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I hope you're well and not bankrupt after last week. I'm just now recovering mentally myself. I saw a few WSB converts and some newbies asking for tips, so here you go. V2 of my Options guide. I hope it helps.
I spent a huge amount of time learning about options and tried to distill my knowledge down into a helpful guide. This should especially be useful for newbies and growing options traders.
While I feel I’m a successful trader, I'm not a guru and my advice is not meant to be gospel, but this will hopefully be a good starting point, teach you a lot, and make you a better trader. I plan to keep typing up more info from my notebook, expanding this guide, and posting it every couple months.
Any feedback or additions are appreciated
Per requests, I added details of good and bad trades I made. Some painful lessons learned are now included. I also tried to organize this better as it got longer. Here's what I tell options beginners: I would strongly recommend buying a beginner's options book and read it cover to cover. That helped me a lot.
I like this beginner book:
https://www.amazon.com/dp/B00GWSXX8U/ref=cm_sw_r_cp_apa_OxNDFb2GK9YW7 Helpful websites: Don't trade until you understand: - You can lose your entire contract value when buying.
- You can lose a lot of money when selling "naked", theoretically unlimited.
- How option expiration works.
- Theta (decay) and how it works. This is imperative since it's attrition when buying and a payout when selling. https://www.optionseducation.org/advancedconcepts/theta
- DTE: Days till expiration/expiry
- Options positions with respect to price:
- ITM: In the money; strike is below stock value. Signif
- ATM: At the money; strike is just at or above the stock value, often very highly traded. Can be very effective with moderate - long term expiry.
- NTM: Near the money; strike is above the stock value, but fairly close. Slightly unofficial term.
- OTM: Out of the money; price is at least a few strikes from the current stock price. I would say 10-30% over stock price.
- Very OTM: Not a real definition, this is essentially a lottery ticket. Cheap, but almost certain to expire worthless unless there is explosive movement.
- Understand delta in general and how delta changes with ITM and OTM options.
- Understand all the greeks at a high level, as you get better understand them well. The greeks: https://www.optionsplaybook.com/options-introduction/option-greeks/
- IV, IV crush, and how IV affects pricing. In general, you want to sell when IV is high and buy when the IV is low. Increasing IV is good for held calls/puts. IV drop or crush is generally good for sellers.
- Selling options can be quite beneficial. Once you have a good general understanding, lookup thetagang . Kamikaze Cash has good youtube videos on most theta strategies (linked above). I personally believe selling options (especially cash secured) is much safer and can consistently make you profits. Θ Gang 4 life.
- FOMO and how to avoid chasing a dangerous trend. DO NOT CHASE FROM FOMO!
- What intrinsic and extrinsic value are. Know how they are affected by being exercised/assigned and how theta affects them.
- Understand that some of WSB recommendations are straight up high-risk gambling and factor in the information accordingly. Be careful with Meme stocks and the survivorship bias on YOLO plays. However, I love the sub and think it’s hilarious. It has a lot of valuable information / DD if you are comfortable with the “colorful” language. It’s also great if you like rocket ship emojis.
Basics / Mechanics - Understand the 4 "main" option types. Buying or selling a call and buying or selling a put. Spreads and more complex multi-legged option strategies are based off these in some way (see below)
- You can sell calls with 100 shares of stock or if you own an underlying longer term option; see LEAPS and PMCCs later. Selling calls naked is incredibly risky and often requires Level 4 (very advanced) permissions and usually a lot of capital. I will literally never sell calls naked since I don't want to ruin my life and end up living in a dumpster eating saltine crackers.
- Puts can be sold/written cash covered (cash secured), which means you have the cash in your account to buy 100 shares. Your broker will put this money on hold until the trade is closed. Puts can be sold "naked" using Margin and Level 3 (with most brokers). Your broker will hold a percentage of cost of 100 shares (often 30-40%, 100% on meme stocks) allowing you to sell more puts. This increases your available capital/power as well as increasing risk.
General Tips and Ideas: - Don't EVER leave (short) spreads open on expiration day, close them. (more details below)
- Start off trading very small. Slowly build up over weeks / months. You need to get accustomed to a fifty dollar swing a day, then a few hundred, then a few thousand. You need to ensure you don't get emotional (see below). I started trading options with 5k, then 25k, 50k, and later over 100k. I added my own funds over time and used my gains to build my account. Don’t go all in immediately, that’s dangerous and unwise.
- Especially as you build up the amount of money you have invested, keep it diversified among several stocks.
- Don't go all in on one thing, ever. Be able to take a hit from one stock and not mortally wound your portfolio.
- A company may be doing great, then there's a major product issue out of nowhere. If you are overexposed in one stock this can really hurt you.
- I had to roll options I sold that were about to expire completely worthless because FDX's CEO changed and the stock took a hard dip.
- Don't trade emotionally. If you realize you are emotionally trading for vengeance, you should probably exit the trade and cool off for several days with that stock. Same if you get caught up in a wave of hysteria.
- Have a plan for every trade, ideally with entries / exits that are specific values, ranges, or a set condition. This helps remove emotions. This is super important for strong movements and high volatility (see later).
