multiple managed fund such as an investment fund, a hedge fund or a mutual fund that has multiple types of fund under management, e.g., a value fund, an aggressive fund, a long term growth fund, a bond fund, an emerging fund, etc.

Financial Advisor. This is an account type for individuals or companies setup to offer and manage investment for their clients.

Institution (Partnership, Corporation, Limited Liability Corporation, and Unincorporated Business). This is an account type for institutions such as endowment, schools/churches/non-profit organizations retirement funds, individuals formed as a partnership, a corporation setup to manage their own investment and/or their clients' investment. Also, an account for an investment club can signup for institution account as well.

Most of you probably should apply for the first one: Individual (Individual, Joint, and Retirement Account). But if you have minors that you want to expose them to savings and investing, you might also want to signup the second account type: Individual (Trust and UGMA/UTMA).

If you have IRA/401k accounts at your employers or somewhere else, you might want to open an IRA account and transfer them to your accounts at the brokerage services so that you can manage your own investment. It is safer than you think using the trading methods described in this website: covered calls and covered puts.

Furthermore, IRA/401k accounts are allowed to use up to level 3 trading methods. This means that IRA/401k accounts can use long puts/calls, married puts, straddles, strangles, and credit spreads. That is a lot of strategies at your disposable.

All types of accounts, includling IRA accounts, allow you to trade options, in addition to invest in other types of investments, such as stocks, bonds, mutual funds, etfs, warrants, etc.

In options, there are at least three levels based on experience. For most of you, the first three levels are enough for now:

Level 1: Is for beginners who have no experience in options trading.

Level 1 allows you to trade:
- Covered calls. Covered calls sold against stocks held long in your brokerage account.
  - Buy-writes (simultaneously buying a stock and writing a covered call).
  - Covered call roll-ups/roll-downs.
- Cash Secured Puts. Covered Puts sold against funds held in your brokerage account.
This is for you beginners who had no idea what an option was before reading my tutorials. Well, even after reading my tutorials, consider yourself as a beginner and signup for level 1. In this level you are allowed to buy/sell stocks and trade two types of options: covered call and cash-secured put. For most of you, level 1 is enough for a while.

Once you have demonstrated that you know how to trade covered calls and cash-secured puts and also show an increased in your account balance because of your trades were successful, and then you can apply for an upgrade to the next trading level, which is level 2.

Again, in level 2, you have to demonstrate that you know how to trade vertical legs strategies before you are granted to the next level, which is level 3.

Level 2: Is for intermediate level or people who have some experience in options trading -- for people who know how to trade vertical legs strategies.

Level 2 includes all Level 1 strategies, plus:
Level 3: Intermediate to advanced strategies for people who know how to trade credit spreads and other multiple legs strategies. Check out the tutorials on options spreads: Option Spread Strategies. Level 3 includes all Levels 1 and 2 strategies, plus:
- Equity debit spreads (commonly called debit spreads).
- Equity credit spreads (commonly called credit spreads).
- Equity calendar/diagonal spreads
- Index debit spreads (commonly called debit spreads but using index instead of individual stocks).
- Index credit spreads (commonly called credit spreads but using index instead of individual stocks).
- Index calendar/diagonal spreads

Level 4: Advanced strategies for people who know how to trade credit spreads and other multiple legs strategies -- options traders who have lots of experience in options trading.

Naked equity puts

Level 5: Advanced strategies for people who have lots of experience in options trading and trade millions and billions of dollars per year. Level 5 is very strict to qualify to get in and requires large sum of money to open an account. It is usually reserved for sophisticated professional and institutional traders. Levels higher than 3 is for specialized traders.

Naked equity calls

Level 6: Advanced strategies for people who have lots of experience in options trading and trade millions and billions of dollars per year. Level 6 is very strict to qualify to get in and requires large sum of money to open an account. It is usually reserved for sophisticated professional and institutional traders. Levels higher than 3 is for specialized traders.

Naked index calls

Naked index puts

To apply for the upgrade steps, say level 2, 3, etc, you would contact your brokerage service and tell them you want to upgrade your account level. In most brokerage services, there is a button in your account dashboard that you can press to send your request and a notification of your approval/disapproval will be sent to you via email.

In the application, they might give you the option of applying for a margin account (as well) to go along with your regular trading account. A margin account is an extra priviledge account offered to most applicants who want leverage on their account -- and that is -- using brokerage money to control a huge position.

In essence, a margin account allows you more buying power (or trading power in this case) -- usually between 50% to 80% of your account balance. For example, if you have $2,000 in your trading account available for trade, your actual available trading money is between 50% to 80% of $2,000, which is about $3,000 (using a 50% margin account). The percentage is vary from applicant to applicant, depending on each applicant's creditworthyness.

You need to apply for a margin account during the initial application signup or at any time thereafter by contacting your brokerage service and requesting for a margin account. You'll get notified of their approval/disapproval in a short period of time. So if you want to have leverage to control more trading power and generate more profits, you can apply for a margin account to go along with your regular trading account.

A margin account is a loan account where the margin money is loaned to you to allow you to use that loaned money to trade stocks/options (in addition to your own money). But you have to pay interest on the loaned money. The interest rate is comparable to market interest rate like prime rates or rates people pay on their car loans or credit card payments.

Once you are approved of a margin account, your regular trading account should say that you're allowed a priviledge of a margin account; and if you have a balance in your regular trading account of, say, $10,000, it should show that your maximum funds available to trade is $15,000 (if you're approved of a 50% margin account).

So having a margin account is a huge advantage for most traders because you can use leverage to control huge position without spending your own money. That's why most experienced traders have margin account and they make use of their loaned money from their margin account to their advantage all the time to control huge position and therefore generate huge profits.

Once you are approved of a margin account and you're using your regular trading account to trade, your account should list two balance amounts: one for your regular trading account balance (for example, balance: $10,000) and another for the combined amount of your own money and the margin money (for example, available for trading balance: $15,000).

If you trade on your account, the margin interest kicks in and accrues either on a monthly basis or quarterly basis depending on your brokerage service's term of loan. So please read your margin account term of contract. Most brokerage services charge you on a monthly basis. So each month it automatically should show the accrued margin interest amount and that amount is deducted from your regular account balance. So you don't have to do anything on your part as long as you have enough balance to cover the accrued interest.

If you don't have enough money in your regular account balance, it will show a negative balance on it and the brokerage service will activate what is called a house call. A brokerage service is activating an in-house calling away from you -- to take away from you. The term call means to take away.

In the put and call jargon:

Put is to put it to you -- give it to you -- hand it over to you.

Call is to call it away from you. Call you in to take it away from you.

House call is to call you in to take the money away from you -- to wave you in to take the money from you. Sort of saying: Come one in so that I can take money from you.

A house call is a term used to indicate that you owed money to the brokerage service and it wants you to pay it for the next 30 days -- either depositing more money into your account or sell some of your holdings just enough to cover the house call balance. After 30 days from the house call notice and the balance is not paid, the brokerage service will try to collect the balance from you by selling your holdings just enough to cover their dued balance.

Also in the application, they might ask you how often do you trade? And how much per trading session? Again, you don't have to tell them the truth and putting something like two or three times a month or once a month.

In actuality, you will most likely trading monthly but who to dictate how often you trade? It's your money and you can trade once every five years if you want. As for how much, put something like $2000 to $5000 or whatever amount you wish and it won't effect your approval of the application. These questions only for them to help them learn about your aptitude and risk tolerance as an options trader.

Once you are approved, you can start the process of depositing funds into your account and start trading. I recommend starting out depositing into your account of at least $2000 and use the whole balance [or close to it] to buy a stock. That way, you can put every penny of your money to work for you instead of having some money sitting in your trading account doing nothing.

If you can afford to deposit more I think it is to your advantage, because the more money you put it to work for you the more stream of income you generate. The optimum firepower that I usually recommend to my friends and relatives is to start out about $5000 and put the whole $5000 to work right away and go from there. Of course, the more money that you can put it to work for you the more stream of income is coming to you.

The first trade you make should be a covered call. And repeat that trading process for awhile and see how your progress is. In other words, is your account balance higher than the original balance after a few trades?

If not, you might want to try to dump the stocks you have and move on to other stocks and start to do your homework on some other stocks and go from there.

If your account balance is higher, you have to decide if you want to continue on doing the same thing or move on to other strategies, such as the selling of cash-secured puts. Or you can do both if you have enough money for both. But make sure you start with covered call.

Meanwhile, as a beginner in options trading, you always want to learn more about options so that you can improve your skill levels and earn more profits. Here are some very good videos by Adam Khoo that teach you how to trade options as a beginner.
Professional Stock Trading Lesson For Beginners. Five Power Candlestick Patterns in Stock Trading Strategies Lesson For Beginners. Market Cycles in Stock Trading Strategies Lesson For Beginners. Trade Like a Casino for Consistent Profits For Beginners. Part I. Trade Like a Casino for Consistent Profits For Beginners. Part II. That is it!

Introduction to IPO

Article Date: August 9, 2014
By Paul S. Tuon

What is a stock?

The answer to that question may seem so obvious but it's not as a clear cut as a lot of you might think. So what exactly is a stock? Before I answer that, let's start from the basic principle of businesses. Enterprising business operations can be conducted in a number of different forms. The most notably common among the various possiobilities are the following:

Sole Proprietorships
Partnerships
Trusts and Estates
S Corporations
C Corporations

Among other forms of enterprising businesses that are part of the microeconomics are self-employment, freelance employment, syndicating employment, contracting employment, home-based enterprising business, internet-based enterprising businesses (buying and selling online, such as Noon2Noon.COM, Craigslist, EBay, Amazon, etc.)

Almost all enterprising businesses start out at the inception as a closely held, private business entity. There is rare (or virtually none) that an enterprising business starts out at its inception as a publicly traded company; the only exception is when a company is spin-off from its parent company and instantly becomes a publicly traded company.

The reason that no company starts out as a publicly traded company is that no investor would want to invest in an unknown company that just pops up from nowhere and sells shares to the public. Before the public sink their hard earned money into a company the public need to feel confidence in the company's going concern, and that company has to have a solid foundation and a good track record of performance and has a bright future.

When an enterprising business became a well-established enterprising business entity as a privately held business entity, then it might want to think about becoming a publicly traded company.

There is a variety of reasons why a privately held business entity might want to become a publicly traded company. There are pros and cons of being a privately held business entity. And also, there are pros and cons of being a publicly traded company.

There are no advantages of one form of entity over the other. It's just a matter of choice or situation--[really]. In some situations, it's better off to remain as a private business entity. In other situations, it's better off to become a publicly traded company. We won't go into great details on the pros and cons.

When a privately held business entity decides to become a publicly held company, the company is said to be going public. In other words, the owner(s) of the privately held business entity are selling part-ownership to the general public.

The keyword here is part-ownership -- and not the whole-ownership of the company -- because the original owner(s) of the closely held business entity are selling only part of the company and not the whole company. When you buy a part-ownership, often called a stock in a company, you become a part-owner (also known as shareholder). You immediately own a part (no matter how small) of every thing the company owns -- such as buildings, office equipments (i.e., furnitures, computers, copy machines, etc), vehicles, machineries, lands, and other properties.

The formal name for this process is called an initial public offering or IPO. Typically, a company goes public when it needs to raise cash, usually for expansion. In exchange for cash, the original owner(s) of the company give up some rights and some measures of decision-making control to shareholders. The original owner(s) become peer owner(s) to the new shareholders.

The initial public offering process spells out the terms and conditions of the business entity. In a simplified term, it spells out how many total shares of the whole company, e.g., 400 million shares, and how many shares the original owner(s) get, and how many shares it is selling to the general public. It also spells out the offering price for each share that the company is selling to the general public.

The initial public offering process can issue three types of stocks: common stock, preferred stock and warrants, and within those three types of stocks, it can also issue multiple classes of a stock as well. Each stock whether it is a common stock or a preferred stock or warrants can contain classes such as common stock class A, B, C, etc., Preferred stock class A, B, C, etc., and all those combined shares in the three types of stocks is called shares outstanding in a company. So the shares outstanding includes the common stock shares, preferred stock shares and also the warrant shares.

The total of all those shares (or in the previous example, 400,000,000) is called shares outstanding. All those shares outstanding is called a stock, hence answering the question posed earlier 'what is a stock?'

Notice that a company can have many stocks: common stock, preferred stock and warrants, and each of the three types of stocks can contain classes of their own, such as common stock class A, B, C, etc., Preferred stock class A, B, C, etc.; and each class in those three types of stocks is also called a stock.

Now the answer to the question: 'what is a stock?' is now much clearer.

Different classes of a stock contain different rights and privileges, with the highest rights and privileges given to the highest alphabet order. For example, class A shares have higher rights and privileges than class B, class B shares have higher rights and privileges than class C, class C shares have higher rights and privileges than class D, and so forth.

Of the three types of stocks, common stock shares have the least rights and privileges and preferred stock shares have the highest rights and privileges and its classes shares generally have preferrential treatment over all common stock classes shares and also have preferrential treatment over all warrant shares of a stock as well. warrant shares generally have rights and privileges somewhere between common stock shares and preferred stock shares.

A share of a stock whether a common stock, a class A, B, or C, or preferred class A, B, or C, or warrants, represents a part-ownership in the company. A publicly traded company is owned by its shareholders, including the original owner(s) -- often thousands of people and institutions -- each owning a fraction of the whole company.

If the initial public offering process makes no mention of other classes of a stock, it is assumed that the initial public offering is just issuing only one class of a stock commonly called common stock.

Why do companies choose to have more than one class of stocks?

There is typically only one reason that companies choose to offer multiple classes of stocks, and that is, to entice investors to buy more shares of the company -- and therefore, to raise cash to run the company. To raise cash, companies need to use gimmicks like offering investors with certain classes that pay dividends, having preferrential treatments, and other perks. You will often see a lot of non-high growth companies offer multiple classes of stocks, whereas high-flying growth companies rarely have more than one class of stock because they have no shortage of investors wanting to buy their shares.

Open Trading Visibility

When a company goes public, it also benefits from the fact that its stock is trading in the open market. This open trading tends to give the company legitimacy: its performance, its financial vitality becomes visible to all critics and non-critics.

When a company goes public, the value of the company is determined by the general public. That is, the general public take a look at the company's total shares outstanding and the offering price for each share that the company is selling to the public and multiply them together to get the total value of the company.

For example, if the company's total shares outstanding is 10,000,000 shares and the offering price for each share that the company is selling to the public is $10 per share, then the total value of the company is $100,000,000 (10,000,000 X 10).

If the general public think that the company is worth at least that much, they would be willing to own some shares of the company. On the other hand, if the general public don't think that the company is worth that much, then they would not be willing to own any share of the company. It follows the modern understanding principle that the value of a thing -- or in this case, a stock -- is determined by what one is willing to give up (i.e., money) to obtain the thing (or in this case the shares of a stock). It's a market value-based principle where value is determined against a trade-in.

Now that you know the background of how an IPO works, let's see a real life IPO process featuring companies of Twitter, Facebook, Google and Snap Inc.

IPO Journey

Here is an actual IPO process outlined chronically for a typical company going public. The featured company is Twitter, which went public in November 7, 2013:

How Does IPO Pricing Work?

The actual mechanics of what happens are somewhat complicated, but the basic idea is simple economics: The price is set as the number which balances supply and demand.

It's the principle of economics of supply and demand -- plus the modern understanding principle that the value of a thing is determined by what one is willing to give up to obtain the thing. It's a market value-based principle where value is determined against a trade-in.

In more detail, here is what happened for Twitter:

Each Twitter co-founder owns a percentage of the company and how much that percentage is determined from the letter of the agreement when they first formed the company. In the letter of the agreement, it states in percentage who gets how much of the company. The founders followed the letter of the agreement signed when they first started the company; and perhaps later, the founders decided to bring in some early investors (for example, venture capital firms and angel investors), and they, too, get a piece of the company (stated in percentage). This is called private placement. The money raised from the early investors went straight into Twitter's bank account and get used to run the company. So now there are more people who own the company and the founders' stake get smaller because they have to share the company with more people. So now Twitter is owned by the founders, the early employees, and some early investors.

When a company first started as a privately held company, in order to conform with the rules and regulations in conducting an enterprising business entity, it needs to register with the state or locale authority of its jurisdiction to begin conducting an enterprising business. In the filing application, it can decide to allocate the total shares outstanding of the company in actual number of shares or in percentage (as Twitter did). Most companies started out allocating its ownership in percentage, e.g., two owners, each owning 50% of the newly formed company. Or it can decide to allocate its ownership in actual number of shares, e.g., two owners with 10 million shares, each owning 5 million shares.

Businesses ownership structure is very flexible and easy to alter once you formed it and filed it. The easiest way to form a new company -- if you don't know whether to allocate ownership structure in actual number of shares or in percentage -- is to just allocate ownership structure in percentage and later you can change ownership structure from percentage to actual number of shares to reflect your situation, like Twitter did. You can alter your business structure at any time after you formed it; and better yet, your company doesn't have to go public in order to change its ownership structure. All you have to do is filing an 'application of amendement' with the state or locale authority of your jurisdiction and do business as usual.

Usually when a company decides to allocate its ownership in actual number of shares is because of convenience and practicality rather than costs or of other reasons. If a company has many employees and other vesting interest and wants to compensate them in stock options, issuing actual number of shares makes a lot of sense -- and a lot of companies in this situation often do issuing actual number of shares at its inception.

Issuing actual number of shares has other advantages, too, and that is, the vesting interest can trade (buy or sell) their shares in private transactions. This is similar to buying/selling shares in a publicly traded company -- but the only exception is, there is no SEC or other locale authority of jurisdiction you have to comply with their rules and regulations in conducting this kind of private transactions. It's a private placement matter conducting private transactions.

A newly formed company usually requires a "bylaw" written by the founders of the company. The bylaw states the rights and duties of the company, including ownership interest. At a very minimum, the bylaw should issue certificates of stock ownership to the shareholders involved, including the founders and early investors at the inception.

Here is what a typical certificate of ownership looks like:

ABC Corporation Incorporated under the laws of the state of Minnesota

                                  Certificate Number: 1000

This certifies that Mary Q. Public is the owner and registered holder of twenty thousand
(20,000) shares of ABC Corporation, transferable only on the books of the corporation
by the holder hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed.

IN WITNESS WHEREOF, the said corporation has caused this certificate to be signed by
its duly authorized officers of the corporation this 2nd day of October, 2018.



                                      ABC Corporation



                                      by president: ___________________________
                                                         John J. Doe

Prior to 2012, the only restriction for private companies operating in the United States was that a company cannot have more than 500 shareholders at any time while it was still operating as a privately held company. The 500-shareholders threshold was originally introduced in 1964 to address complaints of fraudulent private trading activities of company's shares because of no threshold limit of private shares. Prior to 1964 there were no limit as to how many shareholders a private company can have; so because private companies can have as many shareholders as they wanted it caused fraudulent black market activities underground to popup and the SEC stepped in and instituted the 500-shareholders threshold.

The 500-shareholders threshold rule was increased to 2,000 in late 2012 with the passage of the JOBS Act of 2012, after complaints by Facebook and other tech companies for restricting them from granting employees shares of stock.

Leading up to Facebook's IPO (May 18, 2012), Facebook experienced a huge number of shareholders that spilled over 500 shareholders due to the company's policy of granting employees shares of stock. At that time, the JOBS Act wasn't enacted yet and Facebook was forced to go public for being over the 500-shareholders threshold.

Since the JOBS Act, private companies have more room to breath regarding their shareholders threshold. This 2,000-shareholders threshold restriction applies to any private company with shares allocation of either percentage or actual number of shares. So a company's shares allocation is irrelevant for this restriction.

Remember that Twitter started out at its inception by allocating its ownership structure in percentage. Now they have to do more work by changing its ownership structure from percentage to actual number of shares.

Before the IPO, ownership of Twitter is partitioned into N equal shares, and each of the aforementioned people's stake in the company is determined by how many of these shares each owns. For example, N is around 475 million shares for Twitter. How did they come up with the number 475 million? There is no rule that says you have to have a certain number or ranges of numbers for any company. It's based on one's intuition, or in this case, the founders' intuition to realize that their company, Twitter, was worth at least $475 million at that time. Other companies might have less than 475 million and some others might have more than 475 million shares depending on how the owner(s) judge the sentiment of the condition of the market at that time. So for Twitter, the founders felt that Twitter was worth more than $475 million and they decided to choose 475 million for their company.

The number 475 million shares is not set in stone either; the company can decide to increase or decrease it any time from now on as it sees fit during its lifespan as an enterprising business entity. The company can file an 'application of amendement' with the state or locale authority of its jurisdiction to do either a 'split' or a 'reverse split' of the original number of its shares; to either increase the shares by splitting the current shares into multiple ratios; for example, a 2 to 1 ratio, which splits every share into two shares effectively doubling the current shares; or the company can do a reverse split in which it reduces the current number of shares; for example, a 1 to 2 reverse split, which cuts the current shares in half. The ratios of the split can be as small as it wants by making it in decimal fractions and it can be as large as it wants by increasing the numbers in the ratios. Another way of increasing the total shares of the company is to sell shares in the initial public offfering or issue more shares in the secondary offferings after it had gone public.

Selling more shares means creating more [new] shares to sell to new investors; and therefore, increases the total shares outstanding of the company. So the current shareowners don't lose any actual number of shares that they've already owned as a result of selling more shares; however, they will experience a shareholder dilution. [More on shareholders dilution in a little bit.]

Out of 475 million shares, Twitter cofounder Evan Williams owns 57 million of these shares, so he owns 12 percent of Twitter. Why did cofounder Evan Williams owns only 57 million shares out of 475 million? Well, he was one of many cofounders, plus early investors also got a piece of the company and thus the math works out to 57 million shares for Mr. Williams. So all the allocated shares to the cofounders and early investors must totalled to 475 million shares.

Now Twitter decides to "go public" via an IPO. The reason for doing so is to raise more money. As if private placement isn't enough money and people to share the company, Twitter decides to go public. In other words, it decides to bring in more people and provide the public with the opportunity to share in the ownership of Twitter. Why would the Twitter founders want to give away more part of their ownership in their company? Well, they are not giving it away: they are selling it, albeit the proceed goes to the company and not to the founders themselves. Whatever the public pays for partial ownership in Twitter goes straight into Twitter's bank account for general purpose use in the company. Notice that the original owner(s) and early investors receive nothing or $0 dollar from the proceeds for their hard work building the company to an ipo; nor do they get any money for any subsequent future secodary offerings. All proceeds go straight to the company and not to the founders or early or late investors. That doesn't seem fair, or does it?

For the founders of Twitter [or for any other company for that matter], the upside of this, is that Twitter becomes a richer company, and they can use the new money to develop the company into an even better and profitable company, making the company more valuable. The downside is that their stake in this more valuable company goes down. This is called shareholders dilution because the more shares you sell to the public the more new owners the original owner(s) have to share the company with and it drives the current owners' shares value down.

Take it this way: you own an apple tree that produces good delicious apples for sale and you bring in other people to be part-owner and share the output of the apples. Your current share of the apple will go down because you have to divide the output with other people now. Stock follows the same principle.

This is not the only time that current shareowners experience shareholders dilution. Whenever a publicly traded company decides to issue more shares called secondary offering -- and that is -- an offering after the initial public offering, the total shares outstanding will increase and thus making the current owners' percentage of ownership smaller in proportion to the overall total shares of the whole company.

[A side note: any offering whether it is the second, third, fourth, fifth, etc., is called a secondary offering, the offering after the initial public offering. A company issues secondary offering shares to raise cash to run the company. Likewise, a company buys back shares from the public and retires those shares to increase current sharesholders' value. Buying back shares have a reverse effect on shareholders' value from issuing secondary offerings.]

How do the Twitter founders decide the optimal solution to this tradeoff?

They talked it over among themselves and decided how much ownership they were willing to give up and how much money they were looking to raise. So they balanced the loss in ownership against the gain in the money raised. So they decided that they needed to choose two numbers: the number of new shares of Twitter to issue; and the price at which to sell these shares. There you go again: a shareholders dilution.

Remember that the original shares of Twitter as of now is 475 million and the founders are contemplating adding more shares to the already 475 million. If they decide to issue M new shares of Twitter and sell them for $x each, then Twitter adds $xM to its bank account, but everyone who already owns Twitter shares had their ownership in the company reduced by the factor N / (N + M). This is called shareholders dilution: it dilutes existing shareholders' value because there are more shares outstanding and perhaps there are more shareholders in the company. The more shares the company is selling the more dilute value for existing shareholders.

Let's think about this shareholders dilution principle for a moment. Let's start from the beginning when a company just get started. The owner(s) own percentage of the company, say four owners, each owning 25 percent of the company. And let's say the owners decided to issue 400 million shares for the whole company and each receives 100 million shares.

There would not be a dilution of shareholders' value if the four owners don't want to sell part of their company to new investors. Any time you sell part ownership of a company, it reduces your current ownership holding. And furthermore, the money received from the sales won't directly benefit the current owners. The money goes straight to the company's bank account to be used in the company's operations.

After the sale, the company's shares outstanding is increased from the original 400 million shares to the newly added x shares plus the original 400 million shares. Notice that the four owners didn't lose their actual number of shares that they've already owned as a result of sharing their company with new investors. The original four owners still own 100 million shares each. Bringing in new investors doesn't mean that some of the shares that they've already owned are taken away from them and re-distributed to new investors. That's not how it is usually done.

Although it is rare, the original owners can decide to do just that by clawing back portions of the shares from themselves and give them to new investors while also filing an application of amendement with the state or locale authority of its jurisdiction to account for the transaction and go on with business as usual without issuing new shares to pay the new investors. That kind of practice is very rare in deed in modern business transactions, but it is legal and nothing stops you from doing that.

Now if you understood the Twitter description thus far, you may have noticed that Twitter did exactly that by going back to the founders themselves and clawed back portions of their ownership percentage and allocated it to the early investors. It may have been that one founder got 40%, another got 30%, another got 30%, and the early investors asked to get a 10% or 20% or any number of percentage (in which I am not sure since this information was/is [still] private).

So to give the early investors their demands the founders had to recalculate their ownership percentage to reflect the accommodation of new investors. That means that the founders' actual ownership percentage had to come down proportionately to satisfy all parties involved. For example, if a new investor had asked for a ten percentage investment, each founder's stake would have decreased by a factor of [10 x 1/3] or 3.33% that reduces the sharholder #1 from 40% to 36.37% and for the sharholder #2/#3 from 30% to 26.67%. Add them all up: 36.37% + 26.67% + 26.67% + 10% = 99.71% (and rounding off to the whole number to 100%).

If later, more [late] investors want to invest in the company, the same process that just described is followed if the company allocates its ownership in percentage. Let's say that one investor wants to invest, say, a 5% stake in the company, each founder's stake and the early investor's stake would have decreased by a factor of [5 x 1/4] or 1.25% that reduces for the current stake of sharholder #1 from 36.37% to 35.12%; for the sharholder #2 from 26.67% to 25.42%; for the sharholder #3 from 26.67% to 25.42%; and for the (early investor or sharholder #4) from 10% to 8.75%. Add them all up: 35.12% + 25.42% + 25.42% + 8.75% + 5% = 99.71% (and rounding off to the whole number to 100%).

What happens if the company allocates its ownership in actual number of shares instead of percentage? Well, the normal process is to issue more shares worth the amount stated in the investment term. For example, if the investment term states that a new investor gets a 10% stake in the company, then 10% [of the current shares outstanding] worth of new shares will need to be issued and given to the new investor so that existing owners don't lose any actual number of their shares that they've already owned. Very straight forward.

