Category: David Jaffee

What is Regulation T?

In the United States, Regulation T is available for accounts that have a minimum balance of $2,000.

When you sell naked options using Regulation T, it will reduce your available buying power by around 12% to 20%..

For example, if you sell one contract with a strike price of $100 it means that the notional value of that contract is $10,000 (since 1 contract is 100 shares).

If you’re trading Regulation T, then your buying power reduction is going to be anywhere from 12% – 20% of $10,000.

This means that your buying power will be reduced by $1,200 to $2,000 for every contract that you sell.

What is Portfolio Margin?

In contrast, Portfolio Margin is usually available to accounts with an account balance, or net liquidation value, of around $125,000 or more.  

Overall, Portfolio Margin is more capital efficient than Regulation T and your buying power will be reduced by around 4% to 10% of the maximum loss.  

Portfolio margin stress tests your entire portfolio in aggregate.

As a result, the further out of the money options that you sell, the less your buying power is going to be reduced.

This means that “PM”, or portfolio margin, looks at the risk of your entire portfolio.

Why should you use Portfolio Margin?

In my opinion, if you have an account balance of over $125,000 (the amount varies for each brokerage) then I believe it’s best to always use portfolio margin.

Tastyworks, E*Trade, Schwab and Interactive Brokers all offer portfolio margin for accounts over $125,000 – $175,000.

Portfolio margin works very well, especially when you’re disciplined, because it enables you to sell further out of the money options.

I remember when Amazon fell below $3,200 in late September 2021, during that time I sold put options on Amazon with a strike price of $2,200 or $2,300.

My buying power was only reduced by a few thousand dollars per contract, despite collecting around almost $1,000 for every contract that I sold..

Portfolio margin allows you to make less risky trades, and increase your win rate, without significantly reducing your available buying power.  

You can sell further out of the money options and your trades will be more capital efficient when using portfolio margin. 

Cons of Using Regulation T

Your premium collected as a percentage of buying power used is often significantly higher when using Regulation T.

Since Regulation T is less efficient, you may be encouraged to trade  more aggressively and choose higher delta strikes so that you collect more premium.

This will lead to increased risk.

Major drawback of Portfolio Margin

One major drawback of using Portfolio Margin, particularly when trading naked options, is that during a large volatility expansion event, your excess liquidity tends to drastically decrease because many of your positions may get challenged at once.

As a result, it’s very important to make sure that you don’t trade too large and that you always leave an ample safety net.

If you trade too large, then you may be forced to close out your positions at an inopportune time.

As a result, you always want to ensure that you leave enough buying power to ensure that your portfolio can withstand a volatility expansion event.

Conclusion

Portfolio Margin allows you to take less risk by selling options farther OTM and still collect decent premium, without incurring a large decrease in your available buying power.

Oftentimes, even during periods of low volatility, traders can extend the duration of a trade, while going farther OTM, and make a trade using Portfolio Margin that wouldn’t be nearly as efficient if they made the same trade using Regulation T.

Also, Portfolio Margin allows traders to sell naked options much more efficiently than if they were using regulation T.

Visit https://beststockstrategy.com/ to receive $400+ of valuable free options trading information.

About once a week, David Jaffee of BestStockStrategy.com is asked the same question.

What would happen if everyone started selling options?

When people ask this question, they fail to understand that most human beings, at their core, act irrationally. 

People are self-destructive. If they weren’t, nightclubs, cigarettes, casinos, lotteries, packaged foods, sodas, and other harmful stuff would not exist. 

Human beings are a slave to dopamine, and this is getting worse with the advent of mobile devices, Instagram, TikTok, and similar things that provide people with instant gratification. 

Because people are slaves to dopamine, they engage in short-term, risky behavior to get a dopamine fix. They do this because the consequences of their negative behavior are not immediate.

David Jaffee understands how difficult it can be to sacrifice. 

David Jaffee grew up in a poor area and went to a high school where students did not have to work hard. David Jaffee often skipped class while still managing to get good grades and get into a good university. 

However, when he went to Cornell, David Jaffee realized that his fellow students were very smart, and he had to study hard to keep up with them. 

David Jaffee disliked attending Cornell University. Even though he received good grades, he was not as smart as the grades that he achieved. As a result, he had to outperform, out study, and out work the students that he got better grades than. 