- Use an options profit calculator from your broker or an online one before entering a "new" trade, especially a complex multi legged trade: https://www.optionsprofitcalculator.com/
- “Rolling” an option: Closing your existing option and opening a similar one at different strike and/or expiration.
- Rolling a call “Up” would be selling a call you own and buying a cheaper call at a higher strike.
- Rolling a put “Down and out” closes your original one and buying or selling one at a lower strike at a longer expiry.
- Better broker interfaces have a literal “Roll” button. I know E-trade does. You can manually do it by selecting relevant contract legs.
- If you have a losing trade, re-evaluate it. If your initial assumption is definitely incorrect, close it. Don't stay in losing trades forever and lose the entire value of the option over stubbornness. If you re-evaluate and you think your assumption was right, hold, potentially consider adding another cheaper option (or buy another call / put). Rolling out sold options can help here.
- Don't try to day trade, especially with options. It's statistically unlikely to be profitable. Day-trading with options introduces extra liquidity risks and is dangerous, especially with spreads.
- Try not to over-trade, you'll likely mis-time the market over time. When I get emotional I over trade, then lose additional money on wash sales. If you scale your entries into positions it should help alleviate your desire to exit positions when they turn badly against you. Whenever I buy calls I do it at larger increments after W almost made me loss my hair; luckily it eventually came back.
- NEVER enter a position on a stock you have no idea about, especially when you read about it online or heard about it from some rando.
- At market open options contracts are often volatile and inflated. Buying during this time can be more expensive. Options are usually cheaper mid-day, I read somewhere 2-3PM is cheapest. I’ve had success around 12-1PM EST after prices settle.
- Try wheeling on cheaper stocks once you get all fundamentals down.
- When selling puts if you are very bullish consider "doubling down"; note this is higher risk. Use the credit from your put sale to buy shares or a cheap call. This can be roughly inversed with puts, except I wouldn't ever recommend shorting shares.
- Learn from your mistakes. You can’t go back in time and beating yourself up (to a point) is useless. Make a physical &/or mental note of it so you don’t do it again. If you don’t learn from it, then beat yourself up so you won’t do it again.
- If you have friends that like to trade, I find it helpful to discuss strategies and planned plays. I talk openly with my close friends about my current holdings and planned trades, it helps keep me accountable. If I get a wide-eyed look, I might be doing something excessively risky or stupid. I’ve over-leveraged myself in calls twice and I knew I shouldn’t have done it both times. When I tell my friends what I did and I’m embarrassed, it exemplifies the face that I shouldn’t have done it in the first place. You will also get ideas for new strategies or plays from them. It’s good to stay versatile and use multiple strategies when appropriate. Beware of group think/echo chambers.
- I recommend NEVER telling someone what to buy/sell and when. I’ll tell people MY plays or what I like and why, but I will not encourage them to emulate what I do. Depending on the audience, I’ll tell them my exact positions along with my exit and entrance strategy. With closer friends I’ll offer my thoughts on their trades (if asked). If my friend is doing something really risky (one of my friends does some scary stuff) I may ask them if they want my advice, and provide it, especially if they overlooked a risk/event. I will not encourage someone to execute/enter a trade since it has a high potential for hurt feelings or animosity all around.
- Don’t fall in love with a stock. Just because something made you money before and you have high confidence in it doesn’t mean it will keep performing. I joke that FDX betrayed me when it started dipping and losing me money. I was over-confident of its bounce-back and sold too many puts too quickly. I’m in several losing trades because of it. However, I will keep good stocks in my rostetracking list or try different strategies or re-enter trades when they change their behavior.
- As you start to both buy and sell options and get more experience in general, you'll start seeing the two sides to every trade. You will likely start adjusting your strategies or trying new trades out because of this. Things will likely click one day. Most/all the greeks and options concepts will become almost second nature. For me this was when I could build an Iron Condor from scratch, which was a watershed moment involving a good understanding of many strategies.
- Understand Liquidity and volume.
- Trading in low volume, low open interest contracts results in wide bid/ask spreads and difficulty having your contracts filled. Look at all the data for a contract, not just the strike and price.
- Monthly Expiration dates typically have better liquidity.
- Multi-legged trades (Common examples are 2-legged vertical spreads or 4-legged iron condors) have more difficulty being filled, especially on bad brokers like Robin Hood. Having very liquid options for all legs is extremely helpful in obtaining timely and well-priced fills, which maximize your potential profits.
- Time in market vs timing the market:
- It is extremely difficult to time the market perfectly. If you wait for the perfect opportunity forever, history has proven you will miss out on gains. Keeping all your money out of the market has proven to be ineffective. Now if there is something serious happening with a stock/the market (like say a new pandemic), don’t go all in. I recommend entering incrementally at dips. If the stock has huge upside potential it may never go down, so it might make sense to partially enter at the current price.
- IMIO selling puts is a great strategy to get into a stock you like, or at least make money off it. I think buying stock in lots of 100 is usually for suckers. Selling an ATM or ITM put (assuming the math works out) on a stock you were going to buy and hold is ALMOST free money.