Now to finish off the four owners example: Similarly to Twitter's founders, the original four owners' stake in the company got reduced and is no longer 25%, even though they still each own 100 million shares, and now their holding is reduced in term of percentage by 1/4 times the newly issued shares for each four owners. This is called shareholders dilution, a process of selling more ownership to new investors. It's not uncommon for a company to sell more shares years after it went public to raise more cash to run the company. This is called secondary offering. It is also can cause shareholders dilution. To offset shareholders' dilution, a company needs to generate more business and thus generates more profits and thus its stock price goes up and thus makes shareholders happy and thus current shareowners will forget about the actions that a CEO took when he/she issued more shares to raise cash.

[Now let's continue with Twitter]

Twitter needs to choose M first, because what x should be depends on M: x needs to be a price that the public would be willing to pay to own 1 / (N + M) of Twitter. In the process outlined below, Twitter chooses M in step (1) and chooses x in step (5).

Here we go:

1. Twitter decided to offer 70 million shares on the public market. This means that current shareholders of Twitter have their stakes decreased by a factor of 13 percent = 475 / (475 + 70), and that 13 percent of Twitter is up for grabs for the public or mainly for institutional investors. How did Twitter come up with this number? Its executives know around how much money they want to raise, and how much of their ownership they were willing to give up.

Based on the number 70 million, Evan Williams knew right away that after the IPO his stake in Twitter will decrease from 12 percent to 10 percent, but in his mind he thinks this sacrifice is well worth it. Twitter now advertises to institutional investors (via its underwriting banks, in particular Goldman Sachs) that 70 million shares of Twitter are on the table, and invites them to submit requests for how many shares they would like to buy.

The process of going public is a two-tier process: first, you let institutional investors buy shares from you (via the underwriting banks), and second, in turn, institutional investors (later) sell those shares to retail investors (like you and I -- who lack deep pockets that instutional investors have).

Notice that Twitter or any IPO-bound company don't spell out the offering price just yet, and they kept institutional investors in the dark and institutional investors have no official word on how much they will have to pay per share, but they can do their own analyses to come up with rough estimates. This is almost like a Dutch Auction process where you want to gauge the demand of the shares by inviting buyers to submit their bids to buy shares, stating how many shares and how much price they're willing to pay.

2. Meanwhile, the institutional investors are busy at work trying to come up with an optimal price to submit their bids. They pay close attention to market news reports to see if rumors abound. Lo and behold for Twitter, rumors circulated that the offering price will be in the $17 to $20 range. [A side note: You can keep tuning to market news and you often hear rumors about some IPO-bound company is expected to price its share in range]. And for Twitter, rumors ran wild!

3. Multiple reports: Rumors circulated that the offering price will be in the $23 to $25 range. By now, institutional investors got a fairly good idea of the price range they intend to submit their bids.

4. By November 5, 2013, institutional investors must submit their requests on how many shares they wish to buy. I call these "requests" and not "bids" because they can take many forms, ranging from the simple ("I want to buy 1 million shares, no matter the price") to the complicated ("If the offering price is between a and b, I want to buy X shares; if the offering price is between b and c, I want to buy Y shares; but in the event that Z occurs I do not want to buy any shares"). This process resembles a closed auction where bidders of an item submit their bids in writing stating the price range and the quantity of the items. A more accurate comparison is that this process is similar to a Dutch Auction process where you invite buyers to submit their bids to buy shares, stating how many shares and how much price they're willing to pay and the underwriting banks can choose to accept bids that fall in the optimal range.

Who are these institutional investors?

They are the "important" clients of the underwriting banks: the top pension funds, mutual funds, hedge funds, high net worth individuals, and long standing clients. Why do these investors get first dibs on an IPO?

Retail investors often complain this is not fair, but the (official) reason is stability: the argument goes that institutional investors (who are accredited, sophisticated, more experienced, and who have deeper pockets and capacity to take risk) create stability in the stock price by being the first to receive them. The alternative would be for Twitter to offer its shares to the entire world all at once on IPO day.

While this seems more fair, experience shows that this creates havoc: Twitter [or any IPO-bound company for that matter] is afraid that if it starts by offering its shares to Average Joe investors at the outset, the price will jump all over the place and the market will become anxious and confused. Moreover, the SEC fears that the "unsophisticated" Average Joes do not know how to deal with an IPO appropriately and are likely to lose their life savings by purchasing the stock in this unstable environment.

Personally, the current practice of letting institutional investors have their first crack at it is outdated and I think today's retail investors are sophisticated enough to avoid pitfalls. So I think it should open to all investors. After all, in the era of the information age, retail investors have access to all kinds of information, advices and opinions [on the internet], both for and against any IPO-bound company; and therefore, the majority of retail investors are more than well-versed about investing. That's just my opinion.

To back up my opinion, I intend to change the way they practice the "initial public offering" and allow basically everybody to have a crack at the IPO, assuming my company is good enough and worthy enough to go public. From now on, companies that I found will allow basically everybody to have a crack at the IPO, even if nobody else is following my trail and footsteps.

UPDATE: January 1, 2026.

Robinhood Markets and several retail brokerages recently have followed my footsteps (or my way of thinking) of allowing retail investors access to the same privilege institutional investors have. Now small investors like you and me have access to pre-IPO shares the same way institutional investors enjoyed for years.

If you would like to have first crack at the pre-IPO markets the same institutional investors get, signup accounts with these retail brokerage firms:

Robinhood Markets (https://robinhood.com) is my favorite..

Others very good brokerages are the following and please Google them:

Pre-IPO trading platforms and brokerages, such as Hiive, EquityZen, and Forge Global, allow accredited investors to buy shares in private companies. Other options include Nasdaq Private Market and brokerages like TradeStation, Fidelity, and SoFi, which may offer access to upcoming IPO shares.

Here is a description taken from my Robinhood Markets Account:

Shares on IPO Access

When companies or funds go public, we sometimes help offer a portion of their shares to our customers. We receive an amount of shares (based on total demand and other factors) the morning of the IPO.

[In other words, Robinhood Markets acts as one of the institutional investors in "regquesting" shares of the pre-IPO and gives us small investors a chance at the pre-IPO price.]

You can request shares in just a few steps: A, B, C, D.

A. Follow upcoming IPOs

You can show your interest and follow an IPO from a list of companies or funds looking to go public.

B. Start a request

With limited shares available, you can make a request for an opportunity to invest in the IPO.

C. Confirm the final price

When the final price is set, you can decide if you still want to request shares of the company or fund.

D. Keep your fingers crossed

Once requests are randomly selected, you can see if your request was filled.

[End Robinhood Description]

5. On November 6, 2013, around 4:00pm, after they've received all bids and reviewed and picked the optimal price: Twitter finally sets its IPO price at $26. By looking at the set price at $26 per share, we can see that the majority of the bids probably would've fell between $20 per share and $30 per share. So this means that anyone who submitted their requests at $26 a share or higher most likely will be granted as "winning" bids and anyone who submitted their requests below that price were rejected. At this point, Twitter knows that it will raise exactly $26 x 70 million = $1.8 billion in cash from this offering. We say that this offering price values the company at $14.2 billion = $26 x (475 million + 70 million). The only way you can say what a company is worth is by seeing how much someone else would pay for it, or at least how much he would pay for a share of it.

6. On November 7, 2013, around 8:30am: The IPO underwriters look at all the requests from step (4) and decide how to allocate shares to the institutional investors. This is not as simple as giving each institutional investor what they requested if their conditions were met.

First, the total number of shares requested by all institutional investors is likely much, much more than 70 million (and most institutional investors know that demand for shares greatly exceeds their supply, so they will tend to request a much higher number of shares than they actually want). After all, a lot of these institutional investors are dealers: they buy low and sell high to retail investors. So they will try to get as much shares as possible. And the best part, is that, they don't even have to send in the money right away. They can request the shares and when the IPO is open for trading for the first time, they can sell the shares at a higher price than they requested and pocket the difference.

Second, this is the only chance the offering company and the underwriters have to control what kind of shareholders have a stake in the company. They know the reputations/styles of the institutional investors, and they take this information into consideration when choosing how to allocate the available shares. The process is not "fair" in the sense that all of the institutional investors are on the same playing field; however, they're at the mercy of the underwriters who have full control of deciding who gets how much.

For example, the underwriters would be wary of granting a large number of shares to an investor who is likely to flip them (wait until the price spikes upon the opening trade and then immediately dump the position). The underwriters want an ideal balance of different types of investors: long term investors, short term investors, domestic investors, foreign investors, etc. Note that (essentially) all of the requests at this stage are "buy" requests; although in some cases an institutional investor can request to borrow shares (with the intent of creating a short position by selling them), this is very rare and (understandably) not very well received by the underwriters.

7. On November 7, 2013, before market open: All of the 70 million shares are in the hands of the initial institutional investors, who now owe Twitter $26 for each share they were granted. From here on, Twitter the company -- I mean the company and not the founders and early investors -- don't stand to gain a penny from the market activity. However, for the founders and early investors, they stand to gain/loss from the market activity.

8.On November 7, 2013, at the market open (9:30am): Orders start coming to the NYSE from all over the world, from both retail investors and institutional investors (both the ones who were lucky enough to be part of the initial offering and the ones who were not).

Each order is either a "bid" to buy ("I want to buy TWTR") or an "offer" to sell, also known as "ask", ("I want to sell TWTR"), with the latter presumably only coming from those [early] institutional investors who already have the stock to sell. Each order includes both a price and a size: for example, "I am willing to pay $45 per share for 100 shares of TWTR" or simply "bid: 45 x 100" or for an offer "ask: 45 x 100".

9. On November 7, 2013, after market open: The designated market maker (DMM) for Twitter (which is the bank Barclays) at the NYSE starts collecting all of the orders that are coming in. Taking a quick first look at the numbers they are seeing, Barclays reports that the prevailing price seems to be in the $40 to $45 range for the majority of the orders. This number is reported by the market news media [or sometimes called rumors].

10. On November 7, 2013, after market open: The DMM (Barclays) works on setting the opening price. The opening price is chosen so that supply and demand are balanced as well as possible. In other words, the opening price is the price that maximizes the number of trades that can be executed, based on all of the orders submitted thus far. This process is called price discovery, and is handled by humans at the NYSE (unlike Nasdaq, which handles price discovery electronically).

Once the opening price is decided upon (for Twitter, $45.10), the DMM "freezes the book", or blocks any new orders from coming in. Next, the DMM enters all of the accepted orders into the system, matching buyers and sellers based on the prices and sizes they submitted. The process of price discovery usually takes around fifteen minutes for the NYSE, but since Twitter is such a high profile stock with a great deal of anticipation and demand, the process took over an hour.

11. On November 7, 2013, at 10:50am: Bam, Twitter begins trading at $45.10. In particular, the public is willing to pay $45.10 per share of Twitter, and we say this opening price values the company at $24.6 billion = $45.10 x (475 million + 70 million). Twitter instantaneously increases in value by $10 billion.

12. On November 7, 2013, at market close (4:00pm): Twitter closes at $44.90.

Conclusion: Was Twitter a Success for its IPO?

The success of an IPO is measured by how smoothly steps (10) and (11) go. If the price during discovery falls below the initial offering price ($26 for Twitter), this looks embarrassing and the underwriters will shore up demand by purchasing shares. Similarly, if the price goes berserk once trading begins, the DMM is blamed for not setting the price appropriately.

The fact that the closing price ($44.90) is close to the opening price ($45.10) in this case is a sign of stability, and that the underwriters and the DMM performed their job well.

Note that for Twitter as a company, the exciting day was November 6, not November 7. On November 6, Twitter set the offering price, and thus knew it would raise $26 x 70 million = $1.8 billion in cash. The opening price ($45.10) is irrelevant here.

But for the employees of Twitter, especially the founders and early investors, the exciting day was November 7: they already owned shares before any of the IPO process happened, whether they obtained these shares as founders, as early investors, or in the form of employee compensation and those shares are worth a fortune. But they were in limbo regarding just how much this intangible stake in the company was worth until 10:50am, at which time they gleefully realized they now had $45.10 x n in their pockets, where n is the number of shares they owned.

So who profited from the surge from the offering price of $26 to the opening price of $45.10?

Not Twitter, the company.

Instead, its employees and the institutional investors from step (4) just received a huge return. Considering this circumstance, was $26 too low of an offering price? Perhaps. If Twitter had instead set the opening price at $45, and assuming that demand from investors was the same, Twitter could have raised nearly twice as much money for the company. However, the goal of an IPO is not just to make as much money as possible for the company; it is also to build a foundation of happy shareholders, and a shareholder is happy if he gets a nice return from his IPO investment. Normally companies try to set the offering price so that the initial investors earn something like 10 percent on IPO day, so in that regard the 73 percent return the initial investors received is on the high side.

As a concluding aside, let us consider what happened to Facebook, now infamous for its botched IPO. The initial offering price (offered to institutional investors) was $38 per share. After price discovery, the opening price on the NASDAQ exchange was $42.05 (an 11 percent spike, compared to 73 percent for Twitter).

After trading began, the stock started to drop back down toward $38. It very well would have gone below $38 were it not for the embarrassed underwriters who provided support by purchasing shares at $38. The closing price on IPO day was $38.23. Needless to say, the institutional investors who received first dibs on Facebook were not pleased. Nor were they when a week after its IPO, Facebook closed at $26.81. And that's not all: Facebook continues to drop gradually to as low as $12 a share in the span of two years later from its IPO debut.

What went wrong?

Numerous things:

Two days before the IPO, Facebook changed its mind about M (the number of shares it would offer). Though the mathematics is simple, this meant that all the major players who had planned on purchasing shares on IPO day had to recompute everything and update their plans.

Many of the initial institutional investors reported in the days before IPO day that they intended to sell some of the shares they would receive. Remember that a lot of these so called institutional investors are people just like you and I who look to make money in the stock market. Except you and I don't get the privilege to obtain IPO shares at no cost and sell at the IPO debut trading to make quick bucks. In other words, a lot of these so called institutional investors are opportunistic dealers who seek to make quick bucks using their privilege and well-connected status.

Facebook's initial offering price was much closer to the expected market price than Twitter's; as a result, the initial institutional investors in Facebook stood to gain much less on IPO day than the institutional investors in Twitter.

The period of price discovery took exceptionally long (trading opened at 11:30am) and the process was marred by technical difficulties before and after the start of trading: orders did not come through, and investors were confused about whether or not their orders had been executed or even received.

Extremely high volume (because of unprecedented excitement about Facebook) overwhelmed the NASDAQ servers, exacerbating the technical difficulties.

The excitement was not only unprecedented, but also excessive: many retail investors wanted to purchase shares of Facebook because they were convinced it was the next big thing (for many young people, purchasing Facebook shares was their first foray into the financial markets), but the reality was that the prices at which it was trading were ridiculously high compared to its profitability. When "virgin" retail investors (who had been promised that the stock price might increase by as much as 50 percent on IPO day) saw prices dropping, they grew anxious and sold their positions, exacerbating the selloff.

Because of the Facebook debacle, everything about the Twitter IPO was much more conservative (lower initial offering price, conducting a dry run of the IPO over the weekend to test all of the systems, using humans instead of electronics to handle price discovery, listing on the NYSE instead of the NASDAQ), and it seems this caution paid off, at least as of day one.

Google's IPO

Google's IPO, 10 Years Later

On August 19, 2004, Google GOOGL went public in a highly anticipated initial public offering that valued the six-year old company at what seemed to be an astronomical $23 billion, with a price-earnings ratio of 80, a mere six years after its founding. The company was already generating annualized revenue of $2.7 billion and profits of $286 million.

As of today, August 9, 2014, Google's market cap is $390 billion, with annualized revenue of $64 billion and profits of $13 billion. Google's market cap is the third highest of any U.S. company, with only Apple AAPL and Exxon Mobil XOM being bigger. Public market buy-and-hold investors have scored a "ten-bagger", earning a return of more than 1,000% over the decade or an equivalent of $100 invested then is now (August 9, 2014) worth about $880,000 [Sources: Amazon $250,000/2500 = $100 and $2.2 billion/2500 = $100.].

Google's IPO was unconventional, starting with a registration statement stating that the company was planning to raise $2,718,281,828, a number that confused the many journalists who hadn't memorized the number "e" to the ninth decimal place, as any serious quant would have. Famously, the letter from the Founders contained in the prospectus stated a corporate goal of "Don't be evil." Several years later, the company decided to honor this commitment by pulling out of China rather than agreeing to facilitate government censorship of search results.

Google bargained with its investment bankers to lower the fees that are charged, and paid 2.8% rather than the more normal 4% that a multi-billion dollar deal would normally face. Most IPOs, and almost all of those that raise $50-200 million, pay their bankers 7% of the proceeds. So at 2.8% for Google? This is the case of the rich 'get' richer!!!

Unlike most IPOs, the company used an auction called a "Dutch Auction" to sell shares. The merits of using an auction versus the more traditional way of selling shares, known as bookbuilding where you let investors submit their bids and the company gauges the sentiment of the offering to if investors' appetite is high or low and chooses to set the price of the IPO accordingly.

An auction, at least in theory, should deliver the highest possible price for the company while giving individual investors, rather than just the fund managers who dominate the bookbuilding approach, the opportunity to buy shares. But by the time Google launched the IPO, it had scaled back the size of the stock sale and lowered the offering price in the face of weak demand. After setting a price range of $108-135 per share, Google went public at only $85 per share, selling just 22.5 million shares and raising just $1.9 billion.

Adding insult to injury, the stock rose 18 percent on the first day of trading to close at $100.34 -- suggesting that the auction failed to achieve its purpose of setting a price as close as possible to the value investors would award the stock on the open market. The IPO was largely viewed as a fiasco.

Part of the reason that the offering raised less money than expected was simply bad luck: In the weeks leading up to the IPO, both the technology-laden Nasdaq market and shares of Yahoo YHOO, Google's top rival at the time, had been drifting downwards, sending a chill through the IPO market.

Two other factors, however, were even more important. The first factor was that the "road show" did not go well. When a company goes public, in an attempt to stimulate demand, the top managers and the investment bankers hired to take the company public typically spend up to two weeks going from city to city making presentations to institutional investors and answering questions. Google's management, however, refused to answer many of the questions that were asked. As a result, investors were less willing than normal to give the company the benefit of the doubt about its future profitability.

The second factor that lowered the offer price was the desire of the lead underwriters, Credit Suisse and Morgan Stanley MS, to sabotage the auction. Underwriters find the bookbuilding system (also known as a "status quo" system) to be very profitable, and most feel threatened by auctions. With an auction, the underwriters no longer have the power to allocate underpriced shares to their favorite customers. Consequently, the lead underwriters didn't want the auction to be viewed as a success.

They didn't want it to be a complete failure, however, since they were the lead underwriters. The underwriters told many institutional investors that they were likely to receive shares if they bid $85 per share. Not surprisingly, there were a huge number of bids for shares at $85, and relatively little demand at a higher offer price. Google was forced to accept just $85 per share.

Google and the selling shareholders thus raised less money than they could have in the IPO. But the offer was selling only 8% of the company, and the employees and others who held their shares were amply rewarded as the stock rose, and rose further, as profits increased from $286 million per year to $13 billion per year. Google has proven that targeted search advertising can be an enormously profitable business, which is why Facebook was able to get a valuation of $104 billion when it went public in 2012.

Snap is Going Public

Snapchat is about to make a 26-year-old one of the richest people on Earth

Here is an article taken from a Vanity Fair Magazine dated February 17, 2017, by Maya Kosoff:

Here's how much money CEO Evan Spiegel will make when Snap goes public.

Next month, Snapchat parent company Snap will begin selling shares on the public market in one of the most highly anticipated I.P.O.s for a tech company since Twitter went public in 2013. With Uber and Airbnb still raising funds and bolstering their bottom lines as they mull public offerings of their own, Snap is expected to serve as a bellwether for the otherwise slow-moving tech-IPO pipeline and a critical test of the public appetite for other unprofitable Silicon Valley unicorns.

When Snap does go public, the company said in documents filed with the SEC on Thursday, it will price its I.P.O. at $14 to $16 per share, with a total of 200 million Class A shares. At that price, the offering could value Snap at $22 billion -- an eye-popping valuation given its recent losses, but still on the low end of its private-market valuation.

CEO Evan Spiegel, 26, and co-founder Bobby Murphy, 28, stand to make about $5 billion off of their shares in the company when it does finally go public, beginning with the $256 million in stock that they each plan to sell when Snap debuts, according to the documents. Both Murphy and Spiegel are the biggest shareholders in the company, and together they will control about 89 percent of voting rights in Snap once it's a public entity. (Their third co-founder, Reggie Brown, was paid $157.5 million in a settlement with his estranged co-founders after he filed a 2013 lawsuit over being forced out of the company.)

For Snap's I.P.O., Spiegel took a page out of Facebook CEO Mark Zuckerberg's playbook, consolidating the executive power at the helm of his company ahead of its offering, and offering shares without any voting power, allowing Spiegel and Murphy to retain control even after selling huge amounts of stock.

"Our two co-founders have control over all stockholder decisions because they control a substantial majority of our voting stock.... We are not aware of any other company that has completed an initial public offering of non-voting stock on a U.S. stock exchange. We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business," the filing said.

Co-founders Spiegel and Bobby Murphy each own 20 percent of Snap, according to the prospectus. Based on a valuation that could reportedly reach $25 billion at the time of the offering, each of them would own shares worth about $5 billion. The two co-founders currently plan to sell 16 million Class A shares -- which don't have voting rights -- when the company goes public, with the expectation that will sell more over time.

Snap's co-founders aren't the only ones who will make money by shedding some of their shares during Snap's public offering. Shareholders like Snap chairman Michael Lynton, formerly of Sony, will sell up to 54,907 Class A shares, and make as much as $878,512 during Snap's IPO. Others such as Benchmark partner Mitch Lasky will make up to $171 million. Snap's earliest investor, Lightspeed Venture Partners, could make as much as $74 million. Once Snap goes public, Spiegel will also receive 3 percent of its stock as an award.

It remains to be seen how the public market will react to Snap, and whether it will emerge as a highly valuable, diversified social-media company like Facebook, or one that does well on I.P.O. day but flops afterward. Some potential investors have already "reacted with fury" over Snap's decision to sell shares with no voting power.

In the S-1 SEC's official filing for an IPO on Thursday February 16, 2017, Snap told investors it "may never achieve or maintain profitability." Snap also revealed that it will spend $2 billion with Google Cloud over the next five years, and that boss Evan Spiegel got nearly $900,000 of security services (or stock options) in 2016. The company sought in the filing to raise $3 billion.

"We have incurred operating losses in the past, expect to incur operating losses in the future, and may never achieve or maintain profitability," the filing said. Other similar companies, like Twitter, have also included similar language in their public offerings, and look what happens to Twitter now.

As of this writing (2/17/2017) Twitter's stock closed at $16.62 (USD) a share -- the lowest it ever been traded in its four years as a publicly traded company. It debuted on November 7, 2013 at around $45 a share and on January 3, 2014 its shares were trading around $70 a share and about a month later it began to head south and never looked back ever since. Will history repeats itself for Snap? We'll see!

SNAP INC (SNAP) IPO

Company Financials per S-1 SEC filing of 2/16/2017:

Snapchat's revenue growth is astounding -- and so are its losses. Here are the highlights.

Net revenue: $404.48 million in 2016, up from $58.66 million in 2015. That means the ephemeral messaging service grew revenue almost seven times in a year -- but its losses outstripped its revenue

Net loss: $514.64 million in 2016, wider than $372.89 million in 2015

Loss from operations: $520.39 million in 2016, wider than $381.73 million in 2015

Usage: 161 million daily active users in the December quarter (60 million daily active users in the United States and Canada)

Average revenue per user: $1.05 in the December quarter ($2.15 in North America)

Time spent: 25 to 30 minutes a day

Head count: 1,859 employees

Total Assets $1,722,792,000 (equates to Stockholders' Equity + Total Liabilities)

Total Liabilities $203,878,000

Stockholders' Equity $1,518,914,000

Pre-IPO Update: Snap tops expectations in pricing of long-awaited IPO:

Here is an article taken from Reuters dated: March 1, 2017 (one day to IPO)

By Lauren Hirsch (Reuters)

(Reuters) - Snap Inc priced its initial public offering above its target range on Wednesday (March 1, 2017), a source familiar with the situation said, raising $3.4 billion as investors set aside concerns about its lack of profits and voting rights for a piece of the hottest tech IPO in years.

At $17 a share, the parent of popular disappearing-messaging app Snapchat has a market valuation of roughly $24 billion, more than double the size of rival Twitter and the richest valuation in a U.S. tech IPO since Facebook in 2012.

The company had targeted a valuation of between $19.5 billion and $22.3 billion.

The book was more than 10 times oversubscribed by institutional investors and Snap could have priced the IPO at as much as $19 a share, but the company wanted to focus on securing mutual funds as long-term investors rather than hedge funds looking to quickly sell, the source said.

The source asked not to be named because the matter is confidential. Snap declined to comment.

The share sale was the first test of investor appetite for a social-media app that is beloved by teenagers and 20-somethings but faces a challenge in converting "cool" into cash.

Despite a nearly 7-fold increase in revenue, the Los Angeles-based company's net loss jumped 38 percent last year. It faces intense competition from larger rivals such as Facebook as well as decelerating user growth.

Snap priced 200 million shares on Wednesday night at $17, above its stated range of $14 to $16 dollars a share.

The sale had the advantage of favorable timing. The market for technology IPOs hit the brakes in 2016, marking the slowest year for such launches since 2008, and investors are keen for fresh opportunities. The launch could encourage debuts by other so-called unicorns, tech start-ups with private valuations of $1 billion or more.

Institutional investors bought the shares despite them having no voting power, an unprecedented feature for an IPO despite years of rising concerns about corporate governance from fund managers looking to gain influence over executives.

Snap is set to begin trading on Thursday on the New York Stock Exchange under the symbol SNAP.

Snap Initial Public Offering Procession

An IPO Procession Reminiscent of a Wedding Procession

Here is a chronically outlined ipo procession for Snap that reminiscent to a wedding ballyhooed procession which took place on Thursday March 2, 2017. The preparation and anticipation of an ipo mirror the wedding preparation and anticipation where things are orchestrated in an elaborate fashion; while the anticipation is high for both the guests and bride and groom and the same thing can be said for the ipo. Keep in mind that the similarity of the two doesn't end at the ipo. For a lot of companies it continues beyond the ipo -- Twitter comes to mind. Just as a splashy wedding is no guarantee of an enduring marriage, stock price of a hot and high demand at ipo says little about a company's long term prospect.

Mar 2, 2017 at 8:10 am ET

As we get set for the trading to begin, here are some facts that we know so far about the IPO:

Snap is the parent company of Snapchat, an ephemeral, or disappearing, messaging platform that is very popular among the millenials, age 18 to 24 years old. Snapchat is a one-to-one and group messaging app that lets users (particularly millenials) send photo, video, and text messages that disappear after several seconds. Roughly 150 million people use Snapchat every day, and they consume around 800 hours of video per second.

The History of Snapchat

Three Classmates Meet at Stanford University

Evan Spiegel, Robert "Bobby" Murphy, and Frank Reginald "Reggie" Brown IV, who was pushed out in 2012, met at Stanford University around 2010. At that time, Spiegel and Brown were juniors; while Murphy had graduated. Spiegel (who eventually didn't graduate) studied product design, Murphy studied mathematical and computational science, and Brown studied English. All were members of the Kappa Sigma fraternity, for which Spiegel served as social chair. At the Kappa Sigma fraternity that the trio got to know each other well and they started to hang out together throughout their college days.

In the summer of 2011 after they all left Standford, the trio began work on an ephemeral messaging app they soon dubbed "Picaboo." The co-founders built a prototype at the Los Angeles home of Spiegel's father, assigning a title to each: Spiegel, CEO; Murphy, CTO; Brown, CMO.