When he graduated college, David Jaffee started working as an investment banker, which was also extremely self-destructive. Nobody who actually cares about themselves should ever tolerate working in a toxic environment like investment banking.

Investment banking is a horrible job. Even the managing directors, most of whom have been working in investment banking for over 10 years, oftentimes hate their lives and possess a lot of self-loathing.

David Jaffee shares this experience because it highlights a bit of a paradox in thinking. Just because someone makes a lot of money or holds a position with a significant amount of prestige does not mean they are any better at engaging in self-destructive behavior than a typical person. 

Many people who have achieved a large amount of success have had to make significant sacrifices that many other people would be unwilling to make. 

Whether you’re a managing director or you’re unemployed, the point is that people are irrational.

Being a managing director at an investment bank is not a rational decision because you’ve had to sacrifice 10 to 20 years of your life in order to accomplish that goal.

Remember that we are slaves to dopamine. Not everyone is going to act rationally and start selling options. 

The best thing to do is not to take any shortcuts and try to behave in a manner that sets your future self up for the highest probability of success.

Don’t act with a short-term focus. Instead, always try to keep your long-term goals in focus and behave in that manner. By doing that, you should be able to consistently earn about 3% per month by selling option premium. 

Don’t try to hit home runs and don’t try to day trade or trade Forex and engage in risky behavior.

Instead, do what many other people are unable to do.

Think of your long-term self and then work your way backwards. To figure out how to be somewhere long-term, consider what immediate steps you can take today to accomplish your goal. 

Some additional reasons why everyone won’t start selling options is that if everyone started selling options then options prices would become significantly undervalued and it would actually make sense to buy options!

If options prices were low, then the expected volatility would be less than the actual volatility, and you could profit from buying options!

Additionally, there will always be people buying, and selling, options as part of vertical credit spreads.

Learn more from David Jaffee by visiting BestStockStrategy.com. Enter your email to receive $400 worth of valuable options trading training materials.

David Jaffee of BestStockStrategy.com typically reserves his deep thoughts for his trading course, phone calls with students, or in his trade alerts. 

However, while this topic is best for experienced traders, David Jaffee is sharing his knowledge on the biggest problem with selling options to help better prepare you for trading options. 

David Jaffee has found that the biggest problem when selling options is that you really shouldn’t trade at all when many other people are making money. 

The reason for this is that when many other people are making money, there is generally a sense of complacency in the market and the market tends to be going up. 

As a result, volatility is really low. During periods of low volatility, the amount of money that you are going to collect when selling options is also going to be extremely low.

This can make it very difficult to sell options, and collect a little bit of premium, when the market is going up every single day because you would make more money by being long stock. 

The problem with this thinking is that when you sell options you’re able to make money when the market goes up, when the market is flat, and when the market goes down.

However, when you are long stock, the only way that you’re able to make money is when the market is going up. 

When the market is going up, and you’re collecting a small amount of premium, you may inherently feel that you’re missing out.. 

As a result, during periods of low volatility, many traders have a tendency to trade too large in order to compensate for the lower amount of premium that they are going to collect.

However, this is a very bad trading strategy. 

In September of 2021 we experienced two or three days where the VIX increased by around 50%. During those days, your existing positions are going to show you a loss. 

If you start trading really large when the VIX is low, during periods when the VIX is trading at about 15, then the VIX can double in price and trade to about 25 or 30 in one or two days.

If the VIX expands to 25 or 30, then almost all of your existing positions are going to end up showing you a loss and you’re going to allocate capital towards defending those positions instead of opening up new positions.

The biggest problem when trading options is that you are going to be tempted to trade often and trade large during the exact time when you should not be trading large and trading often.

The reason for this is that during periods of complacency, long stockholders are going to be making money and the market is going to be going up and hitting new highs. 

You are not going to want to feel like you’re missing out. As a result, you’re going to be trading larger, which is precisely the wrong thing to do when volatility is low.

As of October 25^th, the VIX was trading at about 15 and the market was relatively close to its 52-week high.

So what’s the solution? What is the best way to keep up with the market and to make a lot of money?

The answer is to be disciplined and patient.

David Jaffee recommends trading small and taking advantage of a few outlier moves such as PayPal, which was recently down around 40%, Facebook, which was also down around 20%, and Amazon, which was about 10% or 15% off its 52-week high. 

