OPTIONS TRADING GUIDEBOOK

OPTIONS TRADING
GUIDEBOOK

THE ONLY BOOK YOU NEED TO SUCCESSFULLY START DAY TRADING
STOCKS AND OPTIONS

© 2020 Illyrian Options - All rights reserved

Options Trading Guidebook

Options Trading Guidebook

A Stock/Options Trading Guide

by
Illyrian Options

&
KV

(founder of Illyrian Options)

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Options Trading Guidebook

Disclaimer

There are inherent risks involved with investing in the stock market, including the
loss of your investment. Past performance in the market is not indicative of future
results. Any investment is at your own risk. Options and stocks involve risk and
are not suitable for all investors.

This book is for educational purposes only as Illyrian Options is not registered as
a securities broker-dealer or an investment adviser. No information herein is
intended as securities brokerage, investment, tax, accounting or legal advice, as
an offer or solicitation of an offer to sell or buy, or as an endorsement,
recommendation or sponsorship of any company, security or fund. The reader
bears responsibility for his/her own investment research and decisions, should
seek the advice of a qualified securities professional before making any
investment, and investigate and fully understand any and all risks before
investing. This information is not intended to be used as the sole basis of any
investment decision, nor should it be construed as advice designed to meet the
investment needs of any particular investor.
All rights reserved. No part of this publication may be reproduced or transmitted
in any form or by any means – electronic or mechanical, including photocopying,
recording or information storage and retrieval systems – without written
permission from the author, except for the inclusion of brief quotations in critical
articles or reviews.
Copyright © 2020 Illyrian Options

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Options Trading Guidebook

Contents

PART I
(Beginner/Intermediate)
I. Intro to the Stock Market………………..…5
II. Financial Crisis (2008 Crash)……………13
III. Basic Technical Analysis…………………19
IV. Market Trends and Movements During

Trading Hours (9:30AM – 4:00 PM)……..25
V. Intro to Options…………………………....33

PART II
(Intermediate/Advanced)
I. How to Trade Options/ Research/

Advanced Concepts……………………....39
II. Advanced Option Greeks………………...50
III. Advanced Price Action/ All You Need to

Know About Charting…….……………….56
IV. Day Trading, Scalping, Swinging/

Indicators…………………………………..70
V. Test Yourself………………………………
VI. Advanced Option Strategies…………….
VII. Emotional Intelligence/

Trading Psychology………………………

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Options Trading Guidebook

PART I

(Beginner/Intermediate)

Options Trading Guidebook

Intro to the Stock Market

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Options Trading Guidebook
Intro to the Stock Market

STOCKS
A stock is a security that represents the ownership of a fraction of a
corporation. One stock is the same as saying one “share”. When you own
stock, you are owning a part of the company; because large corporations have
millions and millions of shares, buying just one stock, does not mean you own a lot,
but just a tiny piece.

■ Example: Facebook (FB) has a total of 2.4 billion shares outstanding (all shares

available for trading), each worth $270, and if you multiply those two numbers
together you find how much the company is worth at that point of time (market
cap). If the stock rises to $300, your profit would be $30 (if you are holding just
one stock, and living in the US, where there are no fees when trading stocks).
Stocks are like auctions, so the more people are willing to buy a certain stock, the
higher the price will be. Not all investors may have the same opinion for a certain
company, so even though you may be willing to buy FB, another investor thinks that
it’s a sell, and that’s how the market is created. Not only do investors change their
minds about a certain stock, but news from the company, or the industry may
influence the price as well.
You may be thinking, why do companies issue these shares, and not keep these
profits to themselves. Well, the the reason is that they need to raise capital, or
simplicity said get more money so that they can use to invest and grow the company.

But wait, there’s another way you can make more than just the $30 profit mentioned
above, and that is dividends!
DIVIDENDS
Another big component of stocks are dividends, which are very important if you are
thinking of holding your shares for long term investments. These are payments that
are made from the company to investors, when the company has a surplus in
earnings. This is a reward you receive for being a loyal investor. NOT ALL
COMPANIES PAY DIVIDENDS!