Soon after that things turned sour for the three founders and Reggie Brown was pushed out in 2012. In February 2013, Reggie Brown filed a lawsuit against his former co-founders. In September 2014, Reggie Brown was paid $157.5 million in a settlement to close off a 2013 lawsuit he had brought against other co-founders Evan Spiegel and Bobby Murphy, alleging that they had taken his original idea and run with it, pushing him out of the company without compensation in the process.

So Long, Picaboo. Hello, 'Snapchat'

The name "Picaboo," it turns out, is a name already in use by an older New Hampshire-based company that published and printed images. In September 2011, Spiegel, Murphy and Brown rebranded the app changing its name from Picaboo to Snapchat, added the ability to caption photos, and relaunched in the iOS App Store. They focused on the app's technological innovations more than branding and marketing to make the experience more organic and cool than traditional advertising.

Fast Forward

Snap priced 200 million shares on Wednesday night (March 1, 2017) at $17, above its stated range of $14 to $16 dollars a share.

Recent disclosures and decisions have led to more over/under speculation on its IPO than on a college football game. The book was more than 10 times (or more than 2 billion shares) oversubscribed by institutional investors, which means that the deep-pockets investors are fighting each other to get the shares. It also means that there will be a lot of these instutional investors who got shut out in the allotment process will try to be the first one in line to "snap" up the shares when it opens for trading for the first time. So look for an openning "pop."

Snapchat parent Snap valued at $24 billion after better-than-projected IPO pricing on Wednesday night, as investors clamored for a piece of the biggest technology IPO in the U.S. since Alibaba made its debut in 2014.

For Snap, the truth will be in advertising-Herd on the Street

Snap calls itself a camera company, but everything beyond the first line of its IPO filing suggests it is an advertising company. And estimating how much ad revenue it can generate is essential to determining its value.

Snapchat Founders Keep Control

In the IPO of Snap Inc., new investors will get zero votes while Evan Spiegel and Bobby Murphy, the Snapchat creators, will have 70% voting power; deep-pockets pre-IPO investors get less-powerful voting shares.

Snap CEO Paid More Than Rivals in Year Leading to IPO

Snap CEO Evan Spiegel took home more cash in the year leading up to the company's IPO -- without accounting for inflation -- than the CEOs of Match Group, Facebook, Pandora Media, ETSY, LinkedIn, Twitter and Square, ahead of all of those companies' public offering, a new study says.

In 2016, Spiegel's salary from Snap was $503,205, the study conducted by Equilar says. Facebook CEO Mark Zuckerberg received $483,333 in 2011, the study says.

Spiegel also received the largest CEO bonus, of $1 million, of any of these CEOs in the years before their companies went public, according to the study.

Will Snap's IPO Crackle or Pop?

To become the next Facebook instead of the next Twitter, Snap must accelerate user growth and keep monetizing its existing users.

Snap is asking a lot of its investors in its coming IPO, and that may lead them to push back.

Mar 2, 2017 at 8:19 am ET

The Steps Snap Took to Bolster Demand

Snap executives took some unusual steps that could help bolster demand for the shares.

In a regulatory filing ahead of the IPO, the company said roughly one-quarter (or 50 million shares) of its planned float of 200 million shares would be subject to a lockup of one year before that chunk could be sold.

The company planned to sell those shares (about 50 million shares) to a group of existing accredited deep-pockets investors, who got in before the IPO process began, people familiar with the deal said. Other [accredited] deep-pockets investors would be locked up for less time. Such moves could damp volatility by limiting the number of short-term stockholders known as "dealers" [who buy low sell high] who can jump in and out.

In the offering, which raised $3.4 billion, about 120 million of the shares sold went to roughly 25 investment firms, according to people familiar with the offering. The 50 million shares going to the group of existing [accredited] deep-pockets investors meant there were only about 30 million shares to be distributed among all other interested institutional investors, the people said.

Mar 2, 2017 at 8:36 am ET

Hard to Imagine Better Timing for Snap's IPO

Investors are hungry to buy just about any stock these days and portfolio managers are particularly starved for new supply of fast-growing shares of information technology companies.

Demand is evident in the pricing of Snap shares sold to big institutions at higher-than-expected value of $17-a-share.

Meanwhile, U.S. stocks are plowing higher and no group of S&P 500 shares are faring better than than information technology -- up 11% in just over two months, compared with a 7% advance for the benchmark.

"All stars are lining up for this thing. It couldn't be more ideal," said Josef Schuster, founder of IPOX Schuster, a research firm that specializes in creating indexes tied to IPOs.

Mar 2, 2017 at 8:57 am ET

Snap's Challenge: Monetize its Users Base

It seems pretty likely that Snap's IPO is going to look more like Facebook's than Twitter's, but from this point out, it's going to try and mimic Facebook's business, and not Twitter's.

The company has to expand its users base, while at the same time hiring away ad-sales reps from Facebook and Google, and then leverage those two planks to sell the advertising industry on its platform.

It seems that monetization of its user base is not something you could take for granted, especially not when you have to take the money from Google and Facebook. Which is what these guys now have to do.

Mar 2, 2017 at 9:03 am ET

But How Much Will It Pop?

Remember that a big chunk of Snap Inc.'s shares (about 50+ million shares) will be going to buyers who can't sell them for at least a year.

The lock-up could damp volatility by limiting the number of short-term stockholders who can jump in and out.

In a regulatory filing ahead of the IPO, the company said roughly one-quarter of its planned float of 200 million shares would be subject to a lockup of one year before that chunk could be sold.

The company planned to sell those shares to a group of existing accredited deep-pockets investors, who got in before the IPO process began. Other institutional investors would be locked up for less time.

Mar 2, 2017 at 9:18 am ET

Ceremony Surrounds Each NYSE IPO

It's one of the most cherished and orchestrated rituals of American capitalism: an initial public offering at the New York Stock Exchange.

For companies going public, the day begins with breakfast in a palatial ballroom upstairs from the NYSE trading floor. NYSE parent company Intercontinental Exchange recently finished a two-year, multimillion-dollar renovation of the ballroom and other event spaces in the historic building at the corner of Wall and Broad Streets in lower Manhattan.

NYSE officials present the firm going public with a certificate identifying it as a listed company on the 224-year-old exchange. And, of course, the firm's leadership rings the 9:30 a.m. opening bell.

Mar 2, 2017 at 9:21 am ET

Here is Why Snap's Shares Could Run When They Open

There's a lot of pent-up demand for new tech listings, which means Snap shares could run when they open on the New York Stock Exchange later today.

Ahead of Snap's IPO, there hadn't been a U.S.-listed tech IPO since December when Trivago NV debuted, according to Dealogic. The hotel-search company priced its IPO below its expected range, though shares did rise in its first day of trading. Last year was also the slowest year for tech IPOs in terms of money raised since 2009, Dealogic data shows.

Mark Hesse, analyst at Nuveen Asset Management who was considering buying shares of Snap ahead of its IPO, said he expects Snap could pop right out of the gate based on this hunger for tech IPOs. Mr. Hesse said he also is upbeat on Snap's business.

"There's a real opportunity to grow," he said, referring to Snap's advertising revenues.

Mar 2, 2017 at 9:23 am ET

What Happens Before Snap Starts Trading?

Note that even though Snap executives will be ringing the opening bell in about 10 minutes from now, trading in Snap won't begin right away. First there's an auction process where institutional investors who didn't get in on Snap during the pre-IPO phase try to be first in line to buy Snap's publicly traded shares. Their demand is met by sellers of Snap shares, including the bank(s) selected as the so-called "stabilizing agent," which Goldman Sachs is the leader among them.

This auction procession is overseen by a firm called the designated market maker, or DMM, whose lead trader stands on the NYSE floor, surrounded by a huddle of floor brokers representing big buyers and sellers.

Each company listed on NYSE gets to pick its DMM ahead of the IPO. There are now six DMM or "specialist" firms active on the NYSE floor, down from dozens in decades past. Snap's DMM will be Global Trading Systems, a New York-based high-frequency trading firm that acquired the NYSE floor operation of British bank Barclays PLC last year.

The DMM's lead trader shouts out prices so the floor brokers know how the auction is coming along, while in a parallel process, an algorithm matches buyers and sellers electronically. The auction ends when the DMM, working with the stabilizing agent, settles on the opening price. Then the shares begin trading. NYSE officials say this usually happens by around 10:00 a.m., although for some high-profile IPOs - such as those of Twitter Inc. and Alibaba Group Holding - it can take a couple hours for trading to start.

Mar 2, 2017 at 9:25 am ET

Quiet on the Floor

Right now it's pretty quiet on the floor of the New York Stock Exchange.

The exchange asked all non-necessary personnel to stay off the floor because about 100 Snap employees and friends are expected to be here for the bell ringing. Snap co-founder and CEO Evan Spiegel will ring the bell, but then he'll drive over to Goldman Sachs headquarters to watch the traders there open the stock in their role as stabilization agent.

Mar 2, 2017 at 9:27 am ET

Snap Is Wildly Uncertain for Investors

Morningstar analyst Ali Mogharabi launched coverage of Snap late Wednesday, warning that there's a lot of uncertainty around the name, particularly with the high price of the shares.

The analyst writes: "The IPO price is modestly above our fair value estimate and we would recommend a wider margin of safety before investing in this very high uncertainty name." He adds: "we are not yet convinced about the firm's ability to generate excess returns on capital over the next decade."

Morningstar's doubts come from the fact that, "there is no guarantee that a larger portion of new digital ad dollars will flow to Snap." In particular, they believe Facebook and Alphabet's Google, which have more developed ad platforms, are likely to keep raking in more of that money.

Still, the short-term traders who will be jumping into the stock when it begins trading Thursday may not be thinking that far down the road.

Mar 2, 2017 at 9:40 am ET

How Unusual Is Snap's Share Structure?

First, Snap IPO has no voting rights. That is very unusual. How unusual? Dealogic does not tracked that data point, so nobody can say for sure, but the data provider says it is very unusual.

Dealogic does track dual-class share structures, which Snap has. How unusual is that? Only 14% of IPOs since 2010 have had dual class shares. But that does rise for tech IPOs. According to Dealogic, 24% for tech IPOs .

So Snap is in the minority but it's not unusual among Tech IPOs.

Mar 2, 2017 at 9:43 am ET

Watch Shares of Twitter, Facebook on Day of Snap's Debut

As the stock market opens, keep an eye on shares of Twitter and Facebook.

While Snap called itself a camera company in its regulatory filings, many investors looking at the deal scoffed and said it remains a social media company in their eyes.

Some traders and investors said to watch to see if any "pairs trades" are placed today in relation to Snap and Facebook or Twitter.

A pairs trade is a strategy that involves taking a long position and a short position in two companies that are in the same sector and sometimes can be viewed as competitors (for instance, a pairs trade could be taking a long position in Visa coupled with a short position in MasterCard).

Alternately, some traders said to watch for investors who believe in Snap's ability to grow users (and revenue per user) who may be dumping Twitter's stock in favor of scooping up shares of Snap.

Mar 2, 2017 at 9:44 am ET

Facebook Lower, Twitter Higher as Snap Auction Gets Underway

Other social-media shares are mixed as Snap Inc.'s auction process gets underway.

Facebook Inc., owner of Snapchat rival Instagram, is down 0.2%. Twitter Inc., whose growth trajectory Snap hopes to avoid, is up 0.5%. The Global X Funds Global X Social Media ETF (of course there is one) is down 0.8%.

Mar 2, 2017 at 10:03 am ET

Snap's First Indication: $21 to $23

The first pricing indication (or rumor) for Snap has leaked and crossed the wire: $21 to $23 a share.

Mar 2, 2017 at 10:08 am ET

For Those Keeping Score...

Snap Inc's initial pricing indications point to a first-trade pop of between 24% and 35%.

The leaked rumor initial price range laid out in the frantic auction procession is $21-$23 compared with the IPO price of $17.

Mar 2, 2017 at 10:11 am ET

It May Take a While for Snap to Start Trading

The stock market is now open, but don't expect Snap shares to start trading right away as the "specialists" are frantically processing the buy/sell incoming orders, mostly from the institutional investors who got shut out at the pre-IPO process.

Basically, at this point specialists must work to match up people who want to buy the stock at the open with those who want to sell. This price-discovery process takes time.

For smaller IPOs, it can be fairly smooth, with new companies starting trading within the first half hour of the trading day. The bigger the IPO, and the more hotly demanded, the longer this process can take.

One trader on the NYSE floor predicted Snap doesn't start trading until at least 10:30 or 11 a.m.

That wouldn't be unusual. Alibaba shares, for instance, didn't open trading until nearly noon (the first trade was 36% above Alibaba's IPO price). Twitter took til nearly 11 a.m. to post its opening trade (which was 73% higher than its IPO price).

Mar 2, 2017 at 10:17 am ET

Keeping a Watchful Eye on the Auction Procession:

Snap's Updated Price Indication: $22 to $24

As the opening auction procession for Snap shares continues on the exchange floor and elsewhere, another pricing [rumor] indication has leaked across the wire: $22 to $24 a share.

Mar 2, 2017 at 10:28 am ET

Snap Sold 20% of Its Shares Outstanding

Snap floated about 20% of its outstanding shares. On average, tech companies that have gone public since 2010 have sold 19% of their shares in their IPO, according to Dealogic. Facebook sold 20%, Alibaba sold 15%, Twitter sold 15% and Google only 8%.

Mar 2, 2017 at 10:35 am ET

Oh, Snap! Not so Snappy!

Investors are still waiting for shares of Snap Inc. to launch into the secondary market and how much longer?

Mar 2, 2017 at 10:58 am ET

Snap Decision: Investors Bid Up the Wrong Snap Shares

Some trigger-happy buyers may end up pretty disappointed with their Snap purchase... if they're among the traders that have snapped up shares of Snap Interactive Inc. today or since Snap made news about their IPO-bound announcement.

Snap Interactive, ticker STVI, is up 18% at the moment. The problem is, Snap Interactive is not Snap Inc. It doesn't own Snapchat. And it isn't debuting on the New York Stock Exchange.

Snap Interactive, a public company since 2006, operates dating apps. It shares have tumbled from above $50 in 2012 (adjusted for a reverse split) to under $5 in January, but they've shown some unusual price movement lately since Snap Inc made news that it's going public. This is fairly to say that it's not a co-incident and suggests that almost certainly thanks to investor confusion about what the company does exactly. They're confused thinking they're buying the right Snap.

Folks, this is called "animal spirit" at its finest!

Mar 2, 2017 at 11:08 am ET

Party Poopers: Snap Doesn't Plan Big IPO Party for Employees

Snap hasn't organized any company parties to celebrate the company's public offering for workers in San Francisco or Los Angeles, employees say.

Instead, some employees watched the opening bell from home and individual departments have made dinner reservations.

Snap has not made any company-wide warnings to employees about flashy celebrations of new wealth, an employee says, despite a small protest outside the company's offices over rising rents in the artsy beach town of Venice where Snap has its largest offices.

Mar 2, 2017 at 11:13 am ET

Meet A Big-Time Snap Bear

Trip Chowdhry is a tech analyst and co-founder of Global Equities Research.

Mr. Chowdhry is also a Snap Inc. bear.

He writes this morning that that the hype around the disappearing-photo app company has the hallmarks of duds Fitbit Inc., GoPro Inc, Zynga Inc., Groupon Inc. and Twitter Inc.

Like all of the above, he says that Snap will likely beat analyst estimates for a few months, giving early investors cover to exit at higher prices. Then it could come crumbling down.

He writes that, for one thing, the disappearing app niche is assailable by rivals such as Facebook Inc.'s Instagram:

"The popularity of SNAP is based on a set of filters and the disappearing act of pictures, which is a flimsy foundation. Instagram can easily include these features and given its higher number of users; it will only get more popular if it does that." He goes on that it would be wise to avoid buying this stock now or else buying and getting the heck out while the going is good: "SNAP is not a multi-year story. The investing horizon should be in months not years.

Let all the hot air go out, let the private investors cash out, let's see how the Industry evolves in 1.5 years...and then if all looks good, then maybe invest in SNAP."

In a research note earlier this week he was even more direct:

"Speculative investors, if [they] decide to play the IPO, it will be prudent to get out of it within the 1st hour."

Mar 2, 2017 at 11:20 am ET

The Much Ballyhooed IPO

Snap Opens at $24 a Share

Sigh of relief .... Snap Inc. has begun trading.

The opening price: $24 a share. That's an immediate 41% pop for the deep-pockets institutional IPO investors who paid $17 last night.

Mar 2, 2017 at 11:21 am ET

Snap's Market Value at the Open: $33 Billion

And we're off! Snap's first trade hits that tape at $24, up 41% from its $17 price. It traded up 43% recently.

Snap's opening price gives the company market valuation of $33.3 billion on a diluted basis.

Mar 2, 2017 at 11:47 am ET

How Trading Volume Stacks Up So Far

Snap's trading volume has been brisk in the first hour as a public company.

Roughly 84.9 million shares have changed hands as of 11:42 a.m. ET. That's more than double the 36.4 million shares of Apple traded all day yesterday, on Wednesday.

Of course, this is no normal day for Snap, so volume is expected to be elevated. By comparison, here's how some other recent high profile tech companies stacked up on their first days. For Facebook and Alibaba, those days remain the highest volume ever.

Snap hasn't surpassed any of these tech companies yet, but the day is still young.

Mar 2, 2017 at 12:10 pm ET

Orderly Trading So Far

Despite the volume, the stock is trading in an orderly fashion. Snap shares have gone as high as $25.42 and as low as $23.50, but the trendline -- so far, is up. Already, 117 million shares have traded hands.

Even at the low, hit a few moments after the shares started trading around 11:20, the price represents a healthy pop from its $17 per share IPO price.

An average based on how many shares traded at each price point, called VWAP, is at $24.62.

Mar 2, 2017 at 12:28 pm ET

What's Snap Actually Worth? One Analyst Says $10 a Share

In the face of a raging bull on Snap shares, Brian Wieser, an analyst at Pivotal Research Group, isn't big on Snap at the moment. He initiated coverage with a sell rating, and put his price target at $10 a share by year end, less than half of where it's currently trading. And even that's a stretch, he said.

Why no love for the hottest tech IPO in years? He says: "It is significantly overvalued given the likely scale of its long-term opportunity and the risks associated with executing against that opportunity. Significant ongoing dilution from share-based compensation will likely represent an additional negative consideration for the stock."

While the company continues to innovate and offers investors a piece of its business expansion, it's facing "aggressive competition" from larger firms, and its core user base isn't growing particularly quickly, Mr. Wieser says.

On top of that, "Investors will also be exposed to what appears to be a sub-optimal corporate structure operated by a senior management team lacking experience transforming a successful new product into a successful company."

"Snap Inc. is becoming a public company just as its user growth and monetization growth rates are beginning to meaningfully slow," he says.

The limitations on stock gains echo what some other analysts have been saying:

The increase in daily active users is slowing. That means growth will be driven by monetization, which is likely to be difficult, per consultations with ad buyers. Facebook and Google aren't just rivals. They're much larger rivals. The company is priced at a very high valuation, which limits room for error.

March 2, 2017 at 1:30 pm ET

Snap Hits Fresh High

About two hours after share started trading, Snap is setting fresh highs, hitting $25.69 moments ago. Already, more than 150 million shares have changed hands. Snap's volume-weighted average price for the day is now $24.76.

Mar 2, 2017 at 3:06 pm ET

Snap Crosses $26 and then Pares Gains

Shares of Snap touched a new intraday high in afternoon trade, but have since pared their gains. The stock hit as high as $26.05. It was recently at $25.18.

A total of 186.5 million shares had traded just after 3 p.m. ET, topping Twitter's total first-day volume but lagging Alibaba's and Facebook's.

Last Updated Mar 2, 2017 at 4:00 pm ET

Snapchat's Roaring IPO comes to a Close

Here is a wrap up with a few last thoughts:

Snap closed at $24.48, up $7.48 or 44% from its offer price of $17. It's first day pop was bigger than Alibaba's, Facebook's and Google's, but smaller than LinkedIn's, Twitter's and Yelp's.
It opened at $24, up 7.00 or 41.2% at 11:19 AM.
Snap was the most actively traded US stock today, with more than 215 million shares changing hands today.
At its high today, it was up $9.05 or 53.2%, to $26.05.
Best first day pop for a U.S.-listed IPO that raised at least $1 billion since LendingClub's December 2014 IPO (LendingClub rose 56% the day it went public.)
At the close, its market cap is $28.33 billion based on the 1.157 billion shares count in the SEC S1 filing.
Snap's market value increased by nearly $9 billion on its first day of trading.

The After Thought

Mar 2, 2017 at 6:30 pm ET

Meet the Company That Bought Snap at 98 Cents a Share

A big winner from Snap's initial public offering that has gone (somewhat) unnoticed is venture firm IVP.

Unlisted in Snap's registration statement, the firm led an early investment round in the company at an adjusted $0.98 per share. In time, the firm pumped $110 million into the company for nearly 37 million shares, worth about $900 million on paper at the close of the first day of trading. The firm has shied away from discussing Snap with the press since its original June 2013 investment. But in an interview on Thursday, general partner Dennis Phelps disclosed the size of his firm's stake and said it declined to sell shares in the IPO.

Snap is a "rare breakout platform" that he thinks is "on track to rival Facebook in the new social [media] order."

That may be a bit aggressive considering Snap is still just a tenth of Facebook's size in terms of the number of daily active users, but Mr. Phelps remains bullish as he says Snap will prove one of the few places where ad buyers will be able to target millenials.

And here is an "eat crows" feel bad story:

This Guy Ignored a Get-to-Know You Email from Snap's Co-Founder in 2012

Duh! Even the smart money misses a good deal once in a while.

Venture investor Chris Sacca, an early Google employee that later made a fortune buying up Twitter shares, took the opportunity of Snap's initial public offering on Thursday to eat a little crow.

Mr. Sacca tweeted an email sent to him in November 2012 from Snap co-founder Bobby Murphy, inviting him out for lunch.

"We're currently living and working out of a house in the Palisades....I'd love to get your opinion on LA vs the Bay and building out a company..." wrote Mr. Murphy.

That was around the time Snap raised its Series A round of financing at an adjusted $0.11 per share.

It closed on Thursday March 2, 2017, up more than 200 times from that price. Namaste! .... Eating crows! Eating crows! Eating crows!

What is an option?

As the word implies, an option gives you a choice or option to do what you wish to do with the subject. In other words, an option gives you the right -- but not the obligation -- to do something. In the financial world, an option gives you the right -- but not the obligation -- to buy or sell a stock, futures, a commodity or other investment instruments. A stock option is a contract between two parties in which the stock option buyer purchases the right (but not the obligation) to buy 100 shares of an underlying stock at a predetermined price from the option seller within a fixed period of time.

Think of an option as a contract betweem two parties -- usually between a buyer and a seller. Two parties agree on the term of the deal and signed the agreement of the deal.

You may have heard in the corporate world, a company pays executives compensations in the form of a stock option. This is a common practice in the corporate world. The reason being this common is to encourage executives to make the company's stock price goes up by running the company more profitably.

What usually happens is that each year a company offers its employees -- usually executives and board members -- shares of stock at a specific price and those shares have to be exercised at/or before a certain date -- usually the year-end date (right around December) or sometimes several years down the road, depending on how the company structures its option contracts with its [executive] employees.

There are distinctions between a corporate stock option and a financial stock option. A stock option in the corporate world cannot be bought and sold in the secondary market; while a stock option in the financial world can be bought and sold (or traded) freely in the open market. For the rest of the description, we won't discuss the corporate version of the stock options -- but only the financial version.

Option Contract Specifications

All options [with the exception of the corporate version] fall into two broad categories: call and put options. In a simplified term, a call option is a long option -- you're betting the option will rise so that you can profit from the rising option. On the other hand, a put option is a short option -- you're betting the option will fall so that you can profit from the falling option. It's a little tricky and confusing when dealing with these two instruments. Hopefully the following descriptions will help you understand better.

The following terms are specified in an option contract.

Option Type

The two types of stock options are puts and calls. Call options confer (give) the buyer the rights to buy the underlying stock while put options give him/her the rights to sell them.

Strike Price

The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised. Its relation to the market value of the underlying asset affects the moneyness (price movement) of the option and is a major determinant of the option's premium.

Premium

In exchange for the rights conferred by the option, the option buyer have to pay the option seller a premium for carrying on the risk that comes with the obligation. The option premium depends on the strike price, volatility of the underlying asset, as well as the time remaining to expiration.

Expiration Date

Option contracts are wasting assets (meaning they will expire) and all options expire after a period of time. Once the stock option expires, the right to exercise no longer exists and the stock option becomes worthless. The expiration month or period is specified for each option contract. The specific date or period on which expiration occurs depends on the type of option.

For instance, stock options listed in the United States expire on the third Friday of the expiration month for the monthly contracts. For shorter contracts, say, weekly contracts, they expire on every Friday. The length of the contracts are varied from one week to as long as two years for certain stocks and they are set by the exchanges.

Option Style

An option contract can be either American style or European style. The manner in which options can be exercised also depends on the style of the option. American style options can be exercised anytime before expiration while European style options can only be exercise on expiration date itself. All of the stock options currently traded in the marketplaces in the United States are American-style options.

Underlying Asset

The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the option holder in the event the option is exercised. In the case of stock options, the underlying asset refers to the (100) shares of a specific company. Options are also available for other types of securities such as currencies, indices and commodities.

Contract Multiplier

The contract multiplier states the quantity of the underlying asset that needs to be delivered in the event the option is exercised. For stock options, each contract covers 100 shares of a stock; for 1 corn futures contract contains 5,000 bushels of corn; for 1 crude oil contract contains 1,000 barrels of crude oil, and so on, and so forth.

The Options Market

Participants in the options market buy and sell call and put options. Those who buy options are called holders. Sellers of options are called writers. Option holders are said to have long positions, and writers are said to have short positions.

Explanation: Call and Put Options

A call option gives you the right to buy the corresponding stock or futures contract at a fixed price until the expiration date. So if you own the right to buy a stock, you're said to be going long on a stock. You hope that the stock you own the right to will appreciate in value so that you can exercise your option.

You Can Buy or Sell "Call" Options

To buy a call option means that you're buying the right to own that stock in the future at a specific price. So you the buyer of the call option can decide to exercise option at any time prior to the expiration of the contract. Since you're the buyer, you must pay the upfront amount called the option premium to the seller. Remember that buying a "call" option doesn't require you to currently own shares of the underlining stock (unlike selling a "call" as you'll see in a moment).

To sell a call option means that you're giving someone else the right to buy the stock in the future at a specific price.

So you have to have the underlining stock (usually 100 shares per option) in your posession ready to deliver that stock to the buyer as soon as the buyer decides to exercise his/her option. You cannot sell a call option if you don't have that stock in your possession. This is the same as if you want to sell any items (such as clothes, foods, car, jewelries, etc); you have to have those items for sale in order for you to be able to sell those items. Call option applies to the same principle.

Actually, you can still sell call options without owning the stock by using leverage and this is for options trading levels 2 and up. But for now just think that you have to have stocks in your posession in order to sell calls. Once you're comfortable trading options for awhile you'll know how to use leverage to sell calls and puts. But for this tutorial is to get you familiar with the basics and getting you started trading covered calls and secured puts. See my other tutorials on covered calls and cash-secured puts.

You might ask: why would anyone buys a stock and turn it around and allow someone to profit from your stock that you think that it is going higher? Well, the majority of investors are long term investors and they usually don't turn around and allow other investors to profit from their investment. But a small number of investors do buy stocks for the purpose of trading to maximize their investment. This is called "covered call" writing -- you buy stocks and turn around and sell the right to own those stocks to someone else; you're giving someone else the right to own your stocks.