Besides those three underlyings, and potentially Intel as well, David Jaffee says the best thing to do is to trade relatively small, especially considering that the VIX is trading around 15. 

You have to accept that during periods of low volatility when complacency is high, you have to train yourself to not give into the temptation to keep up with people who are utilizing different trading strategies.

Remember that during times when the market is flat or during times when the market is going down, you are probably going to significantly outperform them. The only time that they’re going to outperform you is when the market is relatively euphoric and it’s constantly hitting new highs and volatility is extremely low.

During those time periods, you, as an option seller, should not be trading very often and you definitely should not be trading a large number of contracts. 

David Jaffee recommends training yourself to be disciplined and not trade much during times of low volatility. You have to remind yourself that your time will come, and it will.

As Jim Rohn once said, “We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is discipline weighs ounces while regret weighs tons.”

If you train yourself to be disciplined, you should be able to achieve annual returns of about 35% to 40% a year. 

Learn more about selling options and practicing discipline with trading by visiting BestStockStrategy.com. 

Enter your email address and receive over $400 of valuable free training.

Good traders are not flashy, and you may be surprised to learn that there is no secret to becoming massively successful with trading profits.

Successful traders are disciplined and consistent.

David Jaffee of BestStockStrategy.com teaches traders that there is no genius or magic to becoming a massively profitable trader. 

Instead, options trading profits requires boring consistency. 

David Jaffee has had zero losing trades this entire year (as of October 2021) and invites traders to check out his monthly YouTube videos where he shows all of the live options trading alerts that are sent to his students.

This success is not magic. Instead, the reason why David Jaffee has such a high win rate is that he is incredibly disciplined and also very consistent. 

Make Good Options Trading Decisions

In addition to patience, discipline, and consistency, profitable options trading is all about nuance and making good decisions.

Nobody is going to remove the anxiety and the responsibility from making decisions.

David Jaffee understands that nothing is going to remove the anxiety from making decisions and having the responsibility be all on your shoulders.

There are no shortcuts when it comes to options trading success. You must be disciplined and patient.

You can continue to look for magic and shortcuts, but in that case, you’ll only find regret.

Jim Rohn once said, “We must all suffer from one of two pains: the pain of discipline or the pain of regret. The difference is that discipline weighs ounces while regret weighs tons.”

David Jaffee believes this is a very important concept for options traders to understand about being successful. 

Options traders have to get over the perception that there is magic or shortcuts to trading.

Instead, the only way that you’re going to be consistently profitable with options trading is by making good decisions and understanding the nuance that goes along with trading.

You will integrate that nuance into your trading strategy with experience. However, there are no shortcuts to making good decisions.

Gain Experience with Options Trading 

David Jaffee with BestStockStrategy.com hopes that traders can use this concept to potentially shift their mindset and improve their trading.

If you want to learn the truth about options trading and how to win up to 98% of your trades when trading options, visit BestStockStrategy.com. 

David Jaffee offers a comprehensive online options trading course that builds the necessary foundation for success, including learning how to be disciplined and consistent with your options trading strategy. 

Sign up for David Jaffee’s newsletter and get started today with $400 of free options trading training materials.

What is the problem with stock market prediction and reaction videos?

David Jaffee of BestStockStrategy.com shared his thoughts on prediction and reaction videos that try to predict stock market crashes, housing bubble crashes, or anything like that.

In David Jaffee’s opinion, it is all BS when YouTube creators are making random predictions, because no one can tell the future and people aren’t going to remember when they were wrong.

Instead, the one time when the creator is right, they’re going to tout that as if they’re suddenly the new Warren Buffett or the new oracle that can predict future price movements. 

David Jaffee believes that the reality is that the stock market is much more intelligent, and random, than any of us. While uncertainty makes people uncomfortable, it’s important, when trading, to gain experience so that you’re comfortable with uncertainty.  

When you think about a large cap company like Amazon, it has hundreds of billions of dollars traded every day. For you to think that you know more about Amazon’s future price movement than the collective hundreds of billions of dollars is silly.

The only reason why selling options on something like Amazon ends up working is that the expected volatility is almost always less than the actual volatility. 