- I recommend keeping some cash available regardless. If you have a very large account or expect a downturn, hedging with indexes like QQQ, SPY, or VIX or calls/puts may be wise.
- Every trade can't be a winner. You will take some losses, you must get used to it. I don’t like having a realized loss of 1K or more on any trade. However, this will happen, especially with larger accounts.
- As long as you win more often and beat the S&P that year I consider it okay. I’m kind of aggressive, so I consider 20%+ annually good. 30%+ annually is great. 40%+ and I’m dancing. After trading options I am almost baffled by my old belief that 5% annual returns (mostly from dividend ETFs) was “good”. That’s nothing to me now since I’m willing to take risks. Note: While lots of people danced in 2020, realize that’s an insane Bull Run year and is atypical.
- Adhere to your own risk tolerance and never over-extend yourself, especially with margin use. Don’t make huge gambles leaving you uncomfortable. Only gamble with money you are willing to lose.
- My personal strategy is to make safer gains for the year and then enter slightly riskier strategies using those gains. I can be slightly-moderately more aggressive and compound my gains. For me I often sell puts to make money, then when I see a big opportunity I’ll sell a put and buy an OTM or moderately ITM call.
- Understand it’s not safe to try and get rich overnight. However, once you hit big “steps” things may start to snowball. You can enter more positions and take more risks if you choose to.
- For me this when I hit 50k, then 100k. I was able to balance low and moderate risk positions to more significantly grow my account. I’ll even do a high risk thing now and again because my gains can absorb it (assuming I have them).
- I can’t wait to get to 250K, then 500K. I know it’ll take quite a long time, but I am confident I’ll eventually be able to have 500K and (hopefully) 1M in my non-401k trading account with gains and additions from my job. I can only imagine how “dangerous” I will be with that kind of capital.
- If you missed "the next big thing" like AAPL, TSLA, or the time machine I’m building in my basement. Don't get upset, learn from it. Adapt and become a better trader for next time.
- Figure out why a company was so promising, before they mooned. Determine how you would have traded differently in hindsight. Apply those lessons to the next company you believe has long term growth prospects.
- For me that's putting in 1-2.5k towards shares and/or buying LEAPS on it. Depending on my bullishness I may buy “cheap”, fairly far OTM calls. The far OTM options are sort of lottery tickets. If I'm right the (relatively) low cost will have explosive profits; if I'm wrong, they didn't cost that much so it's a calculated loss I’m willing to accept. For more serious bets I’ll buy ITM LEAPS to run PMCCs on. I also like to buy 1-2K in my 401k for very long-term plays.
- The stock market hates uncertainty, it seems to crave the status quo. A shakeup can potential tank a stock, even if it's nothing. With shares you can wait it out, but this can be problematic for options. If you see volatile/uncertain times ahead (politics, disease, manufacturing, earnings, etc.), you might want to reduce your overall portfolio risks or hedge.
Profit Retention / Loss Mitigation - If selling options, it is a viable strategy to close early after a large gain with many DTE left until expiry. See TT videos / strategies on this.
- Don't hold options through earnings unless you literally want to gamble. I like playing on earnings run ups, but that can be risky.
- If you hold options through earnings, IV crush will happen immediately afterwards, devaluing the option. However, if the option is profitable enough, IV crush won’t matter, which will still make money for a call buyer. A sold put sufficiently far OTM will benefit from IV crush, even if the stock dips after slightly bad or lukewarm earnings.
- Don't throw good money after bad. Don't gamble on a recovery if your assumption appears to be wrong or the market is flat out tanking. If you are wrong and still believe in the company, wait twice as long as your original plan (wait for your 2nd entry point vs 1st) before adding to your position.
- Consider using stop losses to lock-in profits on rides up or sometimes use them to prevent losses. Note, stops can be easily triggered in volatile options. Now when I'm up a lot on calls (especially around earnings or large momentum run-ups) I always set stop losses. I have been burned too many times. In December 2020 I didn't set a SL on several thousand dollars of FDX calls I was already up on and I "lost" ~$5K of unrealized gains. If you're up big, don't get too greedy.
- A possible strategy if a stock is on a tear and you have multiple options open: Close some positions (I prefer to do this incrementally if the stock has momentum), but leave 1+ open in case the stock goes into outer space/the floor. Next, set a stop loss with a little buffer below its current movement / range so it doesn't get hit unless the stock falls hard. Finally, watch the stock closely and if it keeps rising, keep moving the stop loss up in little bits incrementally. This will let you keep more profits on a hot streak, but give some protection and secure more gains. It will also help eliminate FOMO if a stock exceeds your expectations.
- Have rules when to roll out, down & out, or up & out. I like TT’s roll at break even or at 1x loss and to always roll for a credit (or for me a very minor cost). Obviously these rules need some monitoring. Know your stocks, the news, and technicals so you don’t jump the gun.
- If you roll early for a credit and you’re right, it’s not the end of the world. You’ll just need to hold longer, which will obviously tie up capital. Sometimes it’s better to tie up some money (especially if you aren’t paying interest) than eating a huge loss.