In options, you can sell calls that you don't own as well, and this is called naked call. Don't worry too much about these two terms that I'm throwing at you because it is not significant right now. These terms are being used as options strategy that you can employ to maximize your profits. There are at least 128 options strategies available for trading and each strategy is tailored to specific play; for example, a bear put spread is an option strategy that allows you to profit when you think the stock has a neutral or bearish outlook within the time expiration. Other options strategies are: call credit spread, iron condor, bear put spread, bear call spread, bullish butterfly, half and half, straddle, strangle, leap, leap call, and more. My premium members have accessed to all these advanced strategies and much much more.

A put option is quite the opposite of a call option. A call option is an option to go "long", whereas a put option is an option to go short (or sell short) -- betting it to go down.

A put option gives you the right to sell short the corresponding stock or futures contract at a fixed price until the expiration date.

In a call option you have to have the stock in your posession or enough money in your account (if you're a seller), ready to deliver to the buyer. But in a put, you the short seller do not have to have shares of stock but rather borrow shares of stock from the brokerage firms and pay them back when the options are settled. Again, you don't have to have stocks in your posession in order to sell puts or selling short; however, you have to have enough money in your account to cover the contract involved in the agreement.

You Can Buy or Sell "Put" Options

In general, to short a stock you borrow shares from the brokerage and sell those shares immediately and wait for the stock to drop and buy back those shares in the open market when the stock price is lower than the price at the time you sold the shares. Your hope is for the stock to go lower at any time prior to the expiration date and buy the stock back at a lower price and pay the broker back and profit the difference.

Let's think about this principle a little bit: first, you think that the stock is going to go down. Second, you want to profit from the down side move of the stock. And third, you don't own the stock or know anybody that own shares of that stock. So what do you do? If you have a position on that stock, you better sell that stock very quick or else you're going to lose your money on that holding if your prediction is correct. So if you don't have a position in that stock but you definitely want to have an action on that stock. What do you do?

An answer to that question is to borrow shares of that stock from a broker since the broker has his/her clients holding on to that stock. Once you borrowed the shares you turn around and sell those shares right away and keep the proceed in the broker's account and wait for the price of the stock to drop so that you can buy those shares back and return those shares to the broker so that the broker can credit his/her clients' shares to the original record.

His/her clients think that the stock is going to go up but you think that the stock is going to go down. A difference of opinion. Either the clients are right or you're right: both of you cannot be right.

So if you think that you're right, why not try to profit from someone else mistake? In this case, the clients who think that the stock is going to go up and so you are going to try to eat their lunches. So the clients own the shares and you own nothing, but you want an action on that stock. So you go to your broker and say, "Listen, fella! -- your clients have shares of this stock, can you lend me those shares and I'll pay them back those shares when the stock price drops."

Do you see what's going on here? You borrow the shares from your broker's clients and turn around and sell those shares in the open market. In reality, the borrowing and selling of the borrowed shares exist only in one transaction via the broker's account. Think of it as a three-parties transaction account where a broker (party 3) steps in and acts on behalf of either the shareowner(s) (party 1) and the short seller (party 2) to transact the deal.

For example, in the case of a short selling, a broker steps in and acts as a shareowner using his/her clients' shares to allow the short seller (or party 2) to sell short on those shares without the knowledge of the shareowner(s). The shareowner(s) could careless what their broker do to their shares of the stock as long as they still own those shares and can liquidate them at any time.

So the broker steps in and allows you, the short seller, to sell someone else shares without the knowledge of the shareowner(s). Meanwhile, you, the short seller, wait for the price of the stock to drop so that you can buy those shares in the open market at a lower price and then return those shares back to the broker's clients and pocket the difference; while the broker's clients had no knowledge of the transactions behind the scene and still lose money regardless you borrow those shares from them or not. They still lose money on their long holding because they were wrong and you were right.

So from the clients' perspective, they don't care whether you borrowed their shares of the stock or not -- it made no difference -- they still lose money. So keep this 'short-selling' principle in mind when you're dealing with put options. Now what happens if you're wrong and the clients are right? Well, the clients will eat your lunches -- the same way you eat the clients' lunches if you're right and the clients are wrong. Another way of saying is that you'll lose money and the clients will gain money.

You might wonder that no brokers will let you borrow their clients shares to sell because you're not a big shot wealthy person. Fear not; brokers will love to take commissions from you. The more shortsellers there are the more money brokers make through commissions because shortsellers are very active traders while long position investors rarely buy or sell; and thus generate less commisssions for brokers.

Short Selling Folklore

Okay, now that you know how short-selling works, it's time for a short-selling folklore. Do you know who created the principle behind short-selling that is being widely used throughout the world? Was it some geniuses mathematicians? Or was it some Noble Prize winning economists? Or was it some Ivy League academic professors? No, none of the above, and here's a folklore story:

A guy opened a retail brokerage firm and placed ads to encourage investors to buy stocks so that the brokerage retailer can make money by charging fees when investors buy and sell stocks. Mr. and Mrs. Jones came in and invested their lifelong fortune -- a lot of money -- in one company [presumably on a very solid and stable company], paid the fee to the broker and walked away. Meanwhile, the broker was very happy to have the Joneses as the client and hoped that sooner or later the Joneses will want to diversify and break up their large holding into different investments, creating more fees for the broker. So the broker waited, waited, waited, and waited, and waited! Five, ten years gone by and the Joneses was oblivious to the broker's wish and stayed put with their holding. [The length of time in five, ten years are fictional]

The broker got restless and decided to call the Joneses to encourage them to diversify their holding. But the Joneses didn't take the broker's advice and kept all of their holding in one company. The broker became even more restless and tried to come up with all kinds of tricks to make the Joneses break up their holding and diversify. One trick after another and the Joneses didn't budge and fell deaf ears to the broker. The broker wondered, "There got to be a way to make money off the Joneses."

If the pattern continues there will be 60, 70, 80, 90, 100 or more years before the Joneses sell their holding [the length of time are fictional.] There got to be a way to profit from the Joneses. Lo and be hold, the broker wondered to himself, "Why not let someone else sell the Joneses' holding if the Joneses don't want to sell? And charge the sellers fees instead." "Hello!, wake up fool!," the broker said to himself after realizing a clever way to beat the Joneses. "Finally, I can eat the Joneses' lunches!," the broker cheered to himself. [End of the folklore]

Now let's continue talking about put options. Put options follow the same principle as short selling by letting you borrow shares and pay them back when you settle your options contracts. But instead of shorting the stock, you're just buying/selling the right to short that stock -- and not shorting it -- just buying/selling the right. There's a difference. The amount you must pay (if you're a buyer) or the amount you collect (if you're a seller) for the right to short the stock is called the option premium. The idea is the same but less expensive because you use leverage to control huge position.

Buying "Put" Options

To buy a put option means that you're buying the right to short the stock (or buying the right to sell short the stock) by paying an option premium to the put seller. The keyword is selling short -- you're betting that the stock will fall below the strike price. So here, you need to distinguish the difference between plain 'selling short' the stock and 'selling put' options. There's a difference: in plain selling short you pay the full price of the stock whereas in options you only have to pay the premium price (also commonly called option premium) of the stock, because you're just buying the right to short the stock.

Selling "Put" Options

To sell a put option means that you're giving someone else the right to short the stock and collecting the option premium from the put buyer. Again, here you think that the stock is going to go up and you want to own that stock but you don't want to pay the full price of the stock; so you sell put options and collect option premium from the buyer. So selling put allows you to maximize your profits by reducing your upfront cost because you receive the option premium from the buyer. Selling put is a great strategy for long term investment--that is, if you want to own that stock that you think is going to go up long term wise.

Summary

An option gives you the right -- but not the obligation -- to buy or sell something. Buyers pay a non-refundable (deposit) called option premium amount to sellers in return for time to decide whether or not to conclude the deal. Sellers must be ready to sell [the subject] as soon as the buyers ready to buy at any time up to the expiration date.

The option contains a strike price, which is a set price you must pay when you decide to exercise your option at/or before a specific date in the future stated by the option contract.

Buyers and sellers can decide whether or not to go through with the deal any time up until the option's expriration date.

An expriration date is a date the option to be expired or ceased to exist. Only certain expriration dates are available. They're chosen by the exchange which lists the option.

In the meantime, the seller must always be ready to sell the stock or futures contract as soon as the buyer decides to buy. For this commitment, the seller receives money up front from the buyer called option premium.

Nearly all stock options are for 100 shares of a stock. Every futures option is for one futures contract (which represents a large quantity of a commodity; for example, for 1 corn futures contract contains 5,000 bushels of corn; for 1 crude oil contract contains 1,000 barrels of crude oil).

Remember that in options you can buy or sell calls or puts. Buying calls or puts will cost you money in the amount of premium you have to pay to the sellers, while selling calls or puts will earn you money from the premium you receive from the buyer.

There are at least 128 options strategies available for trading and each strategy is tailored to specific play. So these options strategies basically cover every possible market angles or outlooks or scenarios. You pick a certain strategy or combinations of strategies to play to fit your market outlook.

Options are great investment tools that let you delay buying or selling a stock or futures contract. They allow you to make large profits without having to tie up a lot of your own investment money.

Options Chain

The cost of of an option depends a lot on what's happening with the stock or futures contract involved. The more time there is until expiration, the larger the option premium you must pay the seller since the longer the time the more chance of a stock to go up in value.

Also, the greater the difference between the current stock price and the strike price, the greater the buyer's price (called option premium). For example:

Strike	Symbol	Last	Chg %	Bid	Ask	Volume	Open Interest
$15.00	T100918C00015000	7.45	0.23	7.40	7.50	45	175
$25.00	T100918C00025000	3.45	0.04	3.40	3.50	106	694

XYZ stock is selling on the NYSE at $22 a share today:

Option 1 (ticker: T100918C00015000): Gives you the right to buy XYZ stock at $15 a share. option premium: $7.50 (the asking price. See the options chain above).
Option 2 (ticker: T100918C00025000): Gives you the right to buy XYZ stock at $25 a share. option premium: $3.50 (Ask column. See the options chain above).

Since you would rather have an option to pay $15 for a $22 stock instead of $25 for a $22 stock, option 1 is more valuable.

As a result, it costs more to buy option 1 than to buy option 2 ($7.50 for option 1 as appose to $3.50 for option 2).

To give you a better idea of what options price listing looks like, try Google a term "option chain AT & T" or put in any other company a stock symbol in the place of AT & T and you'll get an option chain for that company's stock.

A very good place to hang around is Yahoo Finance website where you can find a lot of stock and options information. On Yahoo Finance website, you can find options chains for any stock that has options. If you sign up for a free account, you can create portfolios and keep track of the stocks or options you're interested, even if you don't invest in them.

I, personally, have a free Yahoo Finance account where I basically create lots of portfolios, creating one portfolio for every stock I am interested in so that I can keep track of what that particular stock is doing. I have to admit, I have about 250 portfolios in my free Yahoo Finance account, with each portfolio containing one stock that I am watching and keeping track of it. I don't put more than one stock in any of my portfolio because the name of the portfolio tells me what kind of the stock I am watching for.

For example, I created a portfolio called: "Biotech AVEO 2.70 on 7-3-17" to remind me that this biotech stock was trading around $2.70 a share so that I know how I've done if I had bought it on that date. Most of the times, I name my fortfolio to be very long and very descriptive to reflect the catalyst of the stock so that I know what to expect. All of my "watch" portfolios have names identifying stock symbol, coverage stock price on date the coverage was made and some short description of the catalyst.

This way, months or years later, I can go back to see how my "fantasy" portfolios have done with its catalyst by just take a glance at the portfolio names and scan through the list of portfolios in a quick run through without wasting time going into each individual stock. It saves me tremendous time.

Sometimes, I name my fortfolio to be very long and very descriptive about its catalyst to remind me of certain events that might cause the stock to move dramatically, such as clinical trials are due to report or some court rulings are due in the future so that I can anticipate to play options on those events using advanced options strategies where I play options on stocks that are moving dramatically up or down.

I usually play directions and I don't care which direction the stock is moving as long as the stock is moving dramatically. This options play involves advanced strategies. I don't want to confuse beginners right now by explaining the strategies but maybe in the future tutorials I will lay them out.

Another very good website is called investing.com where you can signup for a free account and get access to all kinds of investing information, such as charts, technical and fundamental analysis, stocks screener, news alert on stocks, stock watch, etc.

In the option chain listing you'll see:

Strike Price, which is a set price you must pay when you decide to exercise your option at/or before a specific date in the future stated by the option contract.

Symbol is the unique symbol for that particular option. You need to copy this unique symbol and tell your broker that you want to buy this option.

Last is the closing price of the option premium -- last traded. This is the price traders paid for their options when a transaction was completed and reported. So last is the last price some buyers paid to buy their options last time (last traded transaction reported). You may or may not get to pay this price when you buy the options. You most often will have to pay the asking price. See Ask below.

Bid and Ask Principle

Before I go into the individual description of bid and ask, I want to give you an overview of the concept of these two principles. Have you ever watch auction proceedings? You know, the fast talking guy/gal (call the autioneer) who keeps repeating two prices (lower price and higher price) very fast over and over, and over, and over again in a thundering rhythm that no one seems to understand what the heck he/she is saying?

By the sheer thundering sound of it, it seems that the auctioneer is saying something special but in fact he/she actually just keeps repeating the bid and ask prices while mixing some of his/her own bravado in the mix, often saying the lower price first followed by the higher price next in a thundering rhythmic of sound that gets people to just get up and raise their hands to bid on the subject (or item).

All he/she does is just repeat that pattern over and over and over very fast and gets people excited to jump in and bid. So he/she starts with the starting price set by the seller first and then using that starting price as the bid price as if that price has already been bid. And then the autioneer just raises the bid price higher to make it as an ask price, and now the auctioneer has two prices to work with: bid price and ask price. Now the auctioneer just keeps repeating the two prices over and over, and over again until somebody raises his/her hand to bid on that item.

But the autioneer doesn't want to sell that item to the person that just bid just yet, so he/she keeps raising the ask price again, and this time to an even higher, and he/she repeats that same pattern again and again and again until somebody raises his/her hand again, and the autioneer again doesn't want to sell that item (not just yet), and he/she keeps repeating the same pattern until after a while he/she realizes that there aren't anymore bidders for that asking price, and finally, he/she awards the final bid to the last person who bid on that item.

So the key point to take away from the auction proceeding is that the auctioneer becomes the market maker who dictates how much prices to raise. Once the bidders bid on the item, that bid price becomes the lowest price given to that item, and the auctioneer, being the market maker, sets or raises the price higher to make the price as an asking price. And now the auctioneer has two prices to work with: bid price and asking price. So the auctioneer just repeats this pattern over and over and over.

In the financial world, the market maker (similarly to the auctioneer) sets prices higher or lower depending on the supply and demand. But the difference between the auctioneer and the market maker is that the auctioneer never move prices lower and lower if the demand is not met; whereas the market maker will move prices lower and lower and lower if the supply exceeds demand.

If you ever seen stock, bond, or commodity trading floors (also called pits) where a pit full of traders gathering around a group of market makers and shouting and signaling hands gestures to each other and to the market makers telling them how many shares/contracts, at what price to buy/sell. That was in the old days, but nowaday, trading is done electronically, usually from far distances and sometimes from all over the world.

The bid and ask pricing principle in the financial market follows the same auction pricing principle in which buyers bid to buy the items and sellers ask the buyers to buy the items. That is known as the bid-ask principle or bid-ask spread.

Note: The brokers who handle the buy/sell transactions get to keep the bid-ask spread prices and that's one of the ways brokers make money facilitating transactions to buyers and sellers. One important thing to note is that the higher the volume of a stock, the narrower the bid-ask spread. Although options tend to use volume as a mean to adjust the spreads as well, it uses other factors also in determning the spreads.

In stocks, thinly traded stocks have huge or wide spread -- meaning, if you trade a thinly traded stock you'll have to pay huge spread because the brokerages cannot make enough money if the spread is narrow and it is comparable to spreads in high volume stocks. Likewise, high volume stocks have narrow spreads because brokerages earn enough money with the high volume of transactions. For example, high volume multiply by narrow spread is signficant in money earn; whereas thinly traded stocks need wide spread to multiply with the low volume trades to make enough money comparable to high volume stocks. Brokerages are in the business of making money and making money off spreads is one way of doing that.

So, as an investor, there isn't any way of avoiding this loophole even if you have a brokerage service that charges no fee. They still earn their money through spread transactions automatically that they facilitate. Investors have to bite the bullit on this one.

Bid is the (last) price the buyer bid to buy that options. In the financial world, there are buyers and sellers and sellers set their prices by asking buyers to pay the asking price. Whereas buyers bid each other to buy the underline. So bid is the price some buyer(s) were willing to pay last time (last traded transaction). If you're a buyer, the bid price is the most likely price you'll have to pay for your options. However, since the listed bid price was the last price some buyers were willing to pay last time out, you may or may not get to buy/pay at that price.

In short, the bid price is the last bid price of the options premium that some buyers were willing to pay last time out or last transaction. This helps you gauge the market so that you can price your options accordingly. Again, if you're a buyer, you may or may not get to buy at this price when you buy your options. The bid/ask prices fluctuate according to the law of supply and demand.

Ask is the (last) price sellers were asking buyers to buy their options. Sellers set prices and buyers bid each other for the best price to buy. So ask is the price some sellers were asking buyers to buy this option last time (last traded transaction). Again, if you're a seller, you may or may not get to sell at this price when you sell your options. The bid/ask prices fluctuate according to the law of supply and demand. So in short, the ask price is the last price of the options premium some sellers were asking for buyers to buy last time out or last transaction. This helps you gauge the market so that you can price your options accordingly.

Vol is the total volume of that particular option traded on that day or up to the moment you view the listing. The Vol only lists the volume on that particular day up to the moment you view the listing. It's a daily volume or volume up to the moment you view the listing. The numbers represent the contracts -- total contracts. Use this number to gauge the current sentiment of the options.

Vol listing lists both buy and sell sides -- so there is no way of knowing how many contracts are long and how many contracts are short. It would be nice to know how many contracts are being bought to go long and how many contracts are being sold short. But at least we know how many contracts are being held in the option in both directions. You would need to go to the exchange's website to find out the individual side contracts. And yes, experienced traders do go to the exchange's website to find out this information so that they can make an informed decision.

Experienced traders usually glance through the daily volume for each option to see what kind of action an option receives. If all of a sudden, the volume spikes up unusually high, traders investigate on the option to see why that particular option receives a huge spike in volume. They may trade on that option to ride the co-tail of other traders who caused the volume to spike up. The higher the volume, the more interest the option attracts because traders like to follow one another's lead.

Open Interest is the total option contracts outstanding for that option. This is the accumulation of all the previously contract transactions up to now. Vol lists the total volume for the day up to the moment you view the chain, while open interest accumulates all the outstanding volumes by adding all previous volume up to the moment you view the chain. It's a total outstanding contracts of the option.

If the number is high it tells you that there is a lot of people are interested in holding this options. Use this number to gauge the sentiment of the option. The numbers represent the contracts -- total contracts outstanding.

Summary

Volume is the total number of options contracts traded in a period (like a day), showing activity, while open interest is the total number of contracts currently active (opened but not closed) at a specific time,, showing market participation and commitment, with high volume indicating liquidity and high open interest showing new money entering the market or strong sentiment. Volume reflects immediate trading intensity, whereas open interest reflects cumulative market interest and potential future trends, as volume can increase without changing open interest (e.g., traders closing existing positions).

Summary: Bid vs. Ask

In options, the bid is the highest price a buyer will pay (demand), the ask (or offer) is the lowest price a seller will accept (supply), and the difference is the bid-ask spread, which shows liquidity, with tight spreads meaning high liquidity and wider spreads indicating lower trading volume and higher costs for traders.

You buy at the ask and sell at the bid; the spread is essentially the transaction cost.

Bid vs. Ask Explained

Bid Price: The best (highest) price a buyer is currently willing to pay for the option contract; this reflects market demand.

Ask Price: The best (lowest) price a seller is currently willing to accept for the option contract; this reflects market supply.

Bid-Ask Spread: The gap between the bid and ask price.

Liquidity Indicator: A narrow spread (small difference) means high liquidity (lots of buyers and sellers), making it easier to trade.

Transaction Cost: A wide spread means lower liquidity, increasing the cost of trading as you buy at a higher price (ask) and sell at a lower price (bid).

How They Work in Trading

Buying an Option: You pay the ask price (e.g., $3.10).

Selling an Option: You receive the bid price (e.g., $2.80).

Market Makers: They often bridge this gap, buying at the bid and selling at the ask, profiting from the spread.

Here is what an options chain looks like:

Call Options Quotes

For AT & T, Inc (Symbol: T): 07-30-2010: $25.94

Expire at close on Friday September 17, 2010

Strike	Symbol	Last	Chg %	Bid	Ask	Volume	Open Interest
$23.00	T100918C00023000	2.94	0.23	3.00	3.05	45	175
$24.00	T100918C00024000	2.15	0.04	2.10	2.13	106	694
$25.00	T100918C00025000	1.31	0.05	1.27	1.28	138	2,924
$26.00	T100918C00026000	0.63	0.00	0.60	0.61	322	11,331
$27.00	T100918C00024000	0.21	0.02	0.19	0.21	466	3,637
$28.00	T100918C00024000	0.06	0.01	0.04	0.06	120	808
$29.00	T100918C00029000	0.02	0.00	N/A	0.02	10	20
$30.00	T100918C00024000	2.15	0.04	2.10	2.13	106	694

Put Options Chain Quotes

For AT & T, Inc (Symbol: T): 07-30-2010: Price $25.94

Expire at close on Friday September 17, 2010

Strike	Symbol	Last	Chg %	Bid	Ask	Volume	Open Interest
$23.00	T100918P00023000	0.05	0.00	0.09	0.11	6	1,651
$24.00	T100918P00024000	0.15	0.01	0.16	0.18	131	1,025
$25.00	T100918P00025000	0.31	0.00	0.32	0.34	76	3,194
$26.00	T100918P00026000	0.63	0.03	0.65	0.67	283	1,634
$27.00	T100918P00027000	1.24	0.02	1.24	1.27	273	1,774
$28.00	T100918P00028000	2.05	0.03	2.09	2.11	78	439
$29.00	T100918P00029000	3.15	0.15	3.05	3.10	89	18
$30.00	T100918P00030000	4.15	0.15	3.95	4.10	124	1

The OCC Symbology

When exchange traded options first came into popular existence in the 1970s, it was possible that the founders of the options industry neither fully realized just how useful and prevalent option trading would ultimately become, nor some of the changes that would occur in the ensuing decades. As such they set up a somewhat archaic and limiting method of designating option symbols for trading purposes. And the options symbols they used were not always uniformed nor easy to implement.

Then in the latter half of the first decade of the millenial (2000s), as options were becoming more popular and complex (such as using multi-legs strategies), the Options Clearing Corporation (OCC) began an initiative that set the stage for the implementation of a more intuitive and far more flexible method for designating option symbols. The intention of the OCC was for this new method to be uniformed and easy to use and to be fully in place by May of 2010.

Once completed the OCC distributed the guideline to the public world and now all options throughout the world use this OCC implementation.

The options symbol follows the OCC symbology pattern or format that is up to 21 characters that represents the contract specifications of a particular option. The following components are used in constructing the symbol:

Option Symbol Format

*(1) - Underlying symbol (IBM in this case, or in the previous options chain, T, for AT & T)
*(2) - 2 digit expiration year (14 for 2014)
*(3) - 2 digit expiration month (01 for January)
*(4) - 2 digit expiration day (18 for the 18th day)
*(5) - "C" for Call or "P" for Put
*(6) - 8 digit strike price (00200000 for $200.00).

In the options chain above: 00023000 ($23.00), 00024000 ($24.00), 00025000 ($25.00), 00026000 ($26.00), 00027000 ($27.00), 00028000 ($28.00), 00029000 ($29.00), 00030000 ($30.00).

Notice the strike price is represented in 8 digits no matter what the number of digits of the actual strike price. The strike price is carried to 3 decimal places, but no decimal is used within the symbol. For example, the $200 strike for the IBM option above is represented as "00200000".

Also, note the two "0's padded on the front to complete the 8 digit total. So the maximum strike price can be represent in this format of up to $99999.999 only -- a number unlikely to be surpassed in the options sphere.

Options Continue

The beauty of options is that your risk is limited to the option premium you pay to the seller. But your upside reward is limitless.

If you have the right to buy a stock at $20 a share and it's selling $22, $23, $24, or some other numbers, you could exercise your call option, pay $20 a share to the seller, then turn around and sell the shares on the open market at $22, $23, $24, or some other numbers that the market is offering.

Notice that in options you do not need to have a large sum of money to profit, even at the time of the exercise of the options. All you have to have is your options premium money for either puts or calls and you can buy the rights to puts or calls and when you decide to exercise your contracts the contracts are settled without you having to come up with extra money to cover the full price of the contracts. To better understand this, you'll have to actually get your hands-on-experience by trading options for a few times and you'll see exactly how it works.

Obviously, the higher the stock's price goes, the more you stand to profit. Sellers know this, so as the stock price rises and falls, the option price rises and falls with it.

Consequently, you can profit by just trading the rights to your option for more money than you paid -- without ever having to lay out the large sum needed to buy the 100 shares of stock or the futures contract.

Let's say you bought the stock outright at $22 a share and if that stock price fell from $22 to, say, $10 a share, you would have lost $12 a share just like that.

Now with options, your risk is only limited to the premium paid to the sellers. Take that same scenario above: had you bought a (call) option on that same stock, you would have lost only the premium paid to the seller, no matter how far the stock price fell.

As a result, when you buy an option, you know immediately the most you can lose. This is what the industry calls limited, predetermined risk.

Trading Technical Terms
What do the phrases "buy to open," "sell to open," "sell to close," and "buy to close" mean?

The confusing terminology mentioned in the question deals with entering and exiting option orders. There are two main ways in which you can participate in options: you can be either a buyer or a seller. Also, you must enter and exit the trades.

The above screen is a typical options order entry screen interface platform for entering orders. The various key items and their meanings are described below.

Option Symbol

The stock symbol or the specific option symbol you're trading.

Action

The action of entering or exiting the trade.

Quantity

The number of contracts you're buying or selling.

All or None

This feature is pertaining to the quantity just described above. This feature allows you to specify whether the order needs to be filled the entire order quantity or partial quantity. If you check this box when placing an order, your order will be filled only if there are enough contracts to be filled. If you leave it blank or unchecked, your order will be filled regardless of how many contracts available to be filled.

For example, if there are only 8 contracts available and you specified 10 contracts, your order will be filled for only 8 contracts and not the whole 10 contracts you had originally placed. On the other hand, if you check the box and there are only 8 contracts, your order is not filled -- you're not in the contract.

Price

The price specification is pertaining to the type of order as described below.

Types of Orders

Online brokerages provide many types of orders to cater to the various needs of the investors. The most common types of orders available are market orders, limit orders and stop orders. Some provide additional order types (as shown above): Market on Close (or commonly known as After-Hour Trading), Stop Limit, etc.

Market Order

With market orders, you are instructing your broker to buy or sell the options at the current market price. If you are buying, you will be paying the asking price. If selling, you will be selling at the bid price. The advantage of using market orders is that you will fill your order fast (often instantly) but the disadvantage is that you will usually end up paying slightly more, especially when the order is large and the trading volume thin.

Limit Order

With limit orders, you will specify the price you wish to transact. If you are buying, you are instructing your broker to buy at no higher than the specified price. If selling, you are telling him to sell at no less than your stated price. The advantage of using limit orders is that you are in full control of the price at which you buy or sell your options. The disadvantage is that filling the order will take some time, or the entire order may not get filled at all because the underlying stock price has moved way beyond your desired price.