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Options Trading Guidebook
Intro to the Stock Market

■ Example: We mentioned FB above, but they do not give out any dividends to

investors. An example of a company that does is Apple (APPL), which currently
gives out $0.20 per each share you own, each quarter (that is 4 times a year,
which leads to a yearly dividend of around $0.80 for each share.
Unlike the price of a share, the dollar value of a dividend does not fluctuate daily,
there is no daily chart where you can see how much you will receive the upcoming
quarter. You only get to know how much you are receiving during quarterly
earnings results. Every public company reports their earnings every 3 months, so
every quarter, where they show their financial performance over the past 3 months,
and what their expectations are for the future.

■ You can find these results/reports on the company’s investor relations page or

on the SEC website by looking for a document called ”10Q”. Here, you as
an investors can begin to analyze and understand if this is the right investment
for you that may have growth in the upcoming months or years.

■ A lot of analysts make predictions before these results get published, on what

they expects earnings are going to be for that quarter. If the company beats
those expectations, the stock price might spike up during the day of the
earnings release, and can be very volatile.

TRADING VS INVESTING
It’s simple, trading is when you are buying and selling stocks actively either daily, or
weekly. If you are doing that currently, that means you are a trader and are mostly
looking at technical analysis. To traders, every minute, even every second counts for
them to get in or out a position.
Investing is when you are buying stocks, but are holding for the long-term, that
means for months, mostly years. Here is where fundamentals of a company get
important and dividends make part of your analysis. Regardless of the daily volatility

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Options Trading Guidebook
Intro to the Stock Market

that certain stocks have, investors keep their shares as they believe the long term
vision.

■ Example: FB went public in 2012, for a stock price of $38, if you had invested

since then and believed in the company’s vision your investment would now
have increased more than +600%.

This guide, and mostly us as a group are more focused on trading, and making you
a successful trader. But there is not just one type of trader, we all have our niche,
find yours by understanding the different types.
DAY TRADING
Simple, buying and selling your shares within the same day. Here you are
keeping your positions for minutes, and hours, but closing every trade before the
market closes. Requires discipline and patience for your plays to go in the direction
you plan to, and not get faked out.

SCALPING
Scalping is when you are making profits on small price change, repeatedly (that is
why it is called scalping, because you try to take advantage of all small movements
up and down, not just a large one. When you are a scalper, your trades will last
from seconds to only a few minutes. In order to scalp, you need to have a larger
capital than simple trading, as these are small movements. You also need to have a
clear exit strategy and strict risk management. NOT FOR BEGINNERS!

MOMENTUM TRADING
When you are a momentum trader, you are usually waiting for big moves to
happen either up and down and capture that whole movement. These traders
focus on stocks that are on the verge of breaking out and waiting for the volume to
get in the position. You need to have a good understanding of the stock, and support
your trade with real reasons on why the stock will move in your direction. Favorable
for small capital traders.

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Options Trading Guidebook
Intro to the Stock Market

SWING TRADING
Swing traders are traders that focus on short-term gains, not day trading, neither
long term investing, but rather holding positions for a couple of days, or weeks.
Here you are focused on larger time frames charts, mostly the hourly and weekly, to
see price trends and patterns. Favorable for traders with other full time jobs.

One key concept that you need to understand and pay attention to is volatility.
VOLATILITY
It is the fluctuation of the stock’s price in any period of time. When a stock
creates new highs and lows rapidly, then it has a high volatility. If it is stable, and it
does not fluctuate as much, then it has a low volatility. Well, is one stock better than
the other? That all depends on your trading strategy. If you are looking to trade,
either through day trading or scalping then high volatile stocks is what you should be
looking for. This creates the opportunity for you to get in and out of your positions
easier and a lot faster. Note: More volatile stocks are risker as if it goes in the
opposite direction, there might not be time for you to exit your position at the
right price. Use the VIX index, to follow the volume of the overall market (see chart
below).

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Options Trading Guidebook
Intro to the Stock Market

So, now you might be asking yourself the question “Where do we find these
stocks?”, well we are going to answer that for you right below.
RESEARCH
It all comes down to what you are most comfortable in using, maybe there is a
certain industry that you really are interested in. Maybe you work full-time in that
industry and may know more than the average trader. That can be a starting point on
you coming up with a list of stocks to analyze and watch. Some industries may be:
technology, energy, healthcare, retail.
Another way to find stocks is by using screeners, which you can find in public
resources such as Yahoo Finance, Finviz, or use your brokers platform. This is the
case when you have in mind what type of company you are looking for, and you use
filters that these screeners provide to get a list of potential stocks to invest in. You
can filter based on market cap, dividend yield, volume or even chart patterns (which
we will talk about later on this guide).