Plus, if you wouldn’t mind owning Amazon at $500 to $600 below its current market price and collecting about $1,000 a contract every time you agree to buy Amazon $500 below its current market price, then it makes perfect sense why selling options on a large cap, strong brand company like Amazon can be extremely profitable.

A lot of YouTube creators, like Graham Stephan for example, make videos where they try to predict a stock market crash. 

David Jaffee believes that these creators are trying to appeal to as many people as possible and use fear as a way of getting you to watch their videos. 

In reality, these creators don’t know anything more than you do. If both you and Graham Stephan were to make 10 predictions, your predictions would be just as good as his. 

David Jaffee does like some of Meet Kevin’s videos because he’s good at crunching data, but the reality is that all that information is already priced in by the market. 

When it comes to the stock market, David Jaffee does not think there’s any value that you can glean by watching videos regarding future economic predictions like housing bubble crashes, stock market crashes, stock market bubbles, when the used car vehicle market bubble is going to pop, or when inflation is going to increase or decrease.

David Jaffee thinks that people are just speculating and they’re feeding into the viewers’ fear. 

The YouTube creator is stoking the fears of his viewers in order to get more people to watch  their videos. 

David Jaffee has noticed a few times where Graham Stephan has said the stock market is going to crash and then Graham is completely wrong. Unfortunately, Graham doesn’t take responsibility for it. Instead, he will continue to put out those types of videos because people continue to watch them, and people forget about his incorrect predictions. 

David Jaffee respects Graham Stephen’s work ethic, and Graham is able to maintain his business and become a multimillionaire by making a lot of sacrifices. 

However, David Jaffee feels that it is disingenuous for YouTube creators to publish a click bait title and stoke the fears of their viewers, making it seem like they have privileged information. 

Then, once a prediction is wrong, they do not call themselves on it or put a disclaimer that they do not know anymore than the viewer watching the video. These creators are pretty much guessing. 

David Jaffee’s issue with reaction videos is that he does not believe the person making the video has any more information or any higher probability of being right than you do.

Oftentimes, the creator will stoke the fears of their viewers in order to gain more YouTube ad revenue, increase their subscriber count, and increase the number of clicks that they get on their videos. 

David Jaffee with BestStockStrategy.com does create videos to get more subscribers, but he is sharing his experiences instead of claiming to know the future. 

David Jaffee has taught more than 1,500 students how to win up to 98% of their trades when selling options through his online options trading course. 

If you want to learn how to be a profitable options trader without watching prediction or reaction videos, visit BestStockStrategy.com. 

You can also receive $400 of free options trading training material today.

While selling options can be risky, I believe in the saying “options are made to be sold.”

Selling options is a great way to generate income. To provide a recap, option sellers want the stock option contracts they sold to decrease in value, eventually becoming worthless. 

When options expire worthless, sellers keep the options premium they initially collected.

Considering options trading

Options are considered a type of security called derivatives –– meaning their price is dependent or derived from another asset.

Trading options depend on strategy, and to some degree, speculation. Traders who feel bullish can buy a call or sell a put; and, if you’re bearish, you can buy a put or sell a call.

Options trading can potentially benefit your portfolio more than stocks, mutual funds, and ETFs.

Call and Put Options

When you buy an options contract, you get the right but not the obligation to either buy or sell the underlying asset at a specific price on or before the expiration date.

Buying a put option allows you to sell a stock. Alternatively, buying a call option gives you the right to buy a stock.

If you’re interested in an options trading guide, puts and calls for dummies, then click here.

Buying / Selling Calls and Puts

Basically, there are four choices a trader can make with an options contract:

1. Buy calls
2. Sell calls
3. Buy puts 
4. Sell puts

Traders who buy contract options are called holders. Meanwhile, people who sell options are called writers of options.

Let’s consider call options first. Buying a call gives traders a potential long position in the asset; meanwhile selling the call will give you a short position.

Holders benefit from options because they have the choice of whether or not to exercise their rights to buy. Buyers prefer options because it limits the risk to only the initial premium that they paid.

On the other hand, buying a put gives traders a potential short position in an underlying asset. Selling the put gives you a potential long position in the underlying stock.

Writers usually will manage or roll a position to avoid having it expire in the money. 

Selling options has a very high probability of profit because there’s a large “safety net” when selling an out-of-the-money (“OTM”) put option. The underlying stock can move up, sideways or down, and the put writer will still make money. 