- Rolling too late can be worse though. I currently have a very underwater FDX put I sold that is over 2x loss, rolling it does almost nothing unless you want to pay a debit or extend it extremely far out.
- On huge options gains, I strongly you recommend taking profits by rolling up/down or incrementally sell your contracts at several different prices (this is why having multiple contracts is nice).
- Rolling up involves selling your initial call, then using a fraction of your proceeds to buy a cheaper, further OTM call with the same expiry; puts are inverse this. When rolling up I like to ensure the new option’s cost is 15-40% of my realized gains. I’ll buy a more or less expensive new optoin based on my convication to the stock and predicted movements. You can also roll up and out to get a further expiry and strike.
- This is monumentally important if you are playing with incredibly high rising stocks or during a short squeeze.
- Sad story time: I completely screwed up when I forgot to roll up, twice, during the GME gamma/short squeeze. I didn’t take my own advice; I didn’t have a real exit or transition plan and I got emotional. It all happened so fast and I was at work; the insanity of the run up and subsequent gamma squeeze caught me off guard. I should’ve clocked out and thought through the situation for 15-30 minutes to form an impromptu plan, then executed trade(s). My moderate risk tolerance coupled with my desire to take profits took over. When the stock partially cratered after a run up, I sold to retain gains. In the heat of the moment I thought the squeeze was squoze and it was going to plummet into the ground and I wasn’t being rational.
- On 1x 4K call I would’ve made an additional 15-25K if I rolled up to a cheaper contract with some of my profits.
- I know I missed out on significantly more with a 2nd call I had. Depending when I rolled it, it would likely have been an additional 25-50k in profits.
- I talked about learning from your mistakes above. This mistake is branded into my brain due to the massive gains I missed out on by not rolling up. I’m furious with myself as I write this 1 week after the GME gamma squeeze, I’m a planner and I didn’t plan. If anything I own is significantly up ever again, I’m rolling up (or at least setting a stop loss). If necessary, I’ll roll up a trade multiple times to keep extracting profits.
- Learn from my mistake so you don’t miss out on gains too. I strongly recommend rolling up when you are up big on a call / roll down when you are up big on a put. This enables you to take profits, stay in the game, and keep extracting more gains.
- If you trade a lot of options, talk to your broker about a discount. I was getting the standard $.50/contract with E-Trade, but I traded over 300 contracts a quarter and was able to get the fee reduced by over $.10 by just asking. I am now doing more spreads and condors, so once my volume gets very high, I’ll ask again.
- If you have a broker that isn’t great and you want to switch, leverage your current trading fees to the new broker. Tell them you’ll move over $### thousand if they beat your current options trading fee per contract.
Trade Planning & Position Management Tips - As you gain experience, start monitoring what kind of Delta, OTM, DTE, etc. you are most profitable with. Use it in your future trades. You'll often see the tasty trade 30-45DTE .3 Delta strategy for selling.
- Before entering a trade, look at rough technicals like resistances and supports to consider your relevant strikes as well as entry/exit points. Look at upcoming earnings & dividend dates as well as stock/market news.
- Consider staggering strikes and expirations for safety and diversity; it’s nice to avoid assignment on 3 puts at once because you used the same strike for all 3.
- Incrementally enter positions on large rises/falls. One of my favor strategies is to buy dips after over reactions. By doing this slowly in large price "steps" it helps combat FOMO and helps you avoid getting slaughtered.
- This will also help you avoid "chasing a falling knife". It also ties into having a plan.
- I set alerts at several predetermined prices and I REALLY try not to enter new trades unless I hit my preset points. It makes me less emotional and usually more effective.
- Don't buy far expiration options with poor liquidity for shorter term plays. I bought 1x GME 1-year+ LEAPS call before the 2021 short squeeze. That was stupid, I should've bought 2-3x 60-120 day calls to have better liquidity. I also paper-handed it and missed out on my lambo.
- If selling options, consider rolling (for a credit) to avoid assignment when it makes sense / meets your plan. Rolling closer to expiration can be a valid strategy to get theta on your side. On the flip side, if the stock moons or plummets it could've been better to roll before it got crazy deep ITM. See rolling “rules” above.
- Covered Calls:
- If a stock has a large movement range, I think it can be worthwhile to wait to open a CC after the last one is closed/expires. I have been more successful waiting for another opportunity vs. opening one immediately on the Monday after the second the last one expires.
- Consider selling covered calls at all time highs/peaks. If you sell a CC and the stock dips significantly, and you think it’s temporary, you can buy to close your CC for a quick profit, then reopen it later.
- If you own Meme stocks, selling covered calls runs the risk of missing out on large gains. On these stocks I typically only sell them further OTM than I normally would or not at all. If I do sell CC on a Meme stock I try to ensure I have 25-100 other shares that won’t be called away.
-Advanced Beginner- Spreads - Spreads (with 2 legs) are neat because they manipulate how delta and theta act. It caps your gains and losses, but you can profit with less stock movement. Try several spreads on a P/L calculator to see for yourself.