But you cannot do all what we’ve mentioned in the last few pages, without having a
brokerage account where you can execute these trades. Not only that, but you also
have the option to paper trade, or simply said, trade with fake money, so you can
practice before risking your own capital. I must note that you will not get the same
emotional feeling when trading this way, as you are not putting your money at risk.
Check out some of the most used brokers below:

■ TD Ameritrade
■ Robinhood
■ WeBull
■ Interactive Brokers
■ ETrade
■ TradeStation

I would recommend you as a beginner have at least two accounts, one of them
being TD Ameritrade as they offer the best platform to chart and analyze your stocks.

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Options Trading Guidebook
Intro to the Stock Market

Robinhood and WeBull are good for beginners as well, but they do not execute as
good as the other brokers (if you have not signed up for these two yet, shoot me an
email and I’ll send you my invitation link, so we both get free stocks when joining).
Also, if your capital is under $25’000, then you will be subject to the PDT
(pattern day trader rule). Which means that you cannot do more than 3 trades per
week, and for you to be an active trader you obviously need more than that. From
the three brokers mentioned above, TD Ameritrade and WeBull offer you a “Cash
Account” meaning that you can make unlimited trades per day, but as long as you
use only the amount of capital you have.

■ Example: You have $5000 in your trading account, and you make your first trade

buying a stock for $100 then selling for $110, now you would think you have
$5110 in your account to trade with but you don’t. With a Cash Account you only
can use $4900 for that day, until your capital resets the next day. This way you
can make unlimited trades without having to worry about the PDT rule, but
you have you have a limit to investing the cash you have on hand.
The other type of account is a “Margin Account”, which a broker such as
Robinhood has as a default account option. With this type of account you don’t have
to wait for your capital to reset when you get out of your position, you have access to
all your capital at any time needed. But, as mentioned above you need to have
$25’000 or more in your account to not be subject to the PDT rule. If you break this
rule and make more than 3 trades (that is buying and selling three times), then
you will be restricted to trade in that account for 90 days.

This is how it would look in your
Robinhood account:

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Options Trading Guidebook
Intro to the Stock Market

You also need to understand that there is not just one way you can buy a stock,
option or any other security, there are different execution methods, which we have
simply described down below. There are a total of five common trading orders, but
the three most important that most traders use are market orders, limit orders and
stop loss orders.
MARKET ORDER
An order placed to trade a security at the current market price. This type of order
will be executed instantly, but you may not get the price you wanted to, because
some stocks are very volatility and the price can change a lot in just a few seconds.
LIMIT ORDER
An order placed to trade a security at a certain price specified by YOU who will be
placing this order. When you go ahead and place this order, you will have to input a
price where you would like to buy or sell, and the trade will only be executed when it
hits and goes above that price. This is a good idea if you have a plan and will stick to
the plan, but if you want to get into the trade as soon as possible, sometimes this
might not work, as mentioned above prices sometimes change very fast so your
order cannot get filled in.
STOP LOSS ORDER
An order placed to liquidate a position when a specific price is reached. This is
similar to the limit order above, but this is when you already are in another position
and have a price in mind when you want to get out. Instead of you watching the
stock constantly, and maybe missing the opportunity to execute, the order will do it
for you.

This is how it would look on your TD Ameritrade platform (thinkorswim)

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Options Trading Guidebook

Financial Crisis
(2008 Crash)

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Options Trading Guidebook
Financial Crisis (2008 Crash)

Even though the idea of this book is not to focus on investing and fundamentals, you
need to understand market cycles and the history of the stock market so you are
best prepared to what’s to come. This section of the book will focus on the 2008
financial crisis.
BACKGROUND AND ECONOMIC ENVIRONMENT
So how did everything lead to the crash of 2008? In 1998 the Glass-Steagall Act
allowed banks to engage in both commercial and investment banking services,
allowing them to engage in riskier businesses. Then in 2001, following the dot-com
bubble, the Federal Reserved dropped rates 11x from 6.5% to only 1.75%, allowing
companies and consumers to borrow at a much lower rate. This led to a spiral in
anything priced in dollars (oil or gold), credit (housing) or liquidity driven (stocks).
Loans of various types (mortgages, credit cards, auto) were easier to obtain. Also, in
2004 the SEC said that banks (Goldman Sachs, Merrill Lynch, Lehman Brothers,
Bear Stearns and Morgan Stanley) now could leverage their investments up to 30-
40x, making their business even more riskier than it was.