Option sellers get in trouble if the underlying asset moves more than the expected move and if they trade too many contracts.

Why Sell Options?

Understanding time decay, or the rate of decline in the price of an option, is critical for option sellers. Sellers know that time decay accelerates as the options contract gets closer to expiration.

Once an option seller makes the trade, they eventually want the option to expire worthless, or decline in value so that they can close out the position for a large gain, so they can keep the premium without having to buy or sell shares of the underlying asset.

Overall, selling options is considered a positive theta trade –– which means sellers benefit as time passes because each day the option loses value.

Sellers can benefit by closing their position early and buying back the option at a lower premium – by doing this, they decrease the gamma risk of the position.

How Options Selling Works

To understand how options selling works, you should know about the difference between naked and covered strategies.

Covered Calls

Covered calls involve selling options while holding existing shares.

Investors who have held a long position in an asset can sell call options for a steady income stream.

Covered calls are a good strategy for flat markets, although the seller relinquishes some of the upside potential of the underlying stock when selling calls.

Naked strategies

Naked selling strategies are riskier, but they can be a valuable way to diversify a portfolio, generate income and realize substantial returns.

Basically, naked writing is a strategy where the underlying securities aren’t owned and options are written against underlying stocks.

To justify why a trader may want to sell an option, it’s critical to understand what type of option is being sold and what benefits are expected from selling the options.

Selling Naked Puts

Traders who sell naked put options have a strong belief that the underlying security is going to rise (or not fall enough to challenge their strike price).

Sellers collect option premium when writing the option for the right to buy the shares at a specified strike price.

The writer benefits because they get to keep the premium if the price closes above the strike price.

Selling Naked Calls

Investors sell naked calls if their outlook on the asset is that it’s going to fall, or not increase beyond the strike price. 

Sellers collect option premium when writing call options for the right to sell the shares at a specified strike price.

When selling naked calls, writers get to keep the premium if the price closes below the strike price.

Conclusion

I hope you enjoyed this options trading guide.

If you’d like to learn more, visit https://BestStockStrategy.com and enter your email address to receive over $400+ of valuable free options trading materials.

Both new and experienced traders want to maximize their investments and earn a profit. 

While there are plenty of tips and tricks online that promise quick returns, very few deliver. 

If you find yourself wasting time and money with ineffective strategies, it is time to learn which stock market trading strategy is best. 

David Jaffee of BestStockStrategy.com has taught more than 1,500 how to sell option premium and earn a consistent profit. 

As one of the top options trading coaches, David Jaffee provides a comprehensive options trading strategy that includes risk management. 

This practical approach to options trading is easily accessible and can be learned by anyone. 

Keep reading to learn why you should sell options to make money trading. 

Selling Options is the Best Trading Strategy 

You can win up to 98% of your trades by selling options and collecting premium. 

Selling options is a better strategy than buying options because there is a lower probability for profit when you buy options. 

If you buy options, you will have to win significantly more money during your winning trades to compensate for all of the losing trades.  

By selling options, you can position yourself as a casino instead of a gambler. 

Selling options has a positive probability of profit, and David Jaffee considers selling options to be the only options trading strategy that is consistently profitable. 

Which Stocks Should You Trade Options On? 

Once you decide to sell options, it can be difficult to get started. 

There is so much information available online about the best stocks to trade options on or the best strategies for success.

David Jaffee is one of the best options trading coaches because he cuts through the noise and confusion by creating a simple watchlist of stocks. 

Focus on market-leaders with large market capitalization and liquid options. 

This strategy can help minimize risk and improve your probability for profit. 

David Jaffee likes to trade companies like Amazon, Tesla, JP Morgan, Microsoft, and PayPal. 

Companies with strong brands and large market capitalization are best for selling options because almost all of the available information is already priced into the current market price. 

David Jaffee teaches his students how to get comfortable with their watch list and the trading ranges of each underlying. 

If one stock is trading at the low end of its range, you can sell a put option. If a stock is trading at the high end of its range, you can sell a call option. 

Manage Risk When Selling Options 

Selling options carries unlimited risk, especially when selling call options. 

You can lose money with leveraged products, but David Jaffee teaches options traders how to manage risk. 

While buying options has a defined risk trade, it also has a low probability of profit. 

