The Art of War Part 1: Understanding the Battle Tactics of Monument Traders Alliance

Welcome to Monument Traders Alliance!

In this three-part report, we will give you an inside look at the battle tactics we use every single day in The War Room. If you would like to join us but think you could use a quick trading primer before diving into the big leagues, then consider this report series your own personal options trading boot camp. After reading this three-part series, you’ll be well equipped to trade alongside the experts in The War Room.

We admit, options trading seems intimidating at first, simply because it requires more strategic thinking than trading other assets. That’s why we’re offering you this special report series! With it, you can understand the strategies and language behind options trading.

Think of this basic knowledge as your primary weapon.

Part 1 of this guide will teach you the ins and outs of that weapon, and how to use it.

Part 2 will show you how to win a battle, with several critical strategies and principles to keep in mind as you begin trading.

Part 3 will show you how to win a war and earn massive gains with advanced strategies.

Armed with the knowledge presented in these reports, you’ll be ready to join our elite group of traders – and begin using The War Room as your own daily wealth-generating machine.

Lock, Stock and Barrel: Getting to Know Options

An option is essentially a contract. It’s an agreement to buy or sell a certain amount of an asset, usually 100 shares of stock, at a specified date and price. Options allow you to bet on the direction you think an asset’s price will go, just like a normal stock.

If you look up an option on an exchange, it will look something like this:

(1) IBM (2) January (3) $90 (4) Put (5) $700

In this example, IBM is the underlying instrument, January is the expiration month of the option, $90 is the strike price, put is the type of option and $700 is the price premium, or what you would pay for the option.

Options are leverage tools. Instead of ponying up the cash to buy an asset outright, you’re instead buying a contract that gives you the right (but not the obligation) to buy or sell that asset. You can also sell that contract to another investor or simply let it expire with no more financial obligation on your part.
There are two basic types of option contracts: calls, which are bullish assets, and puts, which are bearish assets. Assuming the underlying asset is a stock, as the value of that stock goes up or down, so too does the value of the options contracts for that stock.

The relative change in an option’s price compared with the price of the underlying asset is called delta. The rate of that change is gamma. Gamma is how much the price of the option changes when the price of the underlying asset changes.

An option has two types of value: intrinsic value and time value. For a call option, the intrinsic value is the strike price of the option subtracted from the stock price. Let’s say stock XYZ is valued at $100 and an option contract for 100 shares in stock XYZ has a strike price of $90. The intrinsic value of the call option is $10.
For a put option, let’s take the same $100 stock. If an investor held a put contract with a strike price of $110, then the intrinsic value of that option would also be $10.

The other way of valuing an option is called time value. Time value goes down as the expiration date of the option draws near because there’s less time for the value of the underlying asset to be what’s called “in the money.”

An option that’s in the money has intrinsic value. For an in-the-money call option, the strike price is lower than the price of the underlying asset. An in-the-money put is the exact opposite, and the strike price is higher than the price of the underlying asset.

An option that has no intrinsic value is called “out of the money.” Most options expire out of the money. If a call option’s strike price is greater than the underlying asset, it is out of the money. If a put option’s strike price is lower than the underlying asset, then it’s also out of the money. If the asset price and strike price are equal, then the option is at the money.

If an option has no intrinsic value, it has only time value. The time value is the premium (the price you pay for the option) minus the intrinsic value. Take stock XYZ from my example. If the call option has a premium of $15, you subtract the $10 intrinsic value to get the time value of $5. If the put option has a premium of $25, you subtract the intrinsic value of $10 to get a time value of $15.

The decrease of an option’s value over time is called theta. Along with gamma and delta, these numbers are called “The Greeks.” If you hear that term thrown about in options trading circles, that’s what it refers to. There is a fourth number called vega, which is the rate of change between an option’s value and the volatility of its underlying asset. It’s the option’s sensitivity to volatility. We won’t get into that too much here; volatility is another layer of complexity that will be covered in Part 3.

So now that you know what an option is and how it’s valued, you’re probably wondering how you go about trading them.