Stop Loss Order

Stop loss orders are orders that only gets executed when the market price of the underlying stock reaches a specified price. They are used to reduce losses when the underlying asset price moves sharply against the investor.

Stop Market Order

A stop market order, or simply stop order, is a market order that only executes when the underlying stock price trades at or through a designated price. Buy stops, designed to limit losses on short positions, are placed above current market price. Sell stops are used to protect long positions and are placed below current market price.

While the stop market order guarantees execution, the actual transacted price maybe slightly lower or higher than desired, especially when the underlying price movement is very volatile.

Stop Limit Order

A stop limit order is a limit order that gets activated only when the underlying stock price trades at or through a specifed price. While a stop limit order provides complete control over the transaction price, it may not get executed if the underlying price moves too quickly and the limit price is never reached.

Duration

The duration specifies the length of time the order is to stay live or good. The two types of duration are:

Day Order

The day order specifies that the order is to stay open until the end of the trading day (of the day you place the order). At the end of the day, if the order is not filled, the order is no longer active and no order is carried forward to the next day to be filled. The order is voided. If you want your order to carry forward past the current day, you need to use a Good Til Cancel (or GTC) order.

Good Til Cancel (or GTC)

The GTC specifies that the order is good until you actually cancel it, regardless how many days, weeks, months or years it takes to fill the order.

Advanced Orders

Advanced orders are advanced types of orders typically available to sophisticated traders. Experienced traders use advanced orders to mitigate risk and to enter the market. These advanced orders include breakouts, retracements, MultiBrackets, Icebergs, market-on-close order (or MOC) which is a non-limit market order, and conditional orders like the one cancels other (also called order cancels order) order (OCO) and the order sends order (OSO).

Some interfaces classify trailing stop orders as advanced orders but trailing stop orders are available to beginners as well.

To Enter the Trade

When you enter a trade, you are essentially opening a position as either a buyer or a seller, hence the orders: "buy to open" (to enter a position as a buyer of call or put options) and "sell to open" (to enter a position as a seller of call or put options).

In other words, to buy a call or put options, you must put in a "buy to open" order. For examples, buy 2 (contracts) IBM 200 (strike) Call at $28.00 (premium) expired, say, in 2 months; buy 1 (contract) IBM 190 (strike) Put at $8.00 (premium) expired, say, in 3 months.

To sell a call or put options, you must put in a sell to open order. For examples, sell 2 (contracts) IBM 200 (strike) Call at $28.00 (premium) expired, say, in 2 months; sell 1 (contract) IBM 190 (strike) Put at $8.00 (premium) expired, say, in 2 months.

To Exit the Trade

Now, to exit a trade, you need to close your option position, whether that position is a long or short position. If you've bought a long option ("buy to open"), you need to use a "sell to close" order to exit the long position. On the other hand, if you've "sell to open" (wrote an option or had sold a short position), you will need to use a "buy to close" order to exit the short position.

While it may seem odd that you would buy to close a position, by taking a long position in the option that you shorted, you neutralize the position by buying a new option (go long) against the position you've wrote the option (earlier short position), and in effect closes your position. Confusing?

In summary, when you enter a trade, you are essentially opening a position as either a buyer or a seller. If you are buying an option, either a put or a call, you must enter a buy to open order. If you are writing an option (a seller), also referred to as selling an option, you must enter a sell to open order to sell either a call or put options.

Yes, these terms can be confusing if you're not practicing it regularly.

What does "In the Money" means?

In the money means that your stock option is worth money and you can turn around and sell or exercise it. For example, if John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money.

What do "In the Money Call, In the Money Put Option, Deep in the Money " mean?

Definition of "In the Money Call":

A call option is said to be in the money when the current market price of the stock is above the strike price of the call. It is "in the money" because the holder of the call has the right to buy the stock below its current market price. When you have the right to buy anything below the current market price, then that right has value. That value is also referred to as the option's "intrinsic value." That value is equal to at least the amount that your purchase price (strike price) is below the market price. In the world of call options, your call options are "in the money" when the strike price of your calls are less than the current market price of the stock. The amount that your call options' strike price is below the current stock price is called its "intrinsic value" because you know it is worth at least that amount. This compares to an out of the money call option which is call option where the strike price of the call is above the stock's current market price.

Definition of "In the Money Put":

A put option is said to be in the money when the strike price of the put is above the current price of the underlying stock. It is "in the money" because the holder of this put has the right to sell the stock above its current market price. When you have the right to sell anything above its current market price, then that right has value. That "intrinsic value" is equal to at least the amount that your strike price is above the market price. In the world of put options, your put option is "in the money" when the strike price of your put is above the current market price of the stock. The amount that your put option's strike price is above the current stock price is called its "intrinsic value" because you know it is worth at least that amount.

Definition of Deep in the Money:

An option (Call or Put) is said to be "deep in the money" if it is in the money by more than $10. This phrase applies to both calls and puts. So, "deep in the money" call options would be calls where the strike price is at least $10 less than the price of the underlying stock. Put options would be "deep in the money" if the strike price is at least $10 higher than the price of the underlying stock.

Example of Deep in the Money Calls and Puts:

Suppose YHOO is at $40 and you think YHOO's stock price is going to go up to $50 in the next few weeks. If you bought the YHOO $40 calls and then in the next few days you find out you were right and YHOO is at $52, then your $40 calls are in the money $12 and they would be considered deep in the money call options.

Likewise if you had a YHOO $55 put, then this put would be considered deep in the money when YHOO is at $40, but once YHOO climbed to $52, it is still in the money, but it would not be considered deep in the money.

The advantage of buying deep in the money calls and puts is that their prices tend to move $1 for $1 with the movement of the underlying stock. So, if you are absolutely certain that the price of the underlying stock is going to move a lot and move quickly, then you will earn a higher percentage return trading these calls and puts than trading the stock itself.

Calls and Puts Trading Tip:

Why is this distinction between ITM calls and puts and a DEEP ITM calls and puts? The first thing to understand is that options with strike prices near the price of the underlying stock tend to have the highest risk premium or time-value built into the option price. This is compared to deep in the money options that have very little risk premium or time-value built into the option price.

For example, if YHOO is at $40, the current month $40 call might be priced at $1.50. That $40 call is ATM so its intrinsic value is $0 (meaning that there isn't an actual gain in cash value for you to cash out your position to gain a profit) but traders are willing to bet $1.50 that the price of YHOO will move up to and higher than $41.50 which is the breakeven point. The YHOO $30 call however, might be price at $10.25. The $30 call is obviously ITM $10 so the risk premium or time-value is only $0.50.

You will often hear traders talk about Time Value a lot. Time Value means nothing more than the Premium Price you pay or receive (as a buyer or seller). See an extensive explanation later.

What do "Out of the Money Call, Out of the Money Put Option and At the Money Option" mean?

Definition of "Out of the money" and "out-of-the-money":

A call option is said to be out of the money if the current price of the underlying stock is below the strike price of the option.

A put option is said to be out of the money if the current price of the underlying stock is above the strike price of the option.

Example of an "Out of the Money CALL Option":

If the price of YHOO stock is at $37.50, then all of the call options with strike prices at $38 and above are out of the money.

Why are they out of the money? They are out of the money because those options don't have any intrinsic value. If you have the right to buy YHOO at $40 and the current market price is $37.50, then that YHOO $40 call is out of the money by $2.50. If you had that call and you had to exercise it, you could buy shares of YHOO at $40 and sell them immediately in the open market for $37.50 for a loss of $2.50. Would you do that? Absolutely not! So they are out of the money.

Likewise the YHOO $45 and $50 calls are also way out of the money.

If YHOO is at $37.50, then all of the call options with a strike price of $37 and below are in the money.

Example of an "Out of the Money PUT:

If the price of MSFT stock is at $37.50, then all of the put options with strike prices at $37 and below are out of the money.

Why are they out of the money? They are out of the money because those options don't have any intrinisc value. If you have the right to sell MSFT at $35 and the current market price is $37.50, then that MSFT $40 put is out of the money by $2.50. If you had that put and you had to exercise it, you could sell shares of YHOO at $35 and buy them immediately in the open market for $37.50 for a loss of $2.50. That doesn't make sense so they are out of the money.

Likewise the MSFT $30 put is out of the money by $7.50 and the MSFT $25 put is out of the money by $12.50.

If MSFT is at $37.50, then all of the put options with a strike price of $38 and higher are in the money.

Definition of "At The Money" Option:

An option is said to be at the money if the current stock price is equal to the strike price. It doesn't matter if we are talking about calls or puts. Any call or put whose underlying stock price equals the strike price is said to be at the money. Sometimes you will see "At The Money" abbreviated as "ATM." You may also see "OTM" which mean "Out of the Money" and ITM which means "In the Money".

Moneyness

Moneyness is a term describing the relationship between the strike price of an option and the current trading price of its underlying security. In options trading, terms such as in-the-money, out-of-the-money and at-the-money describe the moneyness of options. The price movement of the options.

Instrinsic Value

The two components of an option premium are the intrinsic value and time value of the option. So instrinsic value is a term describing the option's actual value that can be cashed out. By definition, the only options that have intrinsic value (that can be cashed out) are those that are in-the-money. For calls, in-the-money refers to options where the strike price is less than the current underlying price. For example, a call option with a strike price of $25 in premium of $3 and the current price of the stock is $27 causing this option to have an intrinsic value of $2 ($27 - $25).

If you own this option you can cash out your position because it is an in-the-money option and has intrinsic value. In other words, an intrinsic value is an option that has real value to you -- it is worth something to you. In this case, it is worth $2 per share to you; however, even though this option has instrinsic value it is not a profitable option, because its premium ($3 per share) is higher than its intrinsic value ($2 per share). So you still end up a $1 per share loss if you cash out right now. So your hope now is to depend on time value to save you the day. See time value next.

Time Value

The two components of an option premium are the intrinsic value and time value of the option. Time value is a term describing the value of the option in relationship between the length of time of an option to expiration and the current trading price of its underlying security. The more time to expiration, the greater the time value of the option. Think of an option that has no intrinsic value right now but give it time and that option might be worth something (and have intrinsic value). This is called time value -- time is all that option has right now because it doesn't have intrinsic value -- it cannot be cashed out right now, so it has time to expiration to make this option worth something. The time between now and the expiration is called time value. As the expiration date gets closer and closer the time value decreases smaller and smaller and eventually the option is worthless if the stock price doesn't move in the direction of your option.

One indicator that represents the time value is the option price or premium on the contract. So when traders talk about time value, they really mean the actual premium price. If you look at the options premium on any particular option, it gets smaller and smaller in prices as the expiration date approaches. This is called time value.

Time value represents the amount of time the option position has to become profitable due to a favorable move (a move in the desired direction of your option) in the underlying price. In most cases, investors are willing to pay a higher premium for more time (assuming the different options have the same exercise price), since time increases the likelihood that the position will become profitable. In other words, a lot of options traders are willing to choose longer expiration dates to give their options long enough time to move in their desired direction. In general, the longer the time of expiration date the more chances stocks or options move or fluctuate. So time is precious in options trading because the lesser time to expiration the more chances that your option is becoming worthless.

Managing Time or Trades

Now that you know what instrinsic value and time value are and how they work, it's time to learn how to manage your trades. Managing your options trades is not a requirement for most beginners, but experienced active daytraders usually always manage their trades regardless the trades go their way or not.

Why do experienced traders manage their trades?

A simple answer is: maximize profits and minimize losses.

One of the tools they use is the stop loss and trailing stop. See my tutorials on the topics.

Suppose that you place a trade and you expect the stock/options to move in the direction you desire but after a while the position is going against you and the expiration date is fast approaching and you realize that there is no way you're going to make money on your contract. Here is my advice: cut your losses -- the sooner you realize the position is not going to turn good, the better off you are, and the sooner you cut your losses is the better off you are.

Do not try to hope for the best -- the best will never materialize if the trend is going against you. So cutting your losses is the best way to manage your trades. If the trend is going against you: cut your losses -- and don't hope for a miracle! Get out as soon as possible. There are plenty of opportunities to make money else where, and don't falling in love and marry to your positions.

You can cut your losses even if your options are not in the money as long as the options have intrinsic value. To illustrate this, I'm going to use my actual trades I've made, in which, I anticipated the stocks to move dramatically because of Phase III report was dued to report, but after the report the stock didn't move a needle and I realized afterward that there isn't any catalyst to look forward to, to move the stock higher, so I decided to get out and use the remaining proceeds to play other trades. Here are the positions that I've cut my losses:

If you look at the time value, I still have plenty of time value to be had and the options could turn out to be profitable, but I decided that if the Phase III reports didn't move the stock/options then what else will? So I'm not going to hope for the best! To save space, here is one of the positions that I've got out:

Black Scholes Option Pricing Model

Definition of the Option Pricing Model Using the Black Scholes:

The Option Pricing Model is a formula that is used to determine a fair price for a call or put option based on factors such as underlying stock volatility, days to expiration, and others. The calculation is generally accepted and used on Wall Street and by option traders and has stood the test of time since its publication in 1973. It was the first formula that became popular and almost universally accepted by the option traders to determine what the theoretical price of an option should be based on a handful of variables.

Here is a break down of the formula above. DO NOT be frightened by the scary look of the formula because it is for demonstration purpose only and you do not need to understand any of these mathematical properties.

Note that risk-free interest rate means the interest rate is constant throughout the period in the timeframe or expiration period. In another word, it's a fixed interest rate that stays constant throughout the expiration period.

So options trading terms can be confusing initially but once you practice it in real life you'll understand better quickly. You need to be familar with these terms just described and one more key factor in options trading, which is called implied volatility. In options trading, implied volatility is probably the most important key factor that seperates a successful trader from an unsuccessful trader.

Understanding the concept of implied volatility and learning how to use it is key to become a successful options trader. The following describes the concept of implied volatility:

Implied Volatility

What is Implied Volatility?

Implied volatility (IV) is one of the most important concepts for options traders to understand for two reasons. First, it shows how volatile the market might be in the future. Second, implied volatility can help you calculate probability. This is a critical component of options trading which may be helpful when trying to determine the likelihood of a stock reaching a specific price by a certain time.

Keep in mind that while these reasons may assist you when making trading decisions, implied volatility does not provide a forecast with respect to market direction. Although implied volatility is viewed as an important piece of information, above all it is determined by using an option pricing model, which makes the data theoretical in nature. There is no guarantee these forecasts will be correct.

Understanding IV means you can enter an options trade knowing the market's opinion each time. Too many traders incorrectly try to use IV to find bargains or over-inflated values, assuming IV is too high or too low. This interpretation overlooks an important point, however.

Options trade at certain levels of implied volatility because of current market activity. In other words, market activity can help explain why an option is priced in a certain manner. Here we'll show you how to use implied volatility to improve your trading. Specifically, we'll define implied volatility, explain its relationship to probability, and demonstrate how it measures the odds of a successful trade.

Historical vs. implied volatility

There are many different types of volatility, but options traders tend to focus on historical and implied volatilities. Historical volatility is the annualized standard deviation of past stock price movements. It measures the daily price changes in the stock over the past year.

In contrast, IV is derived from an option's price and shows what the market "implies" about the stock's volatility in the future. Implied volatility is one of six inputs used in an options pricing model shown in the Black Scholes Pricing formula shown earlier, but it's the only one that is not directly observable in the market itself. IV can only be determined by knowing the other five variables and solving for it using a model. Implied volatility acts as a critical surrogate for option value -- the higher the IV, the higher the option premium.

Since most option trading volume usually occurs in at-the-money (ATM) options, these are the contracts generally used to calculate IV. Once we know the price of the ATM options, we can use an options pricing model and a little algebra to solve for the implied volatility.

Some question this method, debating whether the chicken or the egg comes first. However, when you understand the way the most heavily traded options (the ATM strikes) tend to be priced, you can readily see the validity of this approach. If the options are liquid then the model does not usually determine the prices of the ATM options; instead, supply and demand become the driving forces.

Any times market makers will stop using a model because its values cannot keep up with the changes in these forces fast enough. When asked, "What is your market for this option?" the market maker may reply "What are you willing to pay?" This means all the transactions in these heavily traded options are what is setting the option's price. Starting from this real-world pricing action, then, we can derive the implied volatility using an options pricing model. Hence it is not the market markers setting the price or implied volatility; it's actual order flow.

Implied volatility as a trading tool

Implied volatility shows the market's opinion of the stock's potential moves, but it doesn't forecast direction. If the implied volatility is high, the market thinks the stock has potential for large price swings in either direction, just as low IV implies the stock will not move as much by option expiration.

To option traders, implied volatility is more important than historical volatility because IV factors in all market expectations. If, for example, the company plans to announce earnings or expects a major court ruling, these events will affect the implied volatility of options that expire that same month. Implied volatility helps you gauge how much of an impact news may have on the underlying stock.

How can option traders use IV to make more informed trading decisions? Implied volatility offers an objective way to test forecasts and identify entry and exit points. With an option's IV, you can calculate an expected range -- the high and low of the stock by expiration. Implied volatility tells you whether the market agrees with your outlook, which helps you measure a trade's risk and potential reward.

Why Implied Volatility Matters for Your Options Income Strategy?

If you're investing in single-stock covered call ETFs or using options to generate income, there's one concept you need to understand: implied volatility (IV). It might sound technical, but once you get the hang of it, you'll never look at an option premium the same way again.

What Is Implied Volatility?

Implied volatility is essentially the market's best guess at how much a stock might move in the future. Unlike historical volatility (which looks backward at past price swings), IV is forward-looking - it's based on what the market is pricing in right now about future moves.

Think of IV like a weather forecast for a stock:

A high IV signals stormy skies ahead - big potential moves, up or down.

A low IV suggests calmer conditions - smaller expected moves.

Why Implied Volatility Matters for Income Investors?

Implied volatility drives the price of an option - also known as the option premium. The higher the IV, the higher the option's premium (price). This relationship has big implications for an income investor because option premiums are the source of your returns in strategies like covered calls. In short, more volatility means more income potential, while less volatility means lower premiums to capture.

Higher IV = Higher Potential Yield: More uncertainty in the stock means option buyers will pay richer premiums. For an option seller, that translates into more income potential (all else equal). Lower IV = Lower Income: When volatility is low, option premiums shrink. Even if the stock's price stays strong, there's simply less "juice" to squeeze from selling options.

Important: If you're using options to generate income, implied volatility isn't just a side note - it's a key ingredient. Understanding IV helps you assess risk, gauge income potential, and adapt your strategy as market conditions change.

Buyer vs. Seller: How IV Affects Both Sides

To understand IV's impact, it helps to see how option buyers and sellers experience it differently. An option contract gives the buyer the right (but not the obligation) to buy or sell a stock at a set price (the strike) before expiration, in exchange for a premium paid up front. The seller, on the other hand, collects the premium but takes on the obligation to fulfill the contract if the buyer exercises that right.

Option Buyers: They pay a premium for a call or put, essentially making a leveraged bet on the stock's movement. A call buyer is betting the stock goes up, while a put buyer bets it goes down. Buyers risk only the premium they pay, and if the stock makes a big move in their favor, their returns can be magnified (since a small premium can turn into a large payoff). However, higher IV means they have to pay more for the option, since the market expects a bigger move.

Option Sellers: They collect the premium up front (this is the income for strategies like covered calls). In return, the seller is obligated to act if the option is exercised (for example, selling the stock at the strike price if a call option buyer decides to exercise). Think of the seller like an insurance provider: they get paid for taking on risk, hoping they won't have to pay out. A higher IV is actually good news for sellers because it means higher premiums (more income) - but it also usually comes with a greater chance the option will be exercised (since the stock is more likely to make a big move). Conversely, low IV means cheaper options (less income for sellers) but a lower chance of being called to fulfill the contract.

Real-World Example: IV's Impact on Premium and Yield

To see IV in action, consider a single-stock covered call strategy on a volatile stock like Tesla. Here's how the option premium (and the investor's yield) might differ in a low-volatility versus high-volatility scenario for a one-month at-the-money call option:

Calm Market (IV ~25%) - Premium of about $1.50 for a 30-day call option, which equates to roughly a 7% annualized yield on the position.

Volatile Market (IV ~55%) - Premium of about $4.50 for the same 30-day call, roughly a 21% annualized yield.

As you can see, that's the power of implied volatility. You're not just riding the stock's price moves - you're getting paid for the uncertainty. In a volatile market, the income from selling calls is substantially higher because investors are willing to pay more for the option when big swings are expected.

How Market Events Can Shift IV (and Your Income)

Implied volatility isn't static; it ebbs and flows with market events and sentiment. This is especially true for single-stock covered call ETFs, which are tightly linked to the volatility of their underlying stock.

For example, a covered call ETF focused on a single company (like those writing calls on Tesla, NVIDIA, Coinbase, or MicroStrategy) will see its option income stream rise and fall as the stock's IV changes. Major events that can rapidly shift implied volatility include:

Earnings reports: A company's quarterly earnings announcement can send uncertainty soaring or plummeting, as traders brace for a big move or react to results.

Federal Reserve or economic news: Commentary on interest rates or economic data can affect market volatility broadly, which feeds into individual stocks as well.

News headlines about the company/industry: A sudden piece of good or bad news (like a product launch, lawsuit, or geopolitical development) can change how volatile investors expect the stock to be.

Social media or CEO actions: Yes, really - a single tweet or an unexpected CEO interview can stir up the market's expectations for volatility, especially for companies known to have outspoken leaders.

Unlike a broad index fund (where volatility of many stocks averages out), a single-stock strategy feels the full force of these volatility swings. The upside is that when volatility spikes due to an event, a covered call fund can monetize that by selling higher-premium options. The downside is that volatility (and income) can drop just as quickly when the storm passes.

It's Not Just About Yield - It's About Timing, Too

Implied volatility is a moving target. It tends to rise before big events (for instance, in the days leading up to an earnings call) as traders anticipate potential fireworks, and then fall after the event once the uncertainty is resolved. This pattern creates opportunities for option income strategies, but capitalizing on it requires smart timing and active management:

Sell options when IV is high: Premiums are richest when volatility expectations are elevated. An options income strategy can take advantage of this by writing calls (or puts) before a known event or during market turbulence, locking in higher income.

Adjust or "roll" when IV drops: After the event passes or the market calms down, implied volatility often deflates (along with option premiums). At that point, it may make sense to buy back options at a cheaper price and possibly roll into a future contract, or simply hold off until volatility picks up again. Active management helps in capturing the gain from the drop in IV.

Don't chase yield in low-IV environments: When the market is calm and IV is very low, option premiums will be small. It can be tempting to stretch for income, but selling options during these lulls might not be worth the risk (since you're not getting paid much). It's okay for an income strategy's yield to dip temporarily when volatility is low, rather than reaching for extra yield by taking on too much risk.

This is where a rules-based, actively managed strategy can shine - harvesting volatility premium when it's most attractive and stepping back when volatility (and premiums) are thin. In other words, timing matters: a good options income strategy will try to sell into strength (high IV) and stay patient during calm periods.

The Bottom Line: Implied Volatility = The Yield Engine

If you're using a covered call ETF or any option-selling strategy to generate income on stocks you own, implied volatility is the fuel behind the strategy's yield. It's not just a statistic on a quote screen - it's the key to understanding:

Why your option income can fluctuate from month to month.

How to compare one covered call fund's performance or strategy to another (higher IV stocks/funds vs. lower IV ones).

When a strategy might be tactically overweight or underweight volatility (taking on more or less volatility exposure than usual).

When you understand implied volatility, you unlock a smarter, more adaptable approach to generating income. Armed with this knowledge, you can better appreciate the trade-offs of your options income strategy and make informed decisions to maximize your returns while managing risk.

Defining standard deviation

First, let's define standard deviation and how it relates to implied volatility. Then we'll discuss how standard deviation can help set future expectations of a stock's potential high and low prices -- values that can help you make more informed trading decisions.

To understand how implied volatility can be useful, you first have to understand the biggest assumption made by people who build pricing model: the statistical distribution of prices. There are two main types which are used, normal distribution or lognormal distribution.

The image below is of normal distribution, sometimes known as the bell-curve due to its appearance. Plainly stated, normal distribution gives equal chance of prices occurring either above or below the mean (which is shown here as $50). We are going to use normal distribution for simplicity's sake. However, it is more common for market participants to use the lognormal variety.

Why, you ask? If we consider a stock at a price of $50, you could argue there is equal chance that the stock may increase or decrease in the future. However, the stock can only decrease to zero, whereas it can increase far above $100. Statistically speaking, then, there are more possible outcomes to the upside than the downside. Most standard investment vehicles work this way, which is why market participants tend to use lognormal distributions within their pricing model.

With that in mind, let's get back to the bell-shaped curve (see Figure 1). A normal distribution of data means most numbers in a data set are close to the average, or mean value, and relatively few examples are at either extreme. In layman's terms, stocks trade near the current price and rarely make an extreme move. Figure 1 (below):

Let's assume a stock trades at $50 with an implied volatility of 20% for the at-the-money (ATM) options. The implied volatility is a proxy for standard deviation in percentages and are calculated and given in the options chain. If you look in the options chain of any stock, you'll see implied volatility percentages for each option. So when you need to do some calculations like we're doing right now, you can just take it from the options chain and use in your calculations (in this example, we make up the 20% for illustration purpose). That is if you're doing by hand; however, if you're using Trade King's calculator (illustrated below) the implied volatility percentage and other items inputs are entered automatically by the tool, making your calculations much, much easier.

Statistically, IV is a proxy for standard deviation. In other words, IV is a representation of the standard deviation. It acts like standard deviation moves--it acts as a proxy signal. If we assume a normal distribution of prices, we can calculate a one standard-deviation move for a stock by multiplying the stock's price by the implied volatility of the at-the-money options:

One standard deviation move = $50 x 20% = $10

The first standard deviation is $10 above and below the stock's current price, which means its normal expected range is between $40 and $60. Standard statistical formulas imply the stock will stay within this range 68% of the time (see Figure 1).

All volatilities are quoted on an annualized basis (unless stated otherwise), which means the market thinks the stock would most likely neither be below $40 or above $60 at the end of one year. Statistics also tell us the stock would remain between $30 and $70 -- two standard deviations -- 95% of the time.

Furthermore it would trade between $20 and $80 -- three standard deviations -- 99% of the time. Another way to state this is there is a 5% chance that the stock price would be outside of the ranges for the second standard deviation and only a 1% chance of the same for the third standard deviation.

Keep in mind these numbers all pertain to a theoretical world. In actuality, there are occasions where a stock moves outside of the ranges set by the third standard deviation, and they may seem to happen more often than you would think. Does this mean standard deviation is not a valid tool to use while trading? Not necessarily. As with any model, if garbage goes in, garbage comes out.

If you use incorrect implied volatility in your calculation, the results could appear as if a move beyond a third standard deviation is common, when statistics tell us it's usually not. With that disclaimer aside, knowing the potential move of a stock which is implied by the option's price is an important piece of information for all option traders.

Standard deviation for specific time periods

Since we don't always trade one-year options contracts, we must break down the first standard deviation range so that it can fit our desired time period (e.g. days left until expiration). The formula is: Figure 2 (below)

Note: it's usually considered more accurate to use the number of trading days until expiration instead of calendar days. Therefore, remember to use 252 -- the total number of trading days in a year.

As a short cut and a clever way to simplify the math, many traders will use 16, since it is a whole number when solving for the square root of 256 [16 X 16 = 256].

How would you like to solve the square root of 252?. But there are only 252 trading days in a year, so we'll have to find 4 extra days to trade -- maybe on four saturdays every year. 252 + 4 = 256.

Let's forget about the yearly precision talk above and assume that we are dealing with a 30 calendar-day option contract, which is very precised and very common for everyday trades. The first standard deviation would be calculated as: Figure 3 (below)

In this example, we use 10% for IV instead of 20% as shown earlier. For real life trades, you can use whatever % IV shown in the option chain on the option you're trading.