Buying options is like buying lottery tickets. There is a higher probability of losing money the more times you play. 

Selling options may have higher risk, but there is significantly greater probability of profit. 

Trade Naked Options 

David Jaffee also prefers to trade naked options. 

While some traders consider naked options to be risky, that is actually a misrepresentation fueled by a lack of understanding. 

There are three main advantages to selling naked options. 

1. Selling option premium with naked options maximizes the premium you are receiving. 
2. Trading naked options increases the likelihood that you can easily manage and roll that position forward in the event it gets challenged by not spending money on the lower priced put option and having more flexibility. 
3. Naked options inherently reduce buying power and protect you against the human desire to be greedy. Trading too large gets you in trouble, and you may be forced to close a position for significant losses. 

Learn Successful Trader Strategies 

If you are wondering which stock market trading strategy is best, it is time to consider a comprehensive online options trading course. 

David Jaffee teaches his students how to sell options to earn a consistent profit while managing risk. 

From the benefits of selling options to trading naked options, David Jaffee’s options trading course covers everything you need to know for success. 

More than 1,500 students have taken David Jaffee’s course, including beginners and advanced traders.

Visit BestStockStrategy.com to learn more and receive $400 worth of free options trading training materials.

The best options trading strategy is not a mystery. 

Both beginner and advanced traders can learn how to be consistently profitable when selling options in a relatively short period of time.

In this article, David Jaffee of BestStockStrategy.com provides a summary of his options trading strategy. 

This strategy should allow even beginner traders to win up to 98% of their trades. 

Keep reading to learn options trading for dummies. 

Should you buy or sell options? 

When trading options, you can either buy options or sell them.

In general, David Jaffee prefers to sell options because selling options offers a higher probability of profit.

Depending on which options you sell, it’s not uncommon to win up to 98% of your trades.

When you buy options, your probability of profit is going to be much lower.

As a result, when you win, you are going to have to make significantly more money to compensate for the losing trades. 

When you sell options, it’s similar to turning yourself into a casino or an insurance company.

The probabilities are in your favor when selling options, and you can better manage losing trades. 

Beginner Options Trading Example 

Around August 20, 2021, David Jaffee provided an example of options traders for beginners by focusing on Amazon. 

At the time, Amazon’s 52-week high was about $3773 and the company reported earnings about three weeks prior. 

After earnings were reported, Amazon stock fell about $230 and was trading around $3250.

As a result, Amazon was trading around $500 off its recent 52-week high. 

In that situation, David Jaffee, who is frequently recognized as the #1 options trading coach,  recommended selling put options on Amazon.

By selling an out of the money put option, you agree to buy stock, and collect premium, at a lower price than it is currently trading at.

You also get to choose which strike price you want to sell. 

For example, if you agree to buy Amazon at $2900, then you will collect significantly more money than you will if you agree to buy Amazon at $2500 because you are agreeing to buy Amazon at a price that is $400 higher.

Learn How to Manage Risk When Trading Options 

David Jaffee recommends selling options that are further out of the money because it reduces stress and mitigates the likelihood that the position will be challenged.

In the example above many people would prefer to sell the $2900 put option and receive about $15 per share, or $1500 per contract.

However, David Jaffee would feel much more comfortable selling the $2500 put option and collecting about $400 to $500 for every contract sold. 

The reason for this is that the $2,500 strike will get challenged much less frequently. As a result, there is less stress when trading that option. 

Which Stocks Should Beginners Trade? 

David Jaffee keeps a small watchlist of about 15 stocks and gets comfortable with their trading ranges.

Once he recognizes that one of those stocks is trading at the low end of its range, he will then sell a put option. 

If one of those stocks is trading at the high end of its range, David Jaffee will then sell a call option.

David Jaffee has taught this options trading strategy to more than 1,500 students, and many have found options trading success. 

Call Options vs. Put Options for Beginners 

With call options, David Jaffee recommends being more careful. 

Call options have a higher probability of getting challenged because the market has a tendency to go up more than it goes down.

As a result, if you were to sell a put option that is about 10% to 15% out of the money, David Jaffee recommends selling a call option that is about 20% out of the money.

If that call option ends up getting challenged, you can feel more comfortable because that stock is likely to, eventually, pull back and fall below the strike price.