- Spreads usually require margin trading.
- Spreads allow you to define max losses (assuming you close before expiration day) and use less capital.
- Experienced traders will open many spreads at identical/similar strikes to heavily profit off movement. Spreads can make you/lose you a lot of money if you are right.
- For example. I could make a $200 premium off a $500 risk trade, max loss would be $300. This is much more effective capital utilization than a naked or cash secured put, however it does not have the same downside protection or “wheel” potential as a sold put. Higher risk, higher reward.
- Vertical Debit spreads: I think of these like mini calls/puts. I personally don’t use them unless calls are outrageously expensive or the break even is absurdly high, but there’s nothing wrong with them. A call debit spread will lower your breakeven and overall cost vs just a call. You can do clever things like making a positive theta call spread if you’re creative. I like doing this since I hate losing money to theta.
- Vertical Credit spreads:
- Very good theta strategy to define downside/upside risks.
- A put credit spread is bullish and allows you to bet on upward movement with less capital and defined losses.
- A call credit spread is a bearish strategy that allows you to bet on downward movement. These are very cool since they allow you to sell calls without selling naked calls, which can ruin you financially. I see selling these as better than buying puts since it’s so much easier to be profitable; to be redundant, Θ rocks.
- https://www.schwab.com/resource-centeinsights/content/reducing-risk-with-credit-spread-options-strategy-0
- I repeat this on purpose: Don't EVER leave short spreads open on expiration day, close them. If you don't close, they better be VERY far from the strike on a non-volatile stock. In after hours a stock can jump/dip below your strike and be exercised without the other leg to protect you. This can lead to massive, life ruining losses. This is not an exaggeration, google this and be scared. It happened to a fair number of people with TSLA. Video explanation: https://www.youtube.com/watch?v=rtVFj9nRRDo&t=315s
- Short Straddle:
Trading Mechanics, Taxes, Market Manipulation - Learn about wash sale rules. They suck and are very easy to activate with options. This will eliminate your ability to write off losses. Over trading can easily cause wash sales. https://www.investopedia.com/terms/w/washsalerule.asp
- Short attacks:
- Learn to recognize these sketchy attacks by hedges/firms. They manipulate the market, it’s been documented countless times. A common one is rapid short selling, which pushes the price down.
- Short Ladder attacks:
- If you plan well enough and the market doesn’t give up on the stock you may be able to use it as a great opportunity to buy the dip.
- Cramer explains how he intentionally manipulated the market when he ran a hedge fund years ago. Multiple links to the video are below since this video gets pulled often, Cramer / The street never wanted this to go public.
- Plan for taxes if you are up big. You may need to over withhold or contribute to taxes quarterly depending on your situation. https://www.irs.gov/taxtopics/tc306
-Intermediate / Advanced Strategies (work in progress)- You’ll notice many of these strategies inverse one another. Options Strategy Finder This website is great for learning about new strategies, you’ll see many links to it below.
https://www.theoptionsguide.com/option-trading-strategies.aspx Short Strangle / Straddle - Both of these strategies profit from little price movement. I recommend using a P/L calculator to determine BE, profit, etc.
- A straddle sells (or buys) two options at the same expiry and strike.
- A strangle sells (or buys) two options at same expiry with different strikes.
- Both these strategies involved selling a Call and a Put for a credit. Straddle uses ATM legs, strangle uses OTM legs.
- Limited max profits and unlimited risk. Due to the unlimited risk, I am not a fan. However, many people like these a lot.
- https://www.theoptionsguide.com/short-strangle.aspx
- https://www.theoptionsguide.com/short-straddle.aspx
Iron Condor and Iron Butterflies - These strategies profit from neutral or mostly neutral stock movement. They receive a credit to open and benefit from theta decay. If your stock is range bound, these may be a good choice.
- These are both 4 "legged" trades, so you will have 4 trading fees to enter or exit the trade. A lower cost or zero cost broker shines here. However, “bad” free brokers will give you poor fills, which may not be worth the discount.
- Condors and butterflies have "wings" which are your purchased puts and calls. The wider the wing the higher the max profit/risk. The condor body can be riskier and skinny with a narrow high profit range or wider for a much greater chance of success with lower payout.
- An iron condor is built by combining a put credit spread and a call credit spread with the same expiry.
- An iron condor can be thought of as a modified short strangle with limited risk, and therefore a bit less profit. I prefer defined limited risk.
- The butterfly is similar except instead of a plateau it has a sharp peak. My personal mental note is that a condor looks more like a strangle with wings, while a butterfly looks like a straddle with wings.
- Pay attention to earnings dates when you open these, I have forgotten to check before and it led to bad trades.
- https://www.theoptionsguide.com/iron-condor.aspx
- https://www.theoptionsguide.com/iron-butterfly.aspx
Long Condor (Debit Call Condor) - The debit version of an Iron Condor. You expect the price to stay inside your defined range. This strategy profits from neutral or mostly neutral stock movement. I’ve never tried this, Iron Condors make more sense to me.
- Limited risk / limited reward.