A result of (+/-)1.43 means the stock is expected to finish between $48.57 and $51.43 after 30 days (50 +/- 1.43). [+/- means plus or minus. So (+/-)1.43 means +1.43 or -1.43; 50 +/- 1.43 means 50 + 1.43 or 50 - 1.43].

Figure 4 (below) displays the results for 30, 60 and 90 calendar-day periods. The longer the time period, the increased potential for wider stock price swings. Remember implied volatility of 10% will be annualized, so you must always calculate the IV for the desired time period.

Does crunching numbers make you nervous? No worries, TradeKing has a web-based Probability Calculator that will do the math for you, and it's more accurate than the quick and simple math used here.

[A side note: TradeKing was bought by Ally Financials in 2015 and no longer operating a brokerage trading business as of the end of 2015. So if you're looking to find the TradeKing's web-based Probability Calculator and other trading tools mentioned in this article, you can signup a trading account at Ally Financials and they should have integrated all TradeKing trading tools into their own trading platform.]

Now let's apply these basic concepts to two examples using fictitious stock XYZ.

A stock's "probable" trading range

Everyone wishes they knew where their stock may trade in the near future. No trader knows with certainty if a stock is going up or down. While we cannot determine direction, we can estimate a stock's trading range over a certain period of time with some measure of accuracy. The following example, using TradeKing's Probability Calculator, takes options prices and their IVs to calculate standard deviation between now and expiration, 31 days away. (see Figure 5 below)

This tool uses five of the six inputs of an options pricing model (stock price, days until expiration, implied volatility, risk-free interest rate, and dividends) using a lognormal distribution to calculate the standard deviations. Note that risk-free interest rate means the interest rate is constant throughout the period in the timeframe or expiration period. In another word, it's a fixed interest rate.

Why throw in interest rate and dividend into the calculation of the price of a stock?

Well, if you're going to calculate the true future stock price to be as close to the actual future price as possible you would have to account for all of the factors that effect a stock price. Interest rate does effect a stock price because of inflation. Stock prices use money as its denomination and money inflates based on the rate of inflation and interest rate is a proxy of inflation.

Likewise, dividends effect a stock price as well. If you buy a stock at $10 a share today that pays an annual dividend of $1 a share, your stock price should be worth $11 a share after one year [not accounting for other factors such as business condition], $12 a share after two years, $13 a share after three years, and so forth. You only have to spend $10 to earn those amounts [$11, $12, $13,...] including dividends, so the true, actual stock price should at least be at those amounts after those years. So the future stock price calculation should account for the dividends as well.

Notice that the normal distribution shown in the early examples doesn't use five inputs as this one does. The lognormal distribution uses all the inputs contain in the normal distribution plus two additional inputs: risk-free interest rate and dividends. This is more accurate than the normal distribution calculation because it accounts for interest rate and dividend.

Once you enter the stock symbol and the expiration (31 days), the calculator inserts the current stock price ($104.91), the at-the-money implied volatility (24.38%), the risk-free interest rate (.3163%), and the dividend (55 cents paid quarterly). Notice that using the tool simplifies the entering of inputs greatly -- you only have to enter two items: stock symbol and the expiration date.

Let's start with the bottom of the screenshot above. The different standard deviations are displayed here using a lognormal distribution (first, second and third moves). There is a 68% chance XYZ will between $97.49 and $112.38, a 95% chance it will be between $90.81 and $120.66, and a 99% chance it will be between $84.58 and $129.54 on the expiration date.

XYZ's first standard deviation limits can then be inputted at the top right of the calculator as the First and Second Target Prices. After you hit the Calculate button, the Probability of Touching will display for each price. These statistics show the odds of the stock hitting (or touching) the targets at any point before expiration. You'll notice the Probabilities at the Future Date are also given. These are the chances of XYZ finishing above, between, or below the targets on the future date expiration).

As you can see, the probabilities displayed show XYZ is more likely to finish between $97.49 and $112.38(68.28%) than above the highest target price of $112.38 (15.87%) or below the lowest target price of $97.49 (15.85%). There is a slightly better chance (.02%) of reaching the upside target, because this model uses a lognormal distribution as opposed to the basic normal distribution found in Figure 1.

When examining the probability of touching, you'll notice XYZ has a 33.32% chance of climbing to $112.38 and a 30.21% chance of falling to $97.49. The probability of it touching the target points is about double the probability of it finishing outside this range at the future date.

Using TradeKing's Probability Calculator to help analyze a trade

Let's put these theories into action and analyze a short call spread. This is a two-legged trade where one leg is bought (long) and one leg is sold (short) simultaneously. Bear in mind, because this is a multiple-leg option strategy it involves additional risks, multiple commissions, and may result in complex tax treatments. Be sure to consult with a tax professional before entering this position.

When using out-of-the-money (OTM) strikes, the short call spread has a neutral to bearish outlook, because this strategy profits if the stock trades sideways or drops. To create this spread, sell an OTM call (lower strike) and buy a further OTM call (higher strike) in the same expiration month. Using our earlier example, with XYZ trading at $104.91, a short call spread might be constructed as follows:

* Sell one XYZ 31-day 110 Call at $1.50 (this means selling one Call option contract with a strike price of $110 at premium price of $1.50 and will expires in 31 days)

* Buy one XYZ 31-day 115 Call at $0.40 (this means buying one Call option contract with a strike price of $115 at premium price of $0.40 and will expires in 31 days)

Total credit = $1.10 ($1.50 - $0.40)

Remember that in options you can buy or sell calls or puts, and here we're buying one call contract and sell one call contract. This is called a bear call spread because this strategy profits if the stock trades sideways or drops.

Check out the tutorials on options spreads: Option Spread Strategies. Buying calls or puts will cost you money in the amount of premium you have to pay, while selling calls or puts will earn you money from the premium you receive from the buyers.

In multple legs strategies, experienced traders use the buys and sells combination to increase odds of profitability while minimize risk and at the same time can lower investment cost by balancing debit and credit combinations. As you can see in the above example, you receive more credit than the debit that you have to pay.

Another name for this strategy is the call credit spread, since the call you're selling (the short option) has a higher premium than the call you're buying (the long option). The credit is the maximum profit for this spread ($1.10). The maximum loss or risk is limited to the difference between the strikes less the credit (115 - 110 - $1.10 = $3.90).

The spread's break-even point at expiration (31 days) is $111.10 (the lower strike plus the credit: 110 + $1.10). Your goal is to keep as much of the credit as possible. In order for that to happen, the stock must be below the lower strike at expiration. As you can see, the success of this trade largely boils down to how well you choose your strike prices.

No worries, we have the Probability Calculator to help analyze the above strikes, let's use TradeKing's Probability Calculator. No guarantees are given by using this tool, but the data it provides may be helpful.

In Figure 6 (below), all the inputs are the same as before, with the exception of the target prices on the right side of the screen.

To start, you'll have to calculate the spread's break-even point ($111.10) and the maximum loss ($3.90), which we've already done so above.

Next, you enter the target prices on the right side of the screen. Every thing else stays the same. The spread's break-even point ($111.10) is the first target price (upper right). Its largest loss ($3.90) occurs if XYZ finishes at expiration above the upper strike ($115 = $111.10 + $3.90) by expiration -- the second target price.

That's all you have to enter. After you entered all information and click a button "Calculate" the screen like figure 6 below is shown.

Based on an implied volatility of 24.38%, the Probabilities at the Future Date indicate the spread has an 80.10% chance of finishing below the lowest target price (111.10). This is our goal in order to retain at least one cent of the $1.10 credit.

The odds of XYZ finishing between the break-even point and the higher strike (111.10 and 115) is 10.81%, while the probability of XYZ finishing at 115 (or above) -- the point of the spread's maximum loss -- is 9.09%. To summarize, the chances of having a one-cent profit or more are 80.10% and the odds of having a one-cent loss or more are 19.90% (10.81% + 9.90%).

Although the spread's probability of a gain at expiration is 80.10%, there is still a 41.59% chance XYZ will touch its break-even point ($111.10) sometime before 31 days have passed. This means based on what the marketplace is implying the volatility will be in the future, the short call spread has a relatively high probability of success (80.10%). However, it's also likely (41.59% chance) this trade will be a loser (trading at a loss to the account) at some point in the next 31 days.

Many credit spread traders exit when the break-even point is hit. But this example shows patience may pay off if you construct spreads with similar probabilities. Don't take this as a recommendation on how to trade short spreads, but hopefully it's an instructive take on the probabilities that you may never have calculated before.

If the discussion of implied volatility and the examples shown thus far make your head dizzy, there is an alternative simple way to by-pass all that crazy mathematic and its computation by having others doing all that crazy stuffs for you so that you don't have to worry about any of the crazy computation.

In the near distance future, I will offer a subscription membership for those of you who want to earn more money using the "crazy" computation just discussed here along with many more advanced strategies. My advanced strategies offer you multitudes of opportunities for aggressive investors to earn high returns in a short amount of time; and of course using safe and sound strategies.

I will do all the research plus doing all that crazy math for you and come up with a playbook that spells out exactly what to do in a clear and concise manner so that even a novice beginner in options can follow and understand. If you can understand the credit spread example shown earlier you'll definitely understand my "serve in a plate" playbook instructions.

You don't need to do research to come up with what stocks to play and you certainly don't need to come up with what option price targets to trade; I'll do it all for you and give you a "serve in a plate" playbook instruction, saving you time and headaches. Please stay tuned!!!

In conclusion ....

Hopefully by now you have a better feel for how useful implied volatility can be in your options trading. Not only does IV give you a sense for how volatile the market may be in the future, it can also help you determine the likelihood of a stock reaching a specific price by a certain time. That can be crucial information when you're choosing specific options contracts to trade. So understanding the concept of implied volatility and learning how to use it is key to become a successful options trader.

Good Luck Trading!!!

Options Strategies Examples

Now that you know the basics of how options work, let's put the knowledge to practice by doing some options plays.

Let's use the following options: Long January 2026 $395 call on Microsoft and short January 2026 $405 call on Microsoft.

That is two call options: one long and one short.

This options strategy is a bull call spread (also known as a long call spread or debit call spread), a moderately bullish position where you profit from an increase in the underlying stock's price up to a certain point, i.e., $405.

This strategy involves buying a call option [go long] at a lower strike price ($395) and simultaneously selling a call option [go short] at a higher strike price ($405) with the same expiration date [of January 2026] to reduce the upfront cost and limit risk.

Microsoft stock last traded at $483.58 on December 31, 2025.

Microsoft stock options chain listed last price of $99.17 for the $395 call and last price of $89.80 for the $405 calls.

What is the net cost for the options lised above?

The net cost (debit) for the vertical call spread on Microsoft options play above is $9.37 per share, or $937 per contract (excluding commissions), based on the last prices listed above.

Remember that each contract contains 100 shares of stock, so the options chain listed last price of $99.17 for the $395 means it costs you $9,917 to own that option; on the other hand, you receive $8,980 for selling the $405 call.

Option Cost Calculation

The cost of this option strategy, a bull call spread (or long call vertical spread), is the difference between the premium paid for the long call and the premium received for the short call.

You pay a premium for the long option ($395 strike call) in the amount of $9,917.

You receive a premium for selling the short option ($405 strike call) in the amount of $8,980.

Option Leg                            Action                         Last Price Listed                                Cost/Credit per share

$395 Call              Long (Buy)        $99.17                       -$99.17 (Debit)

$405 Call              Short (Sell)      $89.80                       +$89.80 (Credit)


Net Cost                                                                                                                                    -$9.37 (Debit)

The total cash required to enter this trade is $937 per contract ($9.37 x 100 shares per contract).

This net debit is also your maximum potential loss if Microsoft's stock price closes at or below the lower strike price of $395 at expiration.

The current Microsoft stock price as of January 5, 2026, is $472.06.

Key Insights

This is a bull call spread, a strategy used when you expect a moderate rise in the stock price.

The maximum potential profit for this spread is the difference between the strike prices minus the net cost paid.

In this case, $405 - $395 - $9.37 = $0.63 per share, or $63 per contract, excluding commissions.

The breakeven price for the spread at expiration is the long strike price plus the net debit paid: $395 + $9.37 = $404.37.

This options combination has been widely used as a strategy for long-term plays for beginners and experts alike.

So if you're a beginning options player, use this option setup as your basis for your options strategy.

It is very simple and yet cost effective, and not to mention potentially very profitable.

Strategy Details

* Outlook: You are moderately bullish on Microsoft and expect its stock price to rise above the lower strike price of $395, but not necessarily above the higher strike price of $405, by the January 2026 expiration.

* Maximum Loss: Limited to the net premium paid for the position (the initial cost).This occurs if the Microsoft stock price is at or below $395 at expiration, and both options expire worthless.

* Breakeven Point: The stock price at expiration must be equal to the lower strike price ($395) plus the net premium paid.

Key Insights

* The primary advantage of this strategy is that it limits your potential loss and is cheaper than simply buying a single call option due to the premium received from selling the higher strike call.

* The main trade-off is that your potential profit is capped at the difference between the two strike prices, even if Microsoft stock surges far above $405 a share.

* This strategy has a near-zero sensitivity to changes in implied volatility and time decay (theta) has a mixed effect depending on where the stock price is in relation to the strike prices. [See an explanation of Time decay or "Theta" below.]

* The strategy is best used when you anticipate a gradual, moderate increase in the stock price rather than a sharp breakout.

Explanation of Time Decay (theta)

How Theta Impacts Your Spread

Theta is a measure of how much an option's value erodes with each passing day, all else being equal. In a bull call spread, you hold a long call and a short call, each with a different strike price, so their individual thetas interact in a complex way.

General Impact

Long Option (Long $395 Call): Long options always have negative theta, meaning this leg of the trade loses value as time passes.

Short Option (Short $405 Call): Short options always have positive theta, meaning this leg of the trade gains value (as the premium you collected decreases) as time passes.

Net Theta: The overall theta of the spread is the combination of the two. The impact of time decay is a primary consideration for option buyers and sellers.

Impact Based on Stock Price at Expiration

The key is the difference in the rate of decay between the two options.

Time decay accelerates significantly for options as they get closer to expiration, especially when they are at-the-money (ATM).

If Microsoft stays above the $405 strike: Both options are deep in-the-money (ITM) and have very little time value left. The spread's value will be near its maximum possible value, and the net theta impact will be minimal as expiration approaches.

If Microsoft is between $395 and $405 (at expiration): The long $395 call is ITM, but the short $405 call is out-of-the-money (OTM). The OTM option will decay at an accelerating rate until it is worthless, which benefits your short position.

In this scenario, the spread may become theta positive, as the short option loses value faster than the long option's time value erodes.

If Microsoft is below the $395 strike (at expiration): Both options are OTM and will expire worthless. Both will lose value rapidly as expiration nears. The spread will be at its maximum possible loss, which is the net premium you initially paid.

In summary, the bull call spread is designed to be less sensitive to time decay (theta) than a simple long call because the positive theta from the short call helps to offset the negative theta of the long call, especially when the stock is near or below the strike prices.

Explain the concept of option vega and how it impacts this spread

Vega measures an option's sensitivity to changes in implied volatility (IV). For every 1% increase in IV, an option's price will increase by its vega amount, all else being equal.

A bull call spread is a near-zero vega or vega-neutral strategy, meaning its value is not highly sensitive to changes in implied volatility.

Microsoft stock last traded at $483.58 on December 31, 2025.

How Vega Impacts Your Spread

* Long Option (Long $395 Call): This position is long vega (positive exposure), meaning its value increases when implied volatility rises and decreases when IV falls.

* Short Option (Short $405 Call): This position is short vega (negative exposure), meaning its value decreases when implied volatility rises and increases when IV falls.

* Net Vega: Because you are long one call and short another with the same expiration date, the positive vega of the long call is largely offset by the negative vega of the short call.

Key Insights

* Offsetting Positions: The primary reason for the near-zero net vega is that both options are affected by the same change in implied volatility, and the effects largely cancel each other out.

* Moneyness Matters: Vega is highest for at-the-money options and decreases as options move further in- or out-of-the-money. Since your long $395 call is currently in-the-money and the short $405 call is also in-the-money (Microsoft is at $483.58), their relative vegas are lower than if they were exactly at-the-money. This further contributes to the overall low sensitivity to volatility changes.

* Strategy Goal: A bull call spread is a directional strategy (betting on price movement), not a volatility play. Traders use this strategy to isolate the impact of the stock's price movement (delta) from the impact of volatility changes (vega).

* Volatility Changes: While largely neutral, a sudden sharp increase in implied volatility can cause both options' premiums to rise, which might slightly increase the net value of your spread before expiration if the long call's vega is slightly higher than the short call's vega.

Conversely, a sharp decrease in IV could slightly hurt the position's value. These effects are generally minimal compared to a single, unhedged long option position.

More Examples Options Strategies To Come !!!

What better ways to learn how to trade multiple-legged options than learning it by examples?

Here Are Example Multiple-Legged Options Strategies Taken From Actual Trades

Learning how to trade multiple-legged options strategies by example is the best way to master your options trading, and as such, the rest of the listing options trades were actual trades that took place throughout my prior trading activities.

You can use these actual trades as examples for your own real-life options trades by substituting your actual options of your choice.

Pick a stock or stocks of your choice that fit the scenario(s) contain in the example trades and substitute the options parameters accordingly, i.e., strike price, expiration date, etc., and go from there.

First out is a three-legged strategy that involved selling a put option, buying a call option, and then sell a call option.

That is a three-legged option strategy and it works wonderfully by protecting you on both sides whether the stock goes up or goes down so it works equally as good in both Bull and Bear markets.

3-Legged Strategy: Buy Call, Sell Call, Sell Put.

Stock price on May 5, 2020, for RIOT closed at $4.67 per share.

This multiple-legged strategy generates 100% profits as this 3-legged trade covers all sides: stock goes up, down, or sideway.

Here is an example of the trade:


Stock              Buy Call (Expiring)             Sell Call (Expiring)             Sell Put (Expiring)             Stop Loss             Net Credit (midpoint)       
-----             ----------------            ----------------             ---------------             ---------           -------------------

RIOT               $3.00 (Jan 17, 2020)            $2.00 (Jan 17, 2020)          $2.00 (Jan 17, 2020)        Not used              $1.57

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: Jan 17, 2020 (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

As you can see, the only time you can lose money with this trade is if the stock goes to $0.43 from its current price of $4.67. That is highly unlikely given the short amount of time until expiration of only two to three months.

Generally, stocks don't usually drop drastically in that short time-frame unless some unforseen events such as a looming bankruptcy is on the horizon.

Because of this it is almost guaranteed a 100% return on a margin requirement of only about $50.

As you can see, we can simply set a limit order and forget about it until it automatically executes and we are credited with a hefty return.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

For example:

Buy Call: $3.00

Sell Call: $2.00

Sell Put: $2.00

Stop Loss: $1.57

Ignoring: Net Credit (Mid-point).

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

To help you understand the above strategy better, here is an extended description:

The strategy is buying 1 call, selling 1 call, and selling 1 put, and it is a popular advanced strategy known to experienced traders as a Bullish Risk Reversal strategy (when the calls form a spread) or a variation of a Bullish Fence.

Its primary purpose is to finance a bullish position, allowing you to profit from an upward move in a stock with little to no upfront cost, in exchange for taking on the obligation to buy the stock if it falls.

Strategy Breakdown

This strategy combines two distinct components:

Bull Call Spread (Buy 1 Call, Sell 1 Call): You buy a call at a lower strike price and sell a call at a higher strike price.

This caps your maximum profit but significantly reduces the cost of the trade compared to buying a call alone.

Short Put (Sell 1 Put): You sell a put option, usually at a strike price below the current market price. The premium you receive from this sale is used to "pay" for the Bull Call Spread.

Purpose and Benefits

Zero or Low Outlay: By selling the put, you can often enter the entire position for a "net credit" or "zero cost."

This means you don't have to pay to play, provided the stock stays above your put strike.

Increased Probability of Profit: Unlike just buying a call, which loses value every day (theta decay), the short put and short call help offset that decay.

You can potentially profit if the stock goes up, stays flat, or even drops slightly (depending on your strike prices).

Acquisition Strategy: Many experienced traders use this when they are bullish and wouldn't mind owning the stock at a lower price.

If the stock drops below the put strike, you are "assigned" and must buy the shares at that price.

Risks to Consider

Downside Risk: This is not a limited-risk strategy.

If the stock price crashes, your loss on the short put can be substantial, as you are obligated to buy the stock at the strike price even if it is trading much lower.

Capped Upside: Because you sold a call, your potential profit is limited to the difference between the two call strike prices.

Margin Requirements: Selling a put "naked" (without owning the stock or cash to cover) requires a margin account and collateral, which can lead to a margin call if the trade goes against you.

Summary Table

Component      Action      Outlook               Risk/Reward
---------      ------      -------               -----------

Long Call      Buy         Bullish               Profits if stock rises

Short Call     Sell        Neutral/Bearish       Offsets cost; caps profit

Short Put      Sell        Bullish/Neutral       Generates income; creates obligation to buy

Here is another trade similar to the above trade:

3-Legged Strategy: Sell Put, Buy Call, Sell Call.

It covers you on both sides whether the stock goes up or goes down so it works equally as good in both Bull and Bear markets.

RIOT closed on Friday April 13th, 2017, at $3.75 per share.

The following data is based on the closing prices of Friday April 13th, 2017.


Stock         Sell Put                                            Buy Call                                    Sell Call                          Stop Loss             Net Credit (midpoint)       
-----        ----------------                     ----------------                ---------------         ---------           -------------------

RIOT    Strike $5.00                Strike $5.00             Strike $5.00        $3.75           $0.68

        (Expiring: 6/15/2017)       (Expiring: 9/21/2017)   (Expiring: 6/15/2017)

Since we've placed a stop-loss point at $3.75, we will not lose any money even if the stock drops by about 50% on June 15th, 2018.

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: Expiration date (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

For example:

Sell Put: $5.00

Buy Call: $5.00

Sell Call: $5.00

Stop Loss: $3.75

Ignoring: Net Credit (Mid-point).

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months (as expiring: 9/21/2017 shows) depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is another trade similar to the above trade:

3-Legged Strategy: Sell Put, Buy Call, Sell Call.

June 8, 2019

Imagine making a trade and forgetting about it... ??? ... knowing that you are almost guaranteed a profit no matter which direction the stock moves.

Here is an example of one of these trades.

The following data is based on the closing prices as of Friday, June 7th, 2019.


Stock         Sell Put                                            Buy Call                                    Sell Call                          Stop Loss             Net Credit (midpoint)       
-----        ----------------                     ----------------                ---------------         ---------           -------------------

GNW       Strike $3.00              Strike $4.00             Strike $3.50        N/A           $3.18

          (Expiring: 01/17/2020)    (Expiring: 01/17/2020)   (Expiring: 01/17/2020)

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: Jan 17, 2020 (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

For example:

Sell Put: $3.00

Buy Call: $4.00

Sell Call: $3.50

Stop Loss: Not Used

Ignoring: Net Credit (Mid-point).

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months (as expiring: 01/17/2020 shows) depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is another trade similar to the above trade:

3-Legged Strategy: Sell Put, Buy Call, Sell Call.

The following data is based on the closing prices as of Friday, June 14th, 2019. That is a six-month time-frame until expiration. However, you can use two to three months for your actual trade time-frame for your options. [Nothing can stop you from choosing four to six months, either.]


Stock         Sell Put                                            Buy Call                                    Sell Call                          Stop Loss             Net Credit (midpoint)       
-----        ----------------                     ----------------                ---------------         ---------           -------------------

CVM      Strike $2.50               Strike $2.50             Strike $2.50        N/A           $2.35

         (Expiring: 01/17/2020)     (Expiring: 01/17/2020)   (Expiring: 01/17/2020)

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: Jan 17, 2020 (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is another trade similar to the above trade:

3-Legged Strategy: Sell Put, Buy Call, Sell Call.

The following data is based on the closing prices as of Friday, June 22th, 2019.


Stock         Sell Put                                            Buy Call                                    Sell Call                          Stop Loss             Net Credit (midpoint)       
-----        ----------------                     ----------------                ---------------         ---------           -------------------

NTEC      Strike $2.50               Strike $7.50             Strike $5.00        N/A           $3.18

         (Expiring: 08/16/2019)     (Expiring: 08/16/2019)   (Expiring: 08/16/2019)

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: August 16, 2019 (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is another trade similar to the above trade:

3-Legged Strategy: Sell Put, Buy Call, Sell Call.

The following data is based on the closing prices of Friday April 13th, 2017.

Stock     Sell Put                Buy Call                 Sell Call             Stop Loss     Net Credit (midpoint)       
-----     ----------------        ----------------         ---------------       ---------     -------------------

RIOT     Strike $5.00             Strike $5.00             Strike $5.00          $3.75           $0.68

         (Expiring: 06/15/2018)   (Expiring: 09/21/2018)   (Expiring: 06/15/2018)

Note: The buy call has a six-month expiration date time-frame: Expiring: 09/21/2018.

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: June 15, 2018 (which is two to three months time-frame from the time you traded).

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

Find a stock of your choice and trade the 3-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months (as the "buy call" shows) depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is a different kind of trade:

4-Legged Strategy: Buy Call, Buy Put, Sell Call, Sell Put

April 8, 2018

The stock AZN could go vertical on or before June 15th, 2018.

This 4-legged strategy covers both sides to profit whether the stock goes up or down.

Learn how you could make money whether AZN goes up... or goes down...

In other words, use this four legs options trade to trade your own stock by mimicking the trade setup in this example trade.

AstraZeneca plc (ADR)

NYSE: AZN - Apr 12, 4:02 PM EDT

$36.36 USD

The following data is based on the closing prices as of Friday April 6th, 2018.


Stock              Buy 3 Calls                            Buy 3 Puts                                        Sell 2 Calls                                            Sell 2 Puts                   Stop Loss       
-----             ----------------            ----------------                         ---------------                               ---------                  --------

AZN          (Expiring: 2 to 3 months)         (Expiring: 2 to 3 months)            (Expiring: 2 to 3 months)       (Expiring: 2 to 3 months)     N/A

Enter on or before: ASAP (in other words, find a stock and trade as soon as you can using two to three months in expiration time-frame.)

Must Exit as stated on or before: Expiration date.

This strategy has the potential to profit big with very little downside risk.

Find a stock of your choice and mimic the trade using the above scenario and you should do very well.

In other words, choose a stock and trade options by buying 3 calls, buying 3 puts (both 3 calls and 3 puts with different strike prices but having the same expiration date) as well as selling 2 calls, selling 2 puts (again, both 2 calls and 2 puts with different strike prices but having the same expiration date.)

This is a very effective 4-legged options strategy. Try it!!!

Find a stock of your choice and trade the 4-legged options strategy using two to three months expiration time-frame. You can even stretch it to four or five months depending on your sentiment on your choice of stock. But generally two to three months is the optimum time-frame for this kind of multiple-legged options.

Here is an extended detail description of the above four-legged strategy:

The option strategy described above is for buying 3 calls and 3 puts while selling 2 calls and 2 puts and it is known to experienced traders as a Hedged Straddle (or Strangle) in a 3:2 ratio containing four legs.

It is an advanced volatility-based strategy that aims to achieve the following:

Profit from Volatility: Like a standard long straddle, it seeks to profit from a significant price move in either direction.

Theta Hedge: By selling a smaller number of shorter-term or further out-of-the-money options, the trader collects premium to offset the "time decay" (theta) that typically erodes the value of a long straddle.

Maintain Unlimited Upside/Downside: Because the number of long options (3) exceeds the short options (2), the trader retains a "net long" position. This ensures the strategy still has unlimited profit potential if the underlying asset makes a massive move, though the breakeven points are wider than a simple straddle.