The velocity of risk is more to the downside than it is to the upside, which means that a stock might go up more than it goes down, however when it goes down, it tends to go down extremely rapidly. 

When a stock is going up, it tends to make a “staircase” pattern where it goes up slowly. As a result, despite the call options getting challenged more frequently, call options also tend to be easier to manage. 

There is a saying in the market that the bull takes the stairs up, but the bear jumps out the window.

That’s why when you sell a put, you are able to collect more premium than you are when you sell a call (because the velocity of risk is to the downside).

If you sell a call option, even if that position gets challenged, then as long as you keep rolling out that position and collecting more premium, you can feel confident that it’s just a matter of time before you make money in that position.

Learn How to Trade Options for Dummies 

This article provides a superficial overview to options trading for beginners. 

David Jaffee offers a comprehensive online options trading course that covers every aspect of options trading in-depth. 

Both beginner and advanced traders can find success by implementing David Jaffee’s options trading strategy. 

Visit BestStockStrategy.com to learn how to trade options for dummies and receive $400 of free options trading training materials.

If you’re new to trading options, then you’re probably eager to learn how to earn profits consistently.

When it comes to calculating how much profit you could potentially make trading options, you’ve probably heard of options profit calculators.

Based on the formulas offered through these calculators, it can be tempting to spend time deciding which options contract will maximize your profits.

If you’re having trouble deciding which trades to enter, check out how David Jaffee teaches his students how to win up to 98% of their trades!

How to Calculate Options Profit

Using an options profit calculator can help you fully understand the potential gains as well as potential risks that accompany a trade.

There are many ways to calculate profits for different options trading strategies.

Let’s look at potential gains made after buying a call option contract. 

To calculate the potential options profit, we need to know:

1. Premium paid for the options contract (the price of the option)
2. Strike price of the option.
3. Current stock price.
4. Number of contracts bought.

Let’s say 2 months ago you bought 3 call options (each contract is 100 shares) for Company Z . The option’s price was $5. The strike price of the option is $30. The current stock value for Company Z is $45 per share.

Options Trading Formulas

1.) Calculate your total investment.

Multiply the option price / premium paid by the total number of shares purchased – 300 shares in this scenario.

$5 x 300 = $1,500

2.) Calculate your total current stock value.

Multiply the total number of shares with the current stock value.

300 x $45 = $13,500

3.) Calculate the total strike price value.

Multiply the total number of shares with the strike price value.

300 x $30 = $9,000

4.) Calculate your profit.

Profit Formula = Total current stock value – total strike price value – total investment

Your Profit = $13,500 – $9,000 – $1,500 = $3,000.

Keep in mind that this calculation applies only if you decide to exercise these 3 options before expiry.

Note that when calculating profit / loss for positions that are not assigned / exercised, it’s very important to keep track of the current market price of the option, and compare it to the price of the option when you entered the position.

Are you interested in studying the most profitable options trading strategies that can increase your income? 

Discover why David Jaffee’s online course makes him one of the internet’s top options trading coaches!

Drawbacks of Using an Options Profit Calculator

If you’re using probability calculations for options profit calculators, these numbers are based on the assumption of stable implied volatility values. 

If the market is volatile, it could significantly change the predictions of the options trade.

It is far better to enter good trades than spending time calculating potential gains. 

As someone that is focused on making profit, options profit calculators can be very distracting.

David Jaffee prefers his students to work on their discipline, patience, mindset and habits.

Other Considerations before using Options Profit Calculators

If you’re learning to trade the way David Jaffee’s teaches his students (by selling far OTM options), very few of your positions will end up getting challenged.

Most brokerages also explicitly show you the live profit and loss for each position in your account. This removes the need to use an options profit calculator.

David Jaffee believes that people should trade a strategy that is as simple as possible and focus primarily on selling naked puts and calls, and / or vertical credit spreads.

Once a trade is made, a closing trade can be entered as a GTC order that will automatically close the position once the sold option can be bought back for 30% – 50% of the original price that it was sold for (therefore allowing the trader to keep 50% to 70% of the premium).

In the event that a position is challenged, the trader can roll the position for a tiny credit, or debit, and use the time premium to significantly reduce the risk of the challenged position by rolling the strike price of the challenged position to one that’s more favorable.

Final Thoughts

It may feel intimidating to enter a trade and not know your potential profits or losses.