- https://www.theoptionsguide.com/condor.aspx
Short Condor (Credit Call Condor) - Inverse of an Iron Condor. You expect the price to go OUTSIDE your defined range. These are useful when you expect significant price movement. Credit to open.
- Limited risk / limited reward.
- Can be harder to set up. I want to try these, haven’t yet.
- https://www.theoptionsguide.com/short-condor.aspx
Reverse Iron Condor LEAPs - LEAP Options are options that are long term with many DTE, often over a year until expiration. LEAP calls are great for long term growth plays (downtrends with LEAP puts) or simply when you really like a company and can't afford 100 shares. LEAPs (or any "longer term" option) enables you to sell a PMCC or PMCP (below)
PMCC / PMCP - PMCC or PMCP are poor man's covered call (or poor man's covered puts). They are diagonal options often used with purchased LEAPs. You sell a shorter DTE call/put with a further OTM strike than your purchased call/put. For PMCC/PMCPs it is often recommended to recoup your extrinsic value as soon as possible, some recommend with your first call CC or put sale, to ensure you are positive if the option is assigned early. These have a lot of moving parts and strategies. If you buy a barely ITM call/put and sell a nearby strike call/put you run the risk of the purchased option getting "blown by" on large stock movement and ending up with a very negative losing trade. Keeping your purchased LEAP deeper ITM should protect you. Check your initial PMCC using an options calculation to make sure you don't screw up.
- I'm currently tinkering with these myself. So far I like .7-.9 delta call LEAPS with 30-45 DTE calls on my CC. The goal is to hold the LEAP long term, potentially until expiration, and constantly sell calls/puts on it that expire worthless. Typically the call/put is rolled up and out or down and out if it's going to be assigned, unless you don't want your LEAP anymore.
- Some people look at these many sold CC or puts as profits, I look at them as lowering my cost basis until it's zero (or even negative). I have a page in my notebook I write each CC on my NIO LEAP (I Meme stock sometimes). I find it satisfying to slowly see the cost of the original option disappear. When I originally wrote this I had ~2 years left on it and it's 9-10% paid for; that doesn't even count the actual gains the LEAP has.
- TT states this is considered an IV play, which I partially agree with. You want to buy these during low IV times since an IV drop will hurt your LEAP value. I look at them more as a way to sell calls/puts on a high IV company with a lot of price movement and potential upside/downside.
Advanced Orders - Guide to several order types: https://us.etrade.com/knowledge/events/webinars/order-types-from-basic-to-advanced-07162019
- One Triggers Other (OTO):
- Good brokers will allow you to set these up, some will require a desktop to do it. This lets you link one action to another. In programming think of it like an if-then. You’ll tie a buy/sell to another buy/sell
- Setting trailing stops on options is very chaotic since their price movement can be drastic due to volatility. I prefer to set my trailing stop to a stock.
- What I like to do is set a trailing stop on a stock (or just link it to a stock price drop) and have it sell 1 share I own. Then it immediately executes a market order to sell my call. I’ve had good luck doing this with incredibly volatile plays were stop losses aren’t effective. I’ll often have an order saved and ready saved for when a strong run up starts. When my price alerts start blowing up my phone, I’ll immediately hit execute to turn it on.
Disclaimer:
I’m not a financial adviser, I'm actually an engineer. I’m not telling you to invest in a specific stock/option or even use a specific strategy. I’ve outlined and more extensively elaborated on what I personally like. You should test several strategies and find what works best for you.
I'm just a guy who trades (mainly options) part-time for financial gain and fun. I don't claim to be some investing savant.
I tried to make it easy to skip around if you just want to see the financials or estimates. Just scroll to them if you don't care what the company is or their sectocompetition/management. TL;DR at bottom with final thoughts.
Introduction “
FuboTV ($FUBO) is an American streaming television service that focuses primarily on channels that distribute live sports, including NFL, MLB, NBA, NHL, MLS and international soccer, plus news, network television series and movies.
Launched on January 1, 2015 as a soccer streaming service, FuboTV changed to an all-sports service in 2017 and then to a virtual multichannel video programming distributor (vMVPD) model. As a vMVPD, FuboTV still calls itself sports-first but its expanded channel lineup targets cord cutters, offering a selection of major cable channels and OTT-originated features that can be streamed through smart TVs, mobile and tablets and the web. The service is available in the United States, Canada and Spain as of 2018."
From their
home page:
They are the only competitors in their space of digital sports broadcasting, offer 4K streaming and upscaling of live sports, cloud DVR capability ranging from 250 or 1000 hours on standard plans, and is available on Roku, Apple TV, Amazon Fire TV, Chromecast, Samsung Smart TVs, Xbox One, Android TV, Android Smart TVs, and Android/iOS smartphones and tablets, with plans ranging from $24.99/month to $79.99/month (not including add-ons).
They have also recently acquired one company and have made plans to acquire another to allow for in-house sports betting. They have stated in a press release that they plan to release a sportsbook before the end of the year. This will push them into a broader spectrum outside of only TV and sports streaming, and into the sports betting sector along with DraftKings ($DKNG), FanDuel ($PDYPY), and Penn National Gaming ($PENN).