Key Strategic Components

Structure: This is a multi-leg order involving four distinct positions (legs) executed simultaneously.

Market Outlook: The trader expects a large price swing but wants to reduce the high cost and daily time decay associated with a 1:1 long straddle.

The 3:2 Ratio: This specific ratio is considered a "medium zone" that provides enough short credit to hedge decay without neutralizing the profit potential from a large move.

Comparative Table: Standard vs. Hedged (3:2) Straddle

Feature         Standard Long Straddle (1:1)       Hedged Straddle (3:2 Ratio)
-------         ----------------------------       ---------------------------

Legs            Buy 1 Call, Buy 1 Put              Buy 3 Call/Put, Sell 2 Call/Put

Primary Goal    Profit from a big move             Profit from move while reducing theta cost

Time Decay      High (loses money every day)       Lower (partially offset by short legs)

Max Loss        Net premium paid                   Net premium paid (less than 1:1)

Risk Profile    Unlimited profit potential         Unlimited profit potential (net long)

When should a trader adjust or close out this position before expiration?

Managing a 3:2 Hedged Straddle is more complex than a standard straddle because you are balancing "net long" gamma (potential for big wins) against "short" components that can become risky if the stock moves too quickly toward those short strikes.

Here are the primary scenarios where a trader should adjust or close the position:

1. The "Volatility Spike" Goal

If the underlying asset makes a sudden, violent move in either direction shortly after you open the trade, the long legs (3) will gain value significantly faster than the short legs (2) lose value.

When to close: If you reach a specific profit target (e.g., 25-40% of the capital risked), close the entire structure.

Why: Volatility is "mean-reverting."

If you wait too long after a big move, volatility may drop (Vega crush), and time decay (Theta) will begin to eat your profits.

2. Approaching the Short Strikes (The Danger Zone)

In this strategy, the short calls and puts act as a buffer. However, if the stock price moves exactly to one of the short strikes and stays there, you face the maximum "pin risk."

When to adjust: If the stock price reaches the strike price of your short options.

The Adjustment: You can "roll" the short legs further out in time or to a different strike price to avoid assignment and to maintain the hedge against the long legs.

3. Time Decay Acceleration (The "T-Minus" Rule)

Options lose value exponentially as they approach expiration. Because you have 6 long legs and only 4 short legs, you are Net Long Theta -- meaning time is your enemy.

When to close: Generally, traders look to exit 14 to 21 days before expiration (if using monthly contracts).

Why: In the final two weeks, the time decay on your 6 long positions will likely outpace any remaining premium you are collecting from the 4 short positions, leading to a rapid decline in the position's total value.

Summary of Exit/Adjustment Triggers

Scenario                       Action                   Reason
--------                       ------                   ------

Rapid Price Move               Close Entire Position    Capture the "Gamma" explosion before it fades.

Low Volatility (Flat Price)    Close for Small Loss     If the stock doesn't move, Theta will eventually win.

Approaching Short Strike       Roll the Short Legs      Prevent assignment and manage the delta of the trade.

2 Weeks to Expiry              Close/Roll Everything    Avoid the "Theta Cliff" where long options lose value
                                                        too fast.

Pro-Tip: Many experienced traders use this 3:2 ratio specifically for Earnings Announcements.

They buy the position 1-2 weeks before earnings (when volatility is rising) and close it immediately after the news is released, regardless of which way the stock moved.

Here is how to calculate the "Net Delta" of the trade of the 3:2 Hedged Straddle strategy (above) to show you how sensitive it is to a $1 move in the stock price

To calculate the Net Delta, we need to look at the sensitivity of each leg to a change in the underlying stock price. Since you are "net long" on both sides (3 long vs. 2 short), the position remains directionally neutral at the start but becomes increasingly aggressive as the stock moves.

1. Defining the Delta Components

Let's assume the stock is at-the-money (ATM). Typically, an ATM call has a delta of approximately and an ATM put has a delta of approximately.

Long Call Leg: 3 x (+0.50) = +1.50

Short Call Leg: 2 x (-0.50) = -1.50

Long Put Leg: 3 x (-0.50) = -1.50

Short Put Leg: 2 x (+0.50) = +1.50

2. Calculating Total Net Delta

We sum the deltas of all four legs to find the position's overall sensitivity:

Substituting our values:

Net Delta = (+1.50 - 1.0) + (-1.50 + 1.0)

Net Delta = (+0.50) + (-.50 ) = 0

3. The "Gamma" Acceleration

While the initial Net Delta is (Delta Neutral), the magic of this strategy is in the Net Gamma.

Because you have a net surplus of 1 long call and 1 long put, as the stock price moves, your Delta will change rapidly in your favor:

If the stock price rises by $1: The delta of your calls will increase toward, and the delta of your puts will move toward.

Because you have more long calls than short calls, your Net Delta will quickly become positive, making you "long" the rally.

If the stock price falls by $1: The delta of your puts will move toward.

Since you have more long puts, your Net Delta will become negative, making you "short" the crash.

The initial Net Delta of this strategy is 0, meaning it is directionally neutral. However, because you are net long 1 call and 1 put, the position has positive Gamma, causing it to automatically become "bullish" if the stock goes up and "bearish" if the stock goes down.

Here is how the Net Theta (time decay) compares to a standard straddle to see exactly how much money you save per day

In a 3:2 Hedged Straddle, the primary advantage is a significantly reduced "daily burn" (Theta) compared to the size of the position you are controlling.

By selling 2 calls and 2 puts, you are collecting premium that acts as a subsidy for the 3 calls and 3 puts you are buying.

1. Daily Cost Comparison (Theta)

Using a standard model (Stock at $100, 30% Volatility, 30 days to expiry), here is how the daily time decay breaks down:

Standard Straddle (1:1): You lose approximately -0.11 per share, per day.

Hedged Straddle (3:2): You are paying for 3 pairs but getting paid for 2. Your net loss is still -0.11 per share, per day.

The catch: While the dollar amount lost to time is the same, the Hedged Straddle gives you the "power" of 3 long pairs for the price of 1.

2. Efficiency Advantage

The 3:2 ratio allows you to maintain a much larger "volatility engine" while keeping your daily expenses low.

Exposure: You have 3 long calls/puts working for you if the stock explodes.

Hedge: The 2 short calls/puts act as a "theta offset," meaning the stock doesn't have to move as far or as fast to cover your daily costs as it would if you just bought 3 standard straddles.

3. Visualizing the Decay Offset

The following chart compares how much value is lost daily. Notice that while the 3:2 position is "larger" in terms of total contracts (10 total vs 2 total), the short legs drastically pull the net decay back down toward the level of a single small straddle.

[Note: The description mentions a chart being shown for a visual guiden, however, the chart is not available.]

The 3:2 Hedged Straddle achieves the same daily Net Theta loss as a single standard straddle, but it provides 3x the profit potential (Gamma) if a major price move occurs.

This makes it a more efficient way to bet on high volatility while "financing" the cost through short positions.

Here is an example of the Profit and Loss (P&L) at expiration to see where the exact "breakeven" points are for this specific ratio

To visualize the 3:2 Hedged Straddle, we have to look at how the "Net Long" position behaves. Since you have 3 long contracts and 2 short contracts, you are effectively Net Long 1 Straddle, but your "cost of entry" is significantly reduced by the premium collected from the short legs.

1. The P&L Dynamics

The "Valley" (Max Loss): If the stock stays exactly at the strike price, all options expire at their maximum time decay. Your loss is the Net Debit paid (Total cost of 3 long pairs minus the credit from 2 short pairs).

The "Wings" (Profit): Because you are net long 1 pair, the P&L curve starts rising once the stock moves far enough to overcome the initial cost.

Because you have "extra" long contracts, the slope of your profit is steeper than a standard 1:1 straddle once you clear the breakeven points.

2. P&L Graph at Expiration

[Note: The description mentions a graph being shown for a visual guiden, however, the graph is not available.]

The graph below assumes a strike price of $100. The "V" shape is characteristic of a straddle, but the 3:2 ratio shifts the cost basis.

3. Key Takeaways from the Curve

Breakeven Points: Your breakevens are generally closer than if you had simply bought 3 straddles, because the 2 short straddles paid for a large portion of the "insurance" cost.

Risk: Your maximum risk occurs at the Strike Price. If the stock doesn't move at all, you lose the net premium.

Reward: Your reward is unlimited. Unlike a "Butterfly" or "Iron Condor" (which have capped profits), the 3:2 ratio leaves one full straddle "uncovered," allowing for massive gains if the stock moons or craters.

At expiration, the 3:2 Hedged Straddle behaves like a highly discounted Long Straddle. It has a lower maximum loss than buying 3 units outright, but it requires the stock to move past its breakeven points to realize its unlimited profit potential.

Here, we look at how Implied Volatility (IV) crush might impact this position specifically after an earnings report

In a 3:2 Hedged Straddle, the impact of an "IV Crush" after earnings is a double-edged sword. While the overall position is Net Long Vega (meaning a drop in volatility hurts), the short legs (the "2" in the 3:2 ratio) act as a shock absorber that can significantly soften the blow.

1. The "Vega Mismatch"

Vega measures how much your position value changes for every 1% move in Implied Volatility (IV). In this strategy:

Long Legs (3 Calls + 3 Puts): These have high positive Vega. When IV drops 20% after earnings, these lose massive value.

Short Legs (2 Calls + 2 Puts): These have negative Vega. When IV drops, these gain value (become cheaper to buy back), offsetting your losses.

2. The Net Impact Calculation

Because you have a net surplus of 1 Long Straddle (3 minus 2), your position is still vulnerable to IV crush, but only as much as if you had simply bought 3 long straddles.

Strategy                  Total Long Vega     Total Short Vega           Net Vega Exposure
--------                  ---------------     ----------------           -----------------

Standard Straddle (1:1)   High	Zero          100%                       Exposed

Hedged Straddle (3:2)     Very High           High                       33% Exposed

3. Survival Scenarios After Earnings

After a typical earnings report in 2026, where IV might "crush" from 80% down to 40%:

Scenario A:

Small Stock Move: If the stock moves less than the market expected, the IV crush will likely cause a net loss. However, your loss will be much smaller than a standard straddle because your short legs "captured" a large portion of that volatility drop.

Scenario B:

Large Stock Move: If the stock "moons" or "craters" beyond the implied move, the profit from your net long 1-straddle (Gamma) will eventually outweigh the IV crush on your Net Vega. This is the "Goldilocks" zone for this trade.

Strategic Summary for Earnings

The Advantage: You are essentially "financing" your volatility bet. You get the upside of a massive move while letting the short legs pay for the "expensive" IV that usually destroys long-only traders.

The Risk: If the stock remains pinned at the strike price, you lose on two fronts: the IV Crush on your net long position and the Theta (Time Decay) on the long legs.

To mitigate this, many traders use the Options Term Structure to ensure they aren't buying into peak IV right before the announcement.

We're not going to worry about Options Term Structure in this example, however, if you want to explore it on your own, here is a link: Options Term Structure

Here is the actual trading setup using the 3:2 Hedged Straddle strategy described above and this actual trading setup is implemented in mid-February 2026

For a $5,000 investment, a 3:2 hedged straddle on Strategy Inc (MSTR) involves buying 3 LEAPS straddles (long 3 calls, 3 puts) and selling 2 shorter-dated straddles (short 2 calls, 2 puts) to create a "ratio calendar straddle."

As of February 17, 2026, with MSTR trading at $133.88, this strategy seeks to profit from high volatility while using the short positions to offset the high cost of LEAPS premiums.

Example 3:2 Hedged LEAPS Straddle

To fit a $5,000 budget, I use lower-cost out-of-the-money (OTM) strikes or closer-dated "mini-LEAPS" due to MSTR's high implied volatility (approx. 85%).

Net Investment: Approximately $4,800 (fitting the $5,000 limit).

The Setup:

Buy 3 Jan 2027 $150 Calls: Long-term upside exposure.

Buy 3 Jan 2027 $120 Puts: Long-term downside protection/speculation.

Sell 2 June 2026 $150 Calls: Offsets call cost; profit if MSTR stays below $150 by June 2026.

Sell 2 June 2026 $120 Puts: Offsets put cost; profit if MSTR stays above $120 by June 2026.

Strategy Mechanics

Hedged Ratio: By being "Net Long" (3 long vs. 2 short), you maintain a positive Gamma position. This means you profit from large price swings in either direction, but the 2 short contracts collect Theta (time decay) to pay for the "rent" of the 3 long LEAPS.

Risk Profile: Your maximum risk is the net debit paid ($4,800). The primary risk is MSTR remaining stagnant (low volatility) near the strike prices, causing the long options to lose value faster than the short options can compensate.

Break-even: This trade typically requires a move of (+/-) 25% to 30% in the underlying stock to reach profitability, though the short legs provide a "buffer" compared to a standard long straddle.

Key Data Points for MSTR (Feb 2026)

Current Price: $133.88

52-Week Range: $104.17 - $457.22

Implied Volatility (Jan 2027): 85.33%

Expected Move (by Jan 2027): (+/-) $81.89 (approx. 61%)

Here is an explanation of the role of Gamma and Theta in the 3:2 hedged straddle

In a 3:2 hedged straddle, you are essentially playing a "tug-of-war" between two Greeks:

Gamma, which wants movement, and Theta, which wants stagnation.

Because you are net-long (3 long vs. 2 short), you are Net Long Gamma and Net Long Theta (initially) or Net Short Theta (overall), depending on the time to expiry.

The goal is for the Gamma gains from the 3 long LEAPS to eventually outpace the Theta decay, while using the 2 short legs to "subsidize" the cost of the trade.

1. The Role of Gamma

Gamma measures the rate of change in an option's Delta as the stock price moves. It is the "acceleration" of your profit:

* Positive Gamma (+3 Longs): Since you own 3 straddles, your position gains Delta as MSTR moves away from the strike. If MSTR moons to $180, your calls become increasingly "heavier" (closer to Delta), making you more money for every dollar MSTR rises.

* Negative Gamma (-2 Shorts): The 2 short straddles work against you. As MSTR moves, these shorts also gain Delta, but in the wrong direction (they become more expensive to buy back).

The Net Edge: Because you have a 3 : 2 ratio, you have 1 unit of "Pure Gamma."

If MSTR makes a massive move, the gains from the 3 longs will mathematically overpower the losses from the 2 shorts because you have a surplus of contracts benefiting from the price acceleration.

2. The Role of Theta

Theta measures the "rent" you pay to hold the position. It is the daily time decay of the option's value.

The Problem (Long LEAPS): Long-term options lose value every day. For a high-volatility stock like MSTR, the "rent" (Theta) on 3 LEAPS straddles is incredibly expensive.

The Solution (Short Legs): By selling 2 shorter-dated straddles (e.g., June 2026), you are collecting Theta. These shorter-dated options decay much faster than the LEAPS.

The Offset: The 2 short legs act as a Theta Hedge. Ideally, the daily decay you collect from the 2 short positions covers a large portion (or all) of the daily decay you pay for the 3 long positions. This allows you to stay in the trade longer, waiting for a big move, without "bleeding out" your capital.

3. Visualizing the Greek Interaction

In this strategy, you are looking for a Volatility Expansion:

* If MSTR stays flat, Theta eventually wins, and your $5,000 shrinks.

* If MSTR swings wildly, Gamma wins. The profit from the 3:2 ratio expands because your net-long position captures the "extra" movement that the 2 shorts can't offset.

Here is the graph showing the gamma mentioned above:

In a 3:2 hedged straddle, Gamma provides the profit "acceleration" during large price swings, while Theta represents the time-decay cost.

The 3:2 ratio ensures you remain Net Long Gamma (benefiting from volatility) while using the Short Theta from the 2 sold contracts to significantly reduce the daily cost of holding the trade.

Here is the calculation of the Theta burn for the next 30 days to see how much "rent" those 2 short legs actually cover

In a 3:2 hedged straddle on MSTR, your next 30 days will be a battle between the "rent" you pay for your long LEAPS and the "income" you collect from your shorter-dated short legs.

For a $5,000 investment at a $133.88 stock price, here is the estimated 30-day Theta burn breakdown:

1. Long-Term LEAPS "Rent" (The Cost)

* Position: 3 Long Jan 2027 Straddles ($150 Calls / $120 Puts).

* Daily Theta: LEAPS have very low daily decay because they are far from expiry.

Estimated Cost: Approximately -$6.00 to -$9.00 per day for all 3 contracts ($180 - $270 per month). You are paying for the right to hold these high-gamma positions for over a year.

2. Short-Term "Income" (The Hedge)

* Position: 2 Short June 2026 Straddles ($150 Calls / $120 Puts).

* Daily Theta: Shorter-dated options decay much faster than LEAPS.

Estimated Collection: Approximately +$8.00 to +$12.00 per day for both contracts ($240 - $360 per month).

3. Net 30-Day Theta Burn

* Daily Net: In many setups, the 2 short legs will nearly or completely offset the cost of the 3 long LEAPS.

* 30-Day Outlook: You may actually experience Positive Theta (a net gain of $30 - $90) or a very "cheap" Negative Theta (a net loss of $50) over the next month.

The "V" Trap: This balance only holds if MSTR stays relatively near your strike prices. If MSTR moves significantly, the Delta and Gamma of the options will shift, changing these Theta values.

Strategy Summary for Next 30 Days (from February 17, 2026)

Time Decay: Your 2 short legs are effectively "subsidizing" your long-term bet, allowing you to wait for a Bitcoin-driven MSTR move without losing your $5,000 to time erosion.

Volatility Risk: If MSTR's Implied Volatility (IV) drops (currently at 81-87%), both your long and short positions will lose value, but your longs will be hit harder.

Over the next 30 days, the 3:2 ratio is designed to result in a near-zero net Theta burn. The rapid time decay of the 2 short June contracts (income) cancels out the slower decay of the 3 long LEAPS (cost), essentially letting you hold the position for "free" while you wait for a major price expansion.

The takeaway from the example and the illustration is that you need to decide whether risking $5,000 is worth the potential reward which can be substantial if MSTR explodes to the upside as most analysts are predicting.

For the rest of the detail is just more details to help you get a good grasp of the strategy.

Here is a related example using single leg rather than four legs

This example trade uses MSTR at the current prices for both non-leaps and leaps, and it will also give prognosis of the potential huge return given bitcoin is seeming to be bottoming out as of this writing (February 16, 2026).

As of mid-February 2026, Strategy (MSTR) is trading near $133.88, showing a recent rebound of approximately 8.8% from a low of $104.17 reached earlier this month.

This price action closely tracks Bitcoin, which is currently testing a potential bottom around $68,000 after a sharp slide from its October 2025 peak of $126,000.

Current Market Prices (February 16, 2026)

* MSTR Stock: $133.88

* Bitcoin (BTC): $68,000 to $70,000

Example Trades on MSTR

Because MSTR is designed to be approximately 1.5 times more volatile than Bitcoin, it typically outperforms BTC during rallies but underperforms during crashes.

1. Non-LEAPS (Short-Term Momentum)

These options are suitable for trading a near-term bounce if Bitcoin holds its current support levels.

* Contract: MSTR Feb 20, 2026, $135 Call (Near-the-money)

* Context: Recent prices for slightly out-of-the-money Feb 20 calls (like the $152.5 strike) have seen massive volatility, dropping 95% over the past month due to the recent slide, while in-the-money calls (like the $110 strike) are trading around $24.44.

* Goal: Capture a quick move back toward the $170 resistance level if the "bottoming out" thesis holds.

2. LEAPS (Long-Term Exposure)

LEAPS allow investors to benefit from the expected recovery of Bitcoin through 2027-2028 without the immediate pressure of weekly expirations.

* Contract: MSTR March 20, 2026, $135 Call (or further out to 2027/2028 if available).

* Context: While specific 2027/2028 premiums are fluctuating, current analysts suggest a base case for Bitcoin to return to $100,000 by late 2026, which would significantly re-rate MSTR's treasury value.

* Strategy: Buying deeply in-the-money (ITM) LEAPS to simulate stock ownership with additional structural leverage.

Prognosis: Potential for "Huge Returns"

The prognosis for MSTR is heavily dependent on Bitcoin reclaiming its 2025 all-time highs. Analysts view MSTR as "Bitcoin on leverage" due to its use of convertible debt and high-beta behavior.

Bull Case: Outsized Gains

* MSTR Price Targets: Wall Street remains bullish despite recent carnage. The consensus rating is a "Strong Buy" with a mean price target of approximately $542, implying a potential upside of over 200% from current levels.

* Bitcoin Recovery Multiplier: During the 2020-2021 bull run, MSTR's stock rose 10x while Bitcoin rose 5-6x. Some strategists believe that if Bitcoin reaches $175,000, MSTR could potentially trade at $1,600 per share (a 10-15x return) if it maintains a 3.0x premium to its Net Asset Value (NAV).

* Yield Generation: MSTR achieved a 22.8% BTC Yield for 2025, consistently increasing its Bitcoin-per-share, which acts as a long-term value driver.

Risks and Support Levels

* Key Support: MSTR has critical support near $139 (which recently failed on a daily basis) and a deeper floor at $107. A drop below these levels would likely coincide with Bitcoin falling below its realized price support of $55,000.

* Liquidation Myth: Executive Chairman Michael Saylor has clarified that MSTR faces no liquidation risk unless Bitcoin drops below $8,000, where its BTC holdings would only then equal its net debt.

* Volatility Warning: MSTR can move 20% in a single day. Analysts warn that while the upside is massive, forced liquidations in the crypto market can cause MSTR to dive well beyond its fundamental value during corrections.

Here are the Greeks (Delta, Theta, Implied Volatility) for the March 2026 LEAPS to help refine the entry point

For a near-term "bottoming out" play on Strategy (MSTR), the March 20, 2026, $135.00 Call is a focal point for traders. With the stock currently trading at $133.88, this contract sits just out-of-the-money and offers high sensitivity to a potential Bitcoin recovery.

March 20, 2026 LEAPS Greeks & Pricing

* Last Price: $13.13 (Mid: $13.15)

* Delta: 0.51 (Estimated)

Interpretation: For every $1.00 MSTR moves up, this option will gain approximately $0.51 in value.

* Implied Volatility (IV): 81.1%

Context: This is in the 85th percentile, meaning premiums are currently expensive due to high market fear/excitement.

Theta (Time Decay): $0.18 per day (Estimated)

Risk: As a mid-term LEAP (approx. 32 days to expiry), time decay is accelerating. You would lose roughly $18 per contract each day if the stock price remains stagnant.

Refined Entry Strategy

The "IV Crush" Warning: Because IV is at 81.1%, you are paying a high "volatility tax."

If Bitcoin stays flat but volatility drops, your option's value will fall even if MSTR doesn't move. An entry during a slight "red day" when IV dips can significantly improve your cost basis.

Profit Target: Analysts suggest a near-term recovery target of $145.00. At that price, this call would be worth roughly $18.85 (a +43% gain), assuming constant IV and delta.

Alternative (Lower Cost): A Bull Call Spread (buying the $135 call and selling a $150 call) could reduce your entry cost by nearly 50%, hedging against the high IV.

Using the same strategy outlined above, but with a $5,000 investment

To deploy $5,000 on Strategy (MSTR) while balancing the "huge return" potential of a Bitcoin bottom against the high cost of options, we have to look at how many contracts you can actually afford.

At a current price of $13.15 per share for the March 2026 $135 Calls, one contract (covering 100 shares) costs $1,315.

Strategy 1: The "High Beta" Leap (March 20, 2026)

This is for the trader convinced the bottom is in. You are buying "pure" leverage.

Quantity: 3 Contracts

Total Cost: $3,945 (leaving $1,000 in cash/reserve)

The Math:

Control: You control 300 shares of MSTR (notional value of $40,164).

Delta Exposure: With a 0.51 Delta, your position gains roughly $153 for every $1 move in MSTR stock.

Prognosis: If MSTR hits the analyst target of $170 by mid-March:

The intrinsic value alone would be $35 per share.

Your $3,945 investment would be worth roughly $10,500 (a 166% return).

Strategy 2: The Vertical Spread (Reduced Risk/Higher ROI)

Since IV is high (81.1%), buying "naked" calls is expensive. You can "sell" some of that high volatility to someone else to lower your cost.

The Trade: Buy 6 contracts of the $135 Call and Sell 6 contracts of the $150 Call.

Net Cost: Roughly $7.50 per share ($750 per spread).

Total Investment: $4,500 (6 spreads).

The Benefit:

Lower Break-even: Your break-even is $142.50 instead of $148.15.

Capped Risk: You cannot lose more than the $4,500.

Prognosis: If MSTR hits $150 or higher:

Each spread is worth $15.00 ($1,500 total).

Your $4,500 turns into $9,000 (a 100% return). This requires a much smaller move in MSTR to double your money than Strategy 1.

Risk Management Table for $5,000 Investment

Scenario                 MSTR Price     Strategy 1 Result (Calls)     Strategy 2 Result (Spreads)
--------                 ----------     -------------------------     ---------------------------

Bullish (BTC Rallies)    $160           +$4,600 (Approx)              +$4,500 (Max Profit)

Neutral (Sideways)       $135           -$3,945 (Total Loss)          -$4,500 (Total Loss)

Bearish (BTC Fails)      $110           -$3,945 (Total Loss)          -$4,500 (Total Loss)

Note:

Because these options expire in 30 days, any "bottoming" thesis that takes longer than a month to play out will result in a 100% loss of the $5,000. If you want more "breathing room," you would need to buy 2027 LEAPS, but $5,000 would likely only buy 1 contract due to the higher premium for time.

My Recommendation

If you truly believe the bottom is in, Strategy 2 (The Spread) is mathematically superior.

It offsets the "IV tax" you are currently paying and allows you to control 600 shares worth of price action instead of 300, giving you a higher probability of doubling your $5,000 even if the rally is modest.

Here is the calculation of the "breakeven" price points for a 2027 LEAP, to see how much "time" that extra $5,000 could buy you

Moving out to the January 15, 2027 expiration provides you with roughly 11 months of "staying power."

This removes the stress of a 30-day "ticking clock" and allows the Bitcoin bottoming process to take months rather than days to resolve.

With $5,000, you are looking at a "Quality over Quantity" play.

The 2027 LEAP Trade Profile

Contract: MSTR Jan 15, 2027 $135.00 Call

Approximate Price: $42.50 ($4,250 per contract)

Total Investment: $4,250 (leaving $750 in cash)

Quantity: 1 Contract

The Greeks for 2027

Delta (0.65): This is much "meatier" than the short-term call. You are effectively controlling 65 shares of MSTR.

Theta ($0.04): This is the magic of LEAPS. While the 30-day option loses $18/day, this one only loses $4/day. You can afford to be wrong about the timing of the bottom as long as you are right about the direction.

Break-even Price: $177.50 ($135 Strike + $42.50 Premium).

Breakeven & ROI Analysis

Because you are paying a high premium for "time," your break-even is higher, but your risk of a total loss (zero) is significantly lower if the market takes 6 months to recover.

MSTR Price at Expiry (Jan 2027)    BTC Equiv. (Est.)    Profit/Loss     ROI %
-------------------------------    -----------------    -----------     -----

$100 (Bear)                        $45,000              -$4,250         -100%

$135 (Flat)                        $70,000              -$4,250         -100%

$177.50 (Break-even)               $90,000              $0              0%

$250 (Bull)                        $120,000             +$7,250         +170%

$400 (Moon)                        $180,000             +$22,250        +523%

Comparison: 30-Day vs. 11-Month LEAP

Feature               30-Day Calls ($135)           2027 LEAP ($135)
-------               -------------------           ----------------

Contracts Owned       3 Contracts                   1 Contract

Cost Basis            $3,945                        $4,250

Risk                  High (Expires in weeks)       Moderate (Expires in a year)

Reward                Explosive (10x potential)     Significant (5x potential)

Best Case             BTC hits $100k by March       BTC hits $150k by year-end

The Prognosis

If the "huge return" you are looking for is tied to the next major Bitcoin cycle leg (post-bottoming), the 2027 LEAP is the professional choice.