Below you can find a simple chart on how mortgage backed securities work,
which will be in detail in the next few pages.

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Options Trading Guidebook
Financial Crisis (2008 Crash)

MORTGAGE
A mortgage is a loan used either by purchasers of real property to raise funds to
buy real estate, or alternatively by existing property owners to raise funds for any
purpose while putting a lien on the property being mortgaged (from Wikipedia). We
also have what’s called a subprime mortgage which is issued to borrowers with low
credit ratings, so obviously has a higher interest rate as it’s riskier. There’s also a
delinquent mortgage where a borrower is late or fails to make a scheduled
payment.

First we have mortgage brokers who are intermediaries that bring borrows and
lenders together. To make it simple, just like a real estate broker, a mortgage broker
is paid a fee to find and evaluate home buyers. In 2008 they provided inaccurate
information to to borrows and lenders to increase the interest rate and their fee.

Mortgage lenders are the ones who are issuing the mortgages, simply the banks. In
2008 they issued sub-prime mortgages to individuals with poor credit ratings or even
no documentation at all.

INVESTMENT BANKS

Banks then, purchased sub-prime mortgages from the lenders, pooled them and
formed a product called mortgage backed securities, which they then sold to their
investors. Just like a stock is backed by the company and their business, a MBS is
backed by the pool of mortgages and their risk. The reason why the banks were
participating in this business is that they got higher returns than investing in bonds,
and because the credit agencies (which we’ll talk about next) were saying that it is a
good safe investment. Because demand increased for this product, banks were
running out of mortgages to pool in these securities, so they started to pack in risker
and riskier mortgages.

RATING AGENCIES

Rating agencies are the companies that assign ratings to corporations that issue
debt instruments, they can be private, public or government entities. When assigning
these ratings they are analyzing the level of debt that the company has, its

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Options Trading Guidebook
Financial Crisis (2008 Crash)

willingness to repay, as well the financial ability to repay the debt. The big three
credit rating agencies are S&P, Moody’s and Fitch Ratings.
They were one of the key players of the 2008 financial crash. The mortgage backed
securities which we talked about, could not been rated and sold without their
approval. And sometimes these evaluations were highly subjecting, which lead to
inaccurate judgments and ratings. As a result many securities were rating AAA,
which is the highest rating, when in reality they were junk securities and not
investible. Investors relied on these ratings, and trusted them blindly, and because
everyone was investing in them there was FOMO (fear of missing out). The crisis
would not have happened without the rating agencies!

GOVERNMENT
The government was to blame as well in what happened in 2008, due to low
regulations. There was not any regulations in place for the credit agencies and their
procedures. Also, as mentioned previously, the SEC allowed banks to increase their
leverage, which made the environment even riskier. Mortgage backed securities
were not regulated at the time, so they were exempt from reserve requirements.
Fannie Mae and Freddie Mac are government-sponsored home mortgage
companies created by the US. Both these enterprises began to support low credit
quality securities in order to protect their decreasing market share. The US
government supported and allowed these actions, which led to an increase in size
and risk.

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Options Trading Guidebook
Financial Crisis (2008 Crash)

HOUSING MARKET BUBBLE
Now that we have a pretty good understanding of the market environment and the
key players, let’s understand how did everything happen. Because of low interest
rates, and large capital inflows from Asia led to an easy environment for credit
purchases, which led to a boom in American housing market. Midyear of 2008,
household debt grew to $14.5 trillion which was 134% of DPI (disposable personal
income, the amount of money that households have available for spending and
saving). There was also a increase in supply of housing, in January 2008 the
inventory of unsold homes was 9.8 more than in December 2007. It’s also important
to note that 40% of home purchases were not intended as primary residences, but
as investment purposes or vacation homes. By August 2008, around 10% of all US
mortgages were either delinquent (go back a few pages if you forgot what this
means) or in foreclosure. These defaults, led to