Just Getting Started

Before you start buying options, we recommend talking to your broker. Your account will need to be at least Level 2. We would also recommend a minimum of $2,000 to start, a margin account and the time to be primarily a trader. Making money with options trading requires you to be active anytime the market is open. Trading alerts can be issued at any time, orders are meant to be entered right away and multiple trades can be recommended any given day.

Options trading is for the strategic investor, and it’s one of the best ways to make money in the market. When done correctly, the risk is lower and the profit potential is higher than ordinary investments. You just need to put in a little more to get the best results from trading options, and jump through a few hoops first.

The Hoops

If you have no experience, then this guide is for you. The thing is, there’s not a test or anything similar standing between you and options trading. All you have to do is find a broker willing to help you. If you’re already experienced, this guide is the perfect refresher for you.

You can trade with any type of account, retirement or otherwise. Regardless of which one you want to use, you will have to complete an options and margin agreement.

The fact that you can trade options in your IRA itself seems to contradict the notion of riskiness in options trading. After all, why would Big Brother let you trade options in your retirement account if he doesn’t allow you to hold life insurance in there?

You can trade every type of option strategy in your retirement account, except the ones that have undefined risk. The basic options trading methods of put selling, covered calls, debit and credit spreads, etc., are all possible with your retirement or other account.

The only difference between trading in an IRA is that for some options you have to secure the trade with more cash than a non-IRA (where you are able to use margin).

Margin is something you need to sign an agreement for regardless of the type of account. Much like options, it’s a dirty word in most people’s dictionaries.
We often hear people say margin is dangerous and options are dangerous. It’s true, but only if using them is done without the requisite knowledge and caution. And by that logic, buying stocks and bonds is also dangerous if not done knowledgeably and carefully.

We don’t advocate the use of margin to people who don’t know what they’re doing. If you don’t know what you’re doing, don’t use margin and don’t trade options.
Essentially, margin is using other people’s money. In this case, you’re using the broker’s money. It’s often referred to as leverage. The brokerage firm asks you to pony up 15%, 20% or even 50% of the cost of a trade and it’ll loan you the rest.

Margin is like borrowing money from your bank to buy more than you can afford if you pay cash. You can see how this can quickly go wrong in the hands of people who like to max out their credit cards and make only minimum payments.

If the underlying trade goes against you, you’ve got to come up with more cash. That means you can rack up huge losses very quickly based on a very small initial outlay. You can also rack up huge wins.

If you use margin wisely and for the right reason, like selling puts to buy shares at much lower than market prices, it’s a winning strategy.

There are no free lunches on Wall Street and no secret codes for cash. However, there are bona fide strategies that come close by reducing risk. And before you make your first trade, you have to fill out the paperwork we mentioned above.

Now that you have the basics, it’s time to move on to some strategies and tools to get you started. In Part 2 of this guide we’ll give you the strategies and concepts you need to succeed in options trading. We’ll teach you how to win a battle (and money)!

Glossary of Terms

Anatomy of an Option

(1) IBM (2) January (3) $90 (4) Put (5) $700

(1) Underlying Instrument
(2) Expiration Month
(3) Strike Price
(4) Type (Call or Put)
(5) Price Premium

The Greeks

Delta represents the relationship between the option’s price and the price of the underlying asset. It’s the price sensitivity of the option. Delta is the change in option price relative to a change in the price of its underlying asset.

Gamma is the rate of change of delta. It illustrates how much the price of the option changes when the price of the underlying asset changes.

Theta is the rate of change between an option portfolio and time. It’s the decrease in an option’s value over time.

Vega represents the rate of change between an option portfolio’s value and the underlying asset’s volatility. It’s the option’s sensitivity to volatility.

In or Out of the Money

Calls:
• When the strike price equals the underlying instrument, the option is at the money.
• When the strike price is less than the underlying instrument, the option is in the money.
• When the strike price is greater than the underlying instrument, the option is out of the money.

Puts:
• When the strike price equals the underlying instrument, the option is at the money.
• When the strike price is less than the underlying instrument, the option is out of the money.
• When the strike price is greater than the underlying instrument, the option is in the money.


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