As a beginner, it may be best to enter a closing order, at your preferred profit target, immediately after opening a new trade rather than spending time using an options profit calculator.

Want to learn options trading strategies that can make a profit consistently? 

Learn how David Jaffee’s options trading course has taught over 1500+ students how to trade successfully!

When it comes to options trading, there are a few keywords to know. 

You will hear a lot about calls and puts as you learn to trade options and develop your strategy. 

But how do calls and puts work? 

David Jaffee of BestStockStrategy.com breaks down exactly how calls and puts work for his students, including the best strategy for options trading. 

If you find yourself searching for puts and calls for beginners, keep reading to learn how calls and puts work with examples of each. 

Call Option Meaning

The value of an option is connected to the price of the underlying asset. 

In many cases, the underlying asset is a specific stock. 

A call option gives the buyer the option to buy 100 shares of the underlying stock, but they are not obligated to do so. 

The call option buyer can purchase the underlying security at the specified price, known as the strike price, on or before the expiration date. 

A call option seller, or writer, can generate income by selling options and collecting option premium. 

The call option seller collects premium upfront from the buyer, which they keep whether the option is exercised or not. 

How does a call option make money?

For a trader who buys a call option, call options provide an opportunity to purchase a desirable stock at a lower price, while also providing favorable leverage when compared to owning stocks. 

If a call option is in the money, the stock price is higher than the strike price. This means the option buyer can purchase 100 shares of the specified stock at a price lower than the current market value. 

The call option buyer can also make money by selling an in the money option (and closing out the position) before its expiration date. 

For a trader who sells a call option, profit is earned by collecting option premium. 

If the option is not exercised by the buyer, the seller keeps the option premium as profit. 

If the option is exercised by the buyer, the seller may still earn a profit depending on the current market value of the stock. 

Call Option Example

A call option gives the buyer the right to purchase 100 shares of Amazon stock at a strike price of $3,250 per share with an expiration date in three months. 

If the call option buyer chooses to hold the option contract until expiration, they can purchase 100 shares of Amazon stock at the strike price.

The call option buyer also has the option of selling the contract before the expiration date.

In this example, the option seller may collect option premium of $5 per share, totaling $500 per contract. 

The option seller keeps the entire $500 option premium, and David Jaffee has taught more than 1,500 students how to earn a profit selling option premium. 

The call buyer will profit if the stock is trading higher than the strike price, plus the premium paid for the option, at the time of exercise. 

The call seller will profit if the option they sell is able to be bought back at a lower price than they sold it for. 

Put Option Meaning

Like call options, the value of a put option is linked to the underlying asset.

When a trader buys a put option, they have the right to sell 100 shares of the specified stock at the predetermined price (strike price) by the expiration date. 

Investors often use put options to speculate or as part of their risk-management strategy.

For the option buyer, a put option can help protect against downside price action and prevent losses on a stock by allowing them to sell their stock at a predetermined price (the strike price). 

Put option sellers generate income by collecting option premium in this scenario as well. 

Put option buyers have the option of selling the contract before the expiration date, and put option sellers collect premium regardless of the outcome of the option contract. 

How does a put option make money?

In general, as the value of the underlying asset falls, or volatility increases for the underlying asset, a put option will increase in value. 

If the price of the underlying asset increases, volatility decreases, or the option gets closer to expiration, a put option loses value. 

The put option seller is able to keep the entire premium and make money trading options if the option expires worthless (or it’s bought back at a lower price than it was sold for). 

Put Option Example

If the same 100 shares of Amazon in the earlier example are part of a put option, the option buyer pays a $500 option premium. 

If the price of Amazon falls below $3,250, the option buyer can short sell the stock at the higher strike price. 

The put option seller collects the $500 option premium, and they can keep the entire premium, but they can lose money if the market price of the stock falls too far below the strike price.

The reason the option seller can lose money is that the premium collected may not be enough to compensate them for the fall of the underlying stock.  

Should you buy or sell calls and puts?

David Jaffee of BestStockStrategy.com recommends selling option premium as a profitable option trading strategy, as long as it’s done correctly.  

While there is a potential for higher profits by buying options, selling options offers more consistency and less risk. 

Learn more about how calls and puts work, including the best options trading strategy at BestStockStrategy.com and earn $400 of free training materials.