Plans and Add-ons FuboTV offers three standardized plans as of February 8, 2021: the Family plan is priced at $64.99/month (normally $75.97/month), Elite at $79.99/month (normally $100.95/month), and Latino Quarterly at $24.99/month, along with offering additional add-ons. Each plan offers a range of channels, cloud DVR capabilities (which allows fast-forwarding through commercials), and casting to multiple devices simultaneously. Only the Elite plan does not offer a 7-day free trial (
Channels page). The Family plan includes 117 channels (mostly news and entertainment with roughly 40 that offer sports, including ESPN), up to 250 hours of DVR space, and casting to 3 devices at once. The quarterly prepaid includes a free upgrade to 1000 hours of DVR space and 5 casting devices at home with 3 on the go (
Channels page). The Elite plan includes 164 channels (includes an additional “47 entertainment channels”), up to 1000 hours of DVR space, and casting to 5 devices at home with 3 on the go. This plan does not offer a quarterly prepaid (
Channels page). The Latino Quarterly plan includes 250 hours of DVR space and can be streamed on up to 3 devices at once, but only has 32 channels. This plan needs to be prepaid every 3 months for a total charge of $74.97 and does not offer a monthly service (
Channels page). Upgrades include additional DVR space--1000 hours for an additional $6.99/month for the Family and Latino Quarterly--and increased device casting--an additional 2 devices at home with 3 on the go for another $9.99/month for the Family and Latino Quarterly plans. You can also add a variety of channels and sports packages (the Latino Quarterly has fewer channel add-ons compared to the Family and Elite plans, which both have the same channel varieties). Sports Plus with NFL RedZone is an additional $10.99/month, but includes all professional and college sports broadcasting services for football, basketball, baseball, hockey, tennis, fighting, etc. (
Channels page). Fubo has recently removed its former Standard plan, which included only 65 channels, up to 2 casting devices, and only 30 hours of DVR support for $60/month.
Financials and Growth Fubo has yet to file an annual report as they have gone public in October of 2020, but they have filed a
10-Q for Q3 2020. All numbers in thousands.
Assets-
Between December 31, 2019 and September of 2020, assets have increased from $368,225 to $799,313 (a 117% increase) . Total current assets increased from $17,973 to $58,016, but accounts receivable decreased from $8,904 to $6,975--this may be attributed to the increase in prepaid subscriptions which increased from $1,445 to $12,177 which shows strong customer satisfaction and retention.
Liabilities-
Liabilities have increased from $145,049 to $290,376 (a 100% increase). The largest contributors to their liabilities are “Due to related parties” increasing from $665 to $85,847, “Warrant liabilities” increasing from $24 to $28,085, and “Accounts payable” from $36,373 to $61,679. Long-term borrowings have decreased from $43,982 to $25,905.
Revenues-
Subscription revenues increased by $53,433, totaling $92,945 for the year. Total revenues including advertisements and licensing have increased by $61,202, totaling $112,669 for the year and an increase of 47% YOY. Q4 revenue is estimated to be between $94,000 and $98,000 which would be a 77-84% increase YOY.
Expenses-
Subscriber related expenses total $114,315 for the year. Total expenses have totaled $500,249 for the year.
Subscribers-
Ended Q3 with 455,000 paid subscribers, a YOY increase of 58%, and plans to end 2020 with over 545,000, an increase of 72% YOY.
Competition Its closest competitors are Hulu + Live TV (owned by Disney ($DIS)), YouTube TV (owned by Alphabet ($GOOG)), and Sling TV (owned by Dish Network ($DISH)).
Hulu + Live TV
- Includes league networks
- 50 hours of free DVR (200 hours for $9.99/month)
- More than 74 channels
- Unskippable ads on DVR without upgrade to 200 hours
- 2 streams at a time
- $64.99/month
- Can add ESPN+ and Disney+ for an additional $7/month
YouTube TV
- Includes league networks
- Unlimited DVR storage
- More than 85 channels plus YouTube Red Originals
- 3 streams at a time
- Sports Plus package for an additional $10.99/month
- NBA LeaguePass for an additional $40/month or $119.99 annually
- Starting at $64.99/month
Sling TV Blue
- Includes league networks
- DVR up to 50 hours (200 hours for $5/month)
- More than 45 channels
- 3 streams at a time
- Sports Extra package for an additional $11/month
- Starting $35/month
- Can be combined with Sling TV Orange for a total of $50/month
Sling TV Orange
- Includes league networks
- DVR up to 50 hours (200 hours for $5/month)
- More than 30 channels
- 1 stream at a time
- Sports Extra package for an additional $11/month
- Starting at $35/month
- Can be combined with Sling TV Blue for a total of $50/month
The vMVPD Sector Cord-cutting has become increasingly popular over the last few years with consumers dropping traditional cable and satellite networks in favor of streaming services--such as Hulu, Netflix, Disney+, etc.--and vMVPD services.