It protects you against "fake-outs" where Bitcoin drops to $60k before rallying to $150k. In the 30-day scenario, that dip would wipe you out; in the 2027 scenario, you simply wait it out.

Here is a "Middle Ground" strike price (like $180 or $200) for 2027 that would allow you to buy 2 contracts instead of 1 for your $5,000

To get more "bang for your buck" with your $5,000, we can move the strike price further Out-of-the-Money (OTM).

This increases your leverage, allowing you to control more shares (2 contracts instead of 1), though it requires a larger price move in MSTR to reach profitability.

For the January 15, 2027 expiration, we are looking for a "sweet spot" where the premium is roughly $25.00 ($2,500 per contract).

The "Middle Ground" 2027 Trade

Contract: MSTR Jan 15, 2027 $230.00 Call

Approximate Price: $24.50 ($2,450 per contract)

Total Investment: $4,900

Quantity: 2 Contracts (Controlling 200 shares)

The Greeks & Mechanics

Delta (0.42): Since you own two contracts, your total position delta is 0.84. This means for every $1 MSTR moves, your $5,000 portfolio gains $84. (Compare this to the single $135 strike LEAP, which only gains $65).

Implied Volatility (IV) Sensitivity: These contracts are highly sensitive to "hype."

If Bitcoin starts ripping toward $100k, the IV will likely spike, increasing the value of these calls even before MSTR hits the $230 strike.

Break-even at Expiry: $254.50 ($230 Strike + $24.50 Premium).

Comparison of $5,000 LEAP Setups

This table shows how the "Middle Ground" strike performs against the "Conservative" strike at the end of the year.

MSTR Price     1x $135 Call (Cost $4,250)      2x $230 Calls (Cost $4,900)
----------     --------------------------      ---------------------------

$150           Value: $1,500 (-64%)            Value: $0 (-100%)

$254.50        Value: $11,950 (+181%)          Value: $4,900 (0% Break-even)

$350           Value: $21,500 (+405%)          Value: $24,000 (+389%)

$500           Value: $36,500 (+758%)          Value: $54,000 (+1,002%)

The Prognosis: Why 2 Contracts Win in a "Moon"Shot Scenario

The Inflection Point:

Notice that around $350, the two-contract strategy starts to outperform the one-contract strategy.

Leverage: Because you control 200 shares instead of 100, once MSTR clears your break-even, your profit grows twice as fast.

Bitcoin Alignment: A $500 MSTR price target aligns with the "Bull Case" of Bitcoin hitting $150k-$175k. If you truly believe the bottom is in and a massive new cycle is starting, the $230 Strike gives you that "huge return" profile (10x potential) while still giving you a year to be right.

Risk Warning

The $230 strike is much more aggressive. If MSTR rallies to $200 (a 50% gain from here) but fails to go higher by Jan 2027, the $135 call would still be worth a lot of money, but the $230 calls would expire worthless.

More Options Strategies Examples To Come!!!

What is a wheel option strategy?

The Wheel strategy is a cyclical options trading approach used to generate consistent income by repeatedly selling put and call options. Also known as the "Triple Income Strategy," it aims to collect option premiums while potentially acquiring high-quality stocks at a discount.

This Wheel options strategy is exactly the same as the one featured in a tutorial that I put out called How to buy stocks at a discount shown among the tutorials in this website.

So if you want to buy stocks that you want to own for a long-term investment, this Wheel options strategy is your roadmap.

How the Wheel Strategy Works

The strategy follows a systematic three-step cycle using options:

1. Sell Cash-Secured Puts (CSP)

* Action: Sell an out-of-the-money (OTM) put option on a stock you are willing to own long-term.

* Requirement: You must set aside enough cash to buy 100 shares of the stock at the strike price if assigned.

* Outcome: If the stock stays above the strike price, you keep the premium and repeat Step 1. If the stock drops below the strike, you are "assigned" and must buy the 100 shares.

This is the part that you get to buy a stock at discount since the stock dropprd below the strike price -- the price that you chose.

When you are "assigned" (of the stock from the options trade), must buy the 100 shares, effectively owning the 100 shares outright and you can do whatever you want to do with that 100 shares, such as holding it for a long-term investment.

This is how to "buy stocks" at a discount.

Now on to the Wheeling Options Strategy:

2. Sell Covered Calls (CC)

* Action: Once you own the shares, sell an OTM call option against them.

* Outcome: You collect more premium ("rental income") while holding the stock. If the stock stays below the call strike, you keep the shares and repeatStep 2.

3. Complete the Cycle

* Action: If the stock price rises above the call strike, your shares are "called away" (sold) at the strike price.

* Result: You lock in capital gains plus the premiums collected. Now that you are back to cash, you return to Step 1 and start over.

This is called "Wheel" or "Wheeling.

Core Benefits and Risks

1. Benefits:

* Multiple Income Streams: Earns money from put premiums, call premiums, and potential dividends while holding shares.

* Lowered Cost Basis: Every premium collected effectively reduces the price you paid for the stock.

* Lower Volatility: Generally less risky than buying and holding stocks outright because premiums provide a "buffer" against small price drops.

2. Risks:

* Downside Risk: If the stock price plummets, you are forced to buy it at the higher strike price and may face significant unrealized losses.

* Limited Upside: If the stock "moons" (surges rapidly), your profit is capped at the call strike price; you miss out on any gains above that level.

* Capital Intensive: Requires significant upfront cash to secure 100-share lots, which can limit your ability to diversify.

Strategy Implementation Tips

* Stock Selection: Only use this strategy on high-quality, stable, or blue-chip stocks/ETFs you would be happy to hold for years.

* Ideal Market: The Wheel performs best in neutral to moderately bullish ("sideways") markets where stock prices move gradually.

* Strike Selection: Many traders aim for a 0.30 Delta (roughly a 70% probability of expiring worthless) to balance premium income with assignment risk.

What are some examples of the Wheel strategy in action?

The Wheel strategy is a cyclical income-generation method where an investor sells cash-secured puts (CSP) to acquire shares at a discount and then sells covered calls (CC) on those shares until they are sold at a profit.

In 2025, some practitioners reported annualized returns of up to 51%, significantly outperforming the S&P 500's 19% gain for that year.

Below are specific examples and current setups for 2026.

Real-World Strategy Outcomes (2025 - 2026)

Metric              2025 Case Study               2026 Active Portfolio
------              ---------------               ---------------------

Account Size        $50,000                       $471,834

Total Profit        $19,718                       $1,241 (Year-to-date)

Trade Count         124 trades                    24 trades

Income Rate         3.2% per month                $7,000 - $8,000 per month

Current Status      Cycle complete                Holding $157,052 in assigned shares

Hypothetical Step-by-Step Example: XYZ Corp

This example illustrates a full "wheel" cycle:

1. Phase 1: Sell Cash-Secured Put

* Setup: Stock XYZ is at $105. You sell a $100 strike put expiring in 2 weeks for a $3.00 premium ($300 total).

* Outcome: Stock falls to $98. You are assigned 100 shares at $100.

* Net Cost Basis: $100 (strike) - $3 (premium) = $97.00 per share.

2. Phase 2: Sell Covered Call

* Setup: You now own 100 shares. You sell a $110 strike call for a $2.00 premium ($200 total).

* Outcome: Stock rises to $112. Your shares are "called away" [from you] (or you are forced to sell it) at $110.

Total Profit Calculation:

* Capital Gain: $1,300 ($110 sale price - $97 cost basis).

* Total Premiums: $300 (Put) + $200 (Call) = $500.

* Final Return: $1,800 total profit (roughly 18% on the $9,700 capital deployed).

Top 2026 Tickers for the Wheel Strategy

Traders prioritize high liquidity, moderate volatility (IV 20 - 50%), and strong fundamentals.

* Broad Market ETFs: SPY (S&P 500 ETF) and QQQ (Nasdaq 100 ETF) are considered the safest for "wheeling" due to zero single-stock risk.

* Blue Chip Stocks: Apple (AAPL) and Bank of America (BAC) are favored for their stability and consistent premiums.

* Income/Dividend Payers: Ford (F) and AT&T (T) allow investors to collect dividends while holding assigned shares.

* Growth/Tech: Nvidia (NVDA) and AMD (AMD) offer higher premiums but carry increased risk of sharp price drops.

Key Lessons from 2026 Traders

* Risk Mitigation: Stick to a 0.20 to 0.30 Delta when selling options to balance high probability of success with decent income.

* Avoid "Binary Events": Never wheel a stock right before its earnings report, as the resulting price gap can leave you holding shares at a massive loss.

* Emotional Discipline: Assignment is a planned event, not a failure. Successful traders remain comfortable holding the stock long-term if the market dips.

Here is a real-world wheel strategy example on mstr for a $5,000 capital

Implementing the Wheel strategy on Strategy (MSTR) with $5,000 capital is currently feasible due to its 10-for-1 stock split in 2024, which brought the share price into an accessible range for smaller accounts.

Of all the stocks out there, MSTR is absolutely my favorite stock to own long-term wise due to in part it is exposed to Bitcoin play -- meaning, you buy this stock, you own Bitcoins since MSTR buys and accumulates Bitcoins to the tune of 717,000 as of this writing (February 25, 2026). And the CEO of the company is a huge Bitcoin fanatic, suggesting that he keeps buying Bitcoins until the day he died. [Music to my ears!!!]

As of February 24, 2026, MSTR is trading at approximately $124.61.

1. Step 1: Sell a Cash-Secured Put (CSP)

To start the Wheel, you sell a put option.

Because one contract represents 100 shares, you need to have enough cash to buy them if assigned. This is called cash secured put.

* The Trade: Sell 1 Put contract at a $115 Strike Price expiring in 30 days. [Again, you need to have enough cash in your account ready to buy them if assigned. This is called cash secured put].

* Capital Required: $11,500 ($115 strike 100 shares). [Cash secured and ready in your account].

* The $5,000 Limit: With only $5,000, you cannot currently "Wheel" MSTR because the stock price ($124) is too high. A $5,000 account can only secure a strike price up to $50.00 ($50 x 100 = $5,000).

I couldn't find other stocks to use as examples, so I chose my favorite stock MSTR to illustrate the Wheel strategy. You might want to use your own stock(s) to trade the Wheel strategy.

* Alternative for $5,000: You could use a Poor Man's Covered Call (diagonal spread) or a Credit Spread, but a true "Wheel" requires $12,400+ for MSTR at current levels.

2. Strategy if Capital Increases to $12,500

If you had the necessary capital, a real-world MSTR Wheel would look like this:

* Sell Put: Sell a $115 Put expiring in 30 days (approx. 0.30 Delta) for a $4.00 premium ($400 total).

* If MSTR stays above $115 (at expiry): You keep the $400 and repeat the process again by selling another put, perhaps at a slightly higher strike price (i.e., $120). If the stock stays flat or goes up at expiry, make sure to increase your strike price accordingly to keep pace with the market.

* If MSTR falls to $110: You are assigned 100 shares at $115. Your Net Cost Basis is $111 ($115 - $4 premium).

Now you own MSTR at a discount -- well, maybe not you but I, since MSTR is my favorite stock to own long-term wise. [You get the point!]

Now You Have 100 Shares of MSTR Stock:

* Sell Covered Call: Now owning 100 shares at a $111 basis, sell a $120 Strike Call for a $3.50 premium ($350 total).

* If MSTR stays below $120: Keep the $350 and sell another call next month.

Here is the truth: Stocks, including my favorite stock MSTR, do stay sideway for a period of time before it either goes up or down. When it does stay sideway, you keep selling the call repeatedly to make more money while waiting for your favorite stock to go up.

* If MSTR rises to $125: Your shares are sold at $120.

Yes, you lost $5 per share by selling a covered call but you get to collect the premiums during all those times that your favorite stock stays sideway -- so it's not a total lost of the $5 per share if you take the premiums into consideration. [Who knows how long your favorite stock will stay sideway.]

Profit Calculation:

* Premiums: $400 (Put) + $350 (Call) = $750.

* Capital Gains: $500 ($120 sale - $115 buy).

* Total Profit: $1,250 (approx. 10% return on the $12,500 cycle).

3. Real-World Risks for MSTR

* Extreme Volatility: MSTR is highly correlated with Bitcoin. If Bitcoin crashes, MSTR can drop 20%+ in days, leaving you with shares worth far less than your $11,500 investment.

* High Premiums, High Stakes: While MSTR offers high "theta" (income), it requires constant monitoring due to its tendency for sharp price "gaps".

Summary of Requirements

* Minimum Capital for MSTR Wheel: $12,500 (based on current $125 price).

* Safety Buffer: Traders often recommend having 20-30% extra cash to "average down" if the stock drops.

With $5,000 capital, you cannot currently perform the Wheel strategy on MSTR because the share price ($125) requires a minimum of roughly $12,500 to secure a single 100-share contract.

Here are some alternative stocks trading under $50 that fit the $5,000 budget for the Wheel strategy

For a $5,000 capital budget, the Wheel strategy requires stocks priced at $50.00 or less to secure a 100-share contract.

As of February 24, 2026, several established companies are within this range, offering a balance of premium income and lower risk of permanent capital loss compared to high-volatility stocks like MSTR.

Of course, you can find your own lower-price stocks that fit your budget.

Top Wheel Strategy Alternatives under $50

These selections are prioritized for their high liquidity (options volume) and relative stability.

* AT&T (T): Trading at $28.35. It is highly popular for the Wheel due to its low volatility and high dividend yield of 3.92%. A single contract requires approximately $2,835 in collateral.

* Ford Motor Co. (F): Currently priced at $14.26. Ford is a "beginner favorite" because you can actually run multiple contracts (up to 3) with $5,000 capital. It offers high premiums relative to its price and a dividend yield of 5.08%.

* Intel (INTC): Trading at $46.06. Intel offers more volatility than AT&T, which typically results in higher option premiums, though it carries more sector-specific risk. One contract requires about $4,600 in collateral.

* Pfizer (PFE): Priced at $27.05. Known for its defensive nature and substantial 6.75% dividend yield, making it an excellent candidate for holding if you are assigned shares.

* Verizon (VZ): Currently near $41.20. Similar to AT&T but with a slightly higher share price and a massive 6.32% dividend yield.

Comparison Table for 2026 Strategy

Ticker        Price (Feb 2026)  Dividend Yield   Key Benefit
------        ----------------  --------------   -----------

Ford (F)      $14.26            5.08%            Lowest barrier to entry; can scale up contracts.

AT&T (T)      $28.35            3.92%            Very low volatility; steady "boring" premiums.

Pfizer (PFE)  $27.05            6.75%            Highest dividend safety among low-priced stocks.

Intel (INTC)  $46.06            0.00%            High "Theta" (premium income) due to tech volatility.

Strategic Recommendation for $5,000

* Diversify or Scale: With $5,000, you could sell one contract of AT&T (leaving $2,100 cash buffer) OR sell three contracts of Ford (utilizing $4,278).

* The "Safety" Play: Many 2026 traders prefer AT&T or Pfizer because if the market dips and you are assigned shares, you are "paid to wait" via their high dividends.

* Risk Note: Avoid SoFi (SOFI) or Penny Stocks for the Wheel with a small account; while premiums are high, the risk of the stock dropping 50% is much higher than for the blue-chip names listed above.

Let's use a real-world example on Intel with a $5,000 investment.

With $5,000 capital, you can currently execute the Wheel strategy on Intel (INTC) by selling one cash-secured put. As of February 24, 2026, INTC is trading at $46.12.

Real-World Intel Wheel Example (2026)

To initiate the cycle with $5,000, you must select a strike price that requires no more than your total cash ($50.00 or lower).

Phase 1: Sell a Cash-Secured Put (CSP)

The Trade: Sell 1 Put contract at a $44.00 strike price expiring in 30 days (e.g., March 27, 2026).

Collateral Required: $4,400 ($44.00 strike X 100 shares).

This fits within the $5,000 budget.

Premium Collected: Based on current implied volatility (60%), you might collect $1.50 per share ($150 total).

Scenario A (Stock stays above $44): You keep the $150 and repeat the process every 30 days [and over time you accumulate more premiums].

Scenario B (Stock drops below $44): You are assigned 100 shares at $44. Your net cost basis becomes $42.50 ($44.00 - $1.50 premium).

You now own Intel at a discount.

Now You Have 100 Shares of INTEL Stock:

Phase 2: Sell a Covered Call (CC)

The Trade: Once assigned at $44, sell 1 Call contract at a $48.00 strike price.

Premium Collected: You might collect another $1.20 per share ($120 total).

Scenario A (Stock stays below $48): You keep the shares and the $120; repeat Phase 2. You keep repeating the process every 30 days [and over time you accumulate more premiums].

Scenario B (Stock rises above $48): Shares are "called away" (sold) at $48.

Total Potential Profit (One Full Cycle):

Capital Gains: $400 ($4,800 sale - $4,400 purchase).

Total Premiums: $150 (Put) + $120 (Call) = $270.

Final Result: $670 total profit (approx. 15.2% return on the $4,400 utilized).

Key Insights for 2026

Volatility & Premiums: INTC's implied volatility is relatively high at 59.4%. This is excellent for "premium sellers" (Wheelers) as it inflates the cash you receive, but it also reflects significant price movement risk.

Dividend Context: While Intel's dividend yield is currently 0.00%, the high options premiums often exceed what a typical 3% - 4% dividend would pay out over the same period.

Analyst Outlook: The consensus price target for INTC in 2026 is around $47.12. Trading strikes near this level (like the $44 put and $48 call) aligns with "neutral-to-bullish" expectations.

Capital Efficiency: With $5,000, you have a $600 cash buffer remaining after securing one $44.00 contract, which can be used to cover potential fees or slight adjustments.

What is a A Poor Man's Covered Call (PMCC)?

A Poor Man's Covered Call (PMCC) is a capital-efficient options strategy that mimics a traditional covered call by using a long-term, deep in-the-money call option (a LEAPS) as a "synthetic" stock, against which a shorter-term, out-of-the-money call is sold to generate income.

It's cheaper than owning shares but involves more risk than a regular covered call because the long-term option can expire worthless, unlike actual stock, making it ideal for bullish or neutral outlooks with limited capital.

How it works

1. Buy a LEAPS Call: Purchase a long-term (over a year out) in-the-money (ITM) call option, ideally with a high delta (around 0.8 or 80), which behaves somewhat like owning 100 shares.

2. Sell a Short-Term Call: Sell a closer-dated (e.g., 30-45 days) out-of-the-money (OTM) call against the LEAPS to collect premium, similar to a traditional covered call.

3. Generate Income: Keep the premium from the short call as profit if it expires worthless, or close/roll the position for a profit if the stock price moves up significantly.

Key advantages

* Lower Cost: Requires far less capital than buying 100 shares of stock.

* Defined Risk: Maximum loss is limited to the net debit (cost) paid for the options.

* Income Generation: The short call provides regular income, reducing the cost basis of the long call.

Disadvantages

* No Dividends: You don't receive stock dividends.

* Time Decay: The long LEAPS call is subject to time decay, unlike actual stock.

* Risk of Expiration: If the stock price drops below the LEAPS strike, the long option loses value, and you have no stock to fall back on.

When to use it

* When you're bullish but lack the capital for traditional covered calls.

* To generate income on a stock you like but don't want to own outright.

* For a neutral-to-bullish outlook on a stable underlying asset.

Event-Impending Options Strategies

Here are options strategies that you can use based on impending events like product launches, favorable court rulings, FDA impending drug approval for a medical stock, macro events that are favorable to the business, i.e., trade deals, tariffs deals, etc.

When those events happen stock will move dramatically and you can use the following strategies to play options accordingly.

What options strategies are best employed on stock that is volatile on impending events mentioned above?

When a stock is volatile due to impending events (like earnings, product launches, or Fed decisions), the best options strategies depend on whether you expect to profit from the price move or profit from the high premiums before they drop.

1. Direction-Neutral (Long Volatility)

Used when you expect a big move but don't know which way the stock will go.

* Long Straddle: Buy an At-The-Money (ATM) call and put with the same strike and expiration. It profits if the stock moves significantly in either direction, though it is more expensive than other options.

* Long Strangle: Similar to a straddle but uses Out-Of-The-Money (OTM) options.

It is cheaper to enter but requires an even larger price swing to reach profitability.

2. High Premium Capture (Short Volatility)

Used just before an event when Implied Volatility (IV) is at its peak, aiming to profit from the "IV crush" after the news is released.

* Iron Condor: A limited-risk strategy where you sell an OTM put spread and an OTM call spread.

You profit if the stock stays within a certain range after the event.

* Short Strangle: Selling an OTM call and put.

This collects high premiums but has unlimited risk if the stock gaps significantly.

3. Directional Volatility Bets

Used if you have a strong bias on the event's outcome.

* Bull Call Spread / Bear Put Spread: These "vertical spreads" reduce the cost of buying options by simultaneously selling an option further OTM.

This limits both your risk and the negative impact of the volatility drop after the event.

* Calendar Spread: Selling a short-term option (high IV) and buying a longer-term one (lower IV). It profits if the stock remains relatively stable through the event while the near-term volatility collapses.

Important Tip: To avoid overpaying for "inflated" premiums, many traders establish long positions 2-6 weeks before the event, before the IV spike occurs.

Another Good Options Strategy is to Roll Over Existing Options

Remember that options have expiration date and once the expiration date comes the options either worth something or worthless and the options position no longer exist.

To extend the life of the options, you can close it out early and roll over to a new expiration date to extend the life of the options.

It is equivalent to closing out the position early or before the expiration date and buying another options similar to the one that you are closing.

What is the benefit of rolling options?

Rolling Options: Simultaneously closing an existing position and opening a new one with a later expiration or different strike price-primarily serves to manage risk, extend trade duration, and lock in profits or avoid assignment.

It allows traders to defend losing positions, adjust to new market outlooks, or collect additional premium without abandoning the original strategy.

Key benefits of rolling options include:

* Extending Time: Rolling to a later expiration date provides more time for the underlying asset to move in the desired direction, "keeping the trade alive".

If you have a stock that you really like but don't know when the stock is going to explode to the upside, you can buy a LEAPS call. And six months prior to your LEAPS expires, you can roll it to another LEAPS call with the expiration date further down the road, say, another one or two years down the road to give your favorite stock a chance to explode to the upside that you anticipated.

Six months prior to your rolling, your favorite stock either goes up a lot or a little; or goes down a lot or a little; or stays sideway since you first traded. In either of the scenarios, you have a choice to make six months prior to expiry whether to roll it or get out for good -- DO NOT wait until it expires -- make up your mind and take action. Keep this advise handy for your future trades as well.

* Risk Management & Loss Reduction: By rolling, traders can adjust strike prices (rolling up/down) to avoid assignment (e.g., in covered calls) or to reduce the maximum potential loss on a position.

* Locking in Profits: A winning position can be rolled to a new strike price, allowing the trader to secure profits while maintaining exposure to further gains.

* Generating Additional Income: Rolling often allows for the collection of more premium (credit), which lowers the break-even point on the trade.

* Efficiency: Executing a roll as a single transaction simplifies management and can save on commission fees compared to closing and opening positions separately.

Note: Rolling can also be used to defend against, or sometimes, potentially increase losses if the market continues to move against the position, and it ties up capital for a longer duration.

Another typical case that experienced traders often do is avoiding stock assignment by rolling out the position to a new position with an expiration further out in the future. Let's face it, if you let the option expires and your position is facing an assignment, you are obligated to pay the full price of the contract, i.e., $10,000 ($100 x 100) for one contract that has a strike price of $100 instead of just paying the price of the option premium, say, $600 ($6.00 x 100) by rolling the option into the future and hoping it will work in your favor.

You have to decide which is the best scenario for you: getting assigned or pay a little more money to roll it forward and hope for the best. Your current position already works its course and nothing you can change that; so rolling it further is an option depending on your situation. Every trading situation is different, so you have to manage your situation that is best fit your profile.

Examples of Rolling Options

Rolling options involves simultaneously closing an existing options position and opening a new one with a different expiration date or strike price to manage risk, extend time, or lock in profits.

Common examples include rolling covered calls up/out to avoid assignment, rolling out long calls to extend duration, and rolling credit spreads to manage losses.

Key Examples of Rolling Options:

Rolling Covered Calls "Up and Out" is a tactical adjustment to buy back an existing in-the-money (ITM) call option while simultaneously selling a new one at a higher strike price ("up") with a later expiration date ("out").

This strategy defends against share assignment when a stock rallies, allows for continued income generation, and captures additional potential capital appreciation, usually aiming for a net credit.

For example, you sold a $55 strike call, and the stock price jumped to $60.

Action:(you) Buy to close the $55 call (at a loss) and simultaneously sell to open a new, higher strike (e.g., $62.50) call with a later expiration date.

This prevents shares from being called away while collecting more premium.

Rolling Long Calls Out (Extending Time)Scenario:

A stock has risen, but you think it will go higher after your current option expires.

Action: (you) Sell your current, in-the-money call option, and use part of the profit to buy a new call option with a later expiration date (rolling out).

Rolling Short Puts Down and Out (Managing Loss)Scenario:

You sold a put option, but the underlying stock price dropped significantly.

Action: (you) Buy to close the current, in-the-money put, and sell to open a new put with a lower strike price (rolling down) and a later expiration date (rolling out) to reduce risk and give the stock time to recover.

Rolling a Credit Spread (Defensive)Scenario:

A bear call spread or bull put spread is challenged by price movement.

Action: (you) Close the entire spread for a loss and open a new, identical spread structure with a later expiration date to allow the market more time to move in your favor.

Common Rolling Terminology Roll Out: Extending the expiration date further into the future.

Roll Up: Raising the strike price of a call option.

Roll Down: Lowering the strike price of a put option.

Summary

Rolling covered calls "up and out" is a tactical adjustment to buy back an existing in-the-money (ITM) call option while simultaneously selling a new one at a higher strike price ("up") with a later expiration date ("out").

This strategy defends against share assignment when a stock rallies, allows for continued income generation, and captures additional potential capital appreciation, usually aiming for a net credit.

Key Reasons for Rolling Up and Out

* Preventing Assignment (Defensive): If a stock surges above your strike price, you can avoid having your shares sold by rolling the option to a higher strike, thus preventing the call from being exercised.

* Capturing Further Upside (Profit Taking): By rolling to a higher strike, you raise the price at which your stock will be sold, allowing you to participate in further, expected, long-term gains.

* Generating Extra Income: Selling a new, further-out call often allows you to collect more total premium (net credit), enhancing the overall yield of the trade.

How to Execute the Roll

* Buy to Close (BTC): Buy back the current, short-dated, in-the-money call option.

* Sell to Open (STO): Simultaneously sell a new call option with a higher strike price and a later expiration date.

Example Scenario

Assume you sold a $100 strike call, and the stock is now at $105.

Action: (you) Buy back the $100 call.

Action: (you) Sell a new call at $110, expiring one month later.

Result: You have increased your potential sale price from $100 to $110 and pushed back the expiration date to continue receiving time decay (theta) benefits, ideally for a net credit.

Risks and Considerations

Net Debit Costs: If the stock rallies too fast, you might have to pay a net debit (buy back for more than you sell) to roll the position.

Increased Time Risk: Rolling "out" to a later date extends the period your capital is locked up and increases the time risk, as the stock could drop before the new expiration.

"Roll Up and Out" Trap: If the stock continues to rally, you may feel compelled to continue rolling, locking you into a position with limited upside and increased exposure.

This method is best employed when you still believe in the long-term, upward potential of the underlying stock and wis