In 2019 alone, 6.3 million people cut their cable connection, totaling 39.3 million. In a survey of what they might miss most from cable networks, 52% said they don’t miss anything, 23% missed live events on TV, 22% missed news, and 19% missed live sports. Although not all of those that miss aspects of cable will pay for another subscription service, the sentiment exists for a sports-focused platform that offers other large networks as well.
Another report by Parks Associates reveals that 17% of vMVPD subscribers switched from traditional TV within the last twelve months. In the same report, a survey conducted on current broadband households determined that 43% were “likely to switch to a… vMVPD within the next 12 months." The potential growth exists for the live digital broadcasting space, although it is slowing down.
With the spread of COVID and quarantines, people have been spending more time at home. When things open and quarantines end, that will be the true test for these providers as people will spend less time watching TV.
The Sports Betting Sector Legal sports betting has taken a huge leap in recent years with the introduction of online sports betting; the ability to place wagers from anywhere at any time and have instant gratification has boomed with its slow legalization.
This sector has a forecasted value of $150 billion with other competitors already having a completed project and vast market share. In 2019, DraftKings ($DKNG) and FanDuel (PDYPY) controlled 83% of the market share.
FuboTV plans to join into this space with its own sportsbook. Their recent acquisition of Balto Sports in December of 2020, whose business was in simulating fantasy sports games, is Fubo’s first step into sports wagering. They plan to create a free-to-play gaming system alongside online sports wagering. Their next planned acquisition, which was announced in January of 2021, will be to acquire Vigtory, a sports betting and interactive gaming company. According to BusinessWire, they plan to utilize Vigtory’s “sportsbook platform and digital gaming assets, and its consumer-driven betting technology, to develop a frictionless betting experience for fubo’s customers."
These recent acquisitions set Fubo up to create an all-in-one viewing and betting experience, which could add new customers to their subscriber list and seal them into online wagering.
It has been over two years since the Supreme Court has denied the federal ban on sports betting, which would have made online betting illegal in all of the United States. Currently, more than two dozen states have legalized sports betting, but most have only legalized in-person betting. More states may be willing to legalize to take advantage of the increased revenues and taxes associated with gambling and online wagering. As of 2020, six additional states plan to legalize some form of betting, although some are only allowing in-person. There are an additional 14 states that are considering the notion to allow legal gambling, whether in-person, online, or tribal.
Management and Investors David Gandler - CEO / Director / Co-Founder
Appointed as CEO and director in April of 2020. Prior to Fubo, Gandler had a 15 year career in marketing and advertising in local broadcast and cable TV within both general and Hispanic markets at companies such as Time Warner, Telemundo, and Scripps Networks Interactive.
Alberto Horihuela - CMO / Co-founder
In charge of marketing, Horihuela was head of Latin America for SVOD service DramaFever.
Simone Nardi - CFO
Nardi has worked as SVP and CFO of Scripps Networks Interactive where he was responsible for the finance and strategic planning for the company’s international business. Was also a key player in refinancing TVN S.A.’s billion dollar debt.
Large Investors
- Islet Management, LP with 5,108124 shares
- Morgan Stanley with 3,317,333 shares
- FMR LLC with 1,262,907 shares
- BlackRock Inc. with 956,678 shares
- Merger with FaceBank for $100 million revolving credit
Analysts and Estimates Average analyst ratings put Fubo at a Buy to Strong Buy rating with an average price target of $45.50 with a high of $60 and a low of $30. EPS estimates are estimated to be -5.23 for 2020 and -1.64 for 2021.
Currently has a short float of about 75%, but the short volume has been holding at roughly 15-20% over the last month and has drastically declined from its October short volume of over 50%.
Originally valued at $700 million less than a year ago, a current valuation of $3.19 billion is respectable for this company and is on par for its current performance.
Risks - Marketing fails and Fubo is never known as a household name, so consumers stick with other more known providers
- Their sportsbook fails and becomes dead weight and wasted money
- Subscriber count and streaming drops as quarantine lifts, reducing revenues while maintaining expenses
- Consumers opt for cheaper options
- People paying for the sports package cancel when the season is over, creating a boom and bust cycle if not managed correctly
Final Thoughts / TL;DR With its drastic growth over the last year (400% in the last 4 months), support from FaceBank and well-known investors, and plans to join the sports betting sector, FuboTV has potential to become a household name and grow well beyond its current valuation by combining both sports broadcasting and online sports betting into one convenient place. Although unlikely to overthrow any of the current forces, it can become the best live sports broadcaster that people can turn to when they cut cable but want to keep live sports. It has many hurdles to overcome (creating their sportsbook, better marketing, increasing subscriber count, etc.) before it is any real competition to its already established competition.
At a $3.19 billion market cap and very high (75%) short interest, it will be very difficult to realize consistent growth, but it is on par for a company with almost $100 million in revenue.
My Position 25 shares at $47.30
Edit: edited final thoughts/TL;DR
Please provide feedback! First time actually researching and compiling information for a company and not just reading about them on here. Also, please ask questions to clear up any confusion; it was kinda hard to put everything together neatly, so I might have accidentally left stuff out or oveunder explained some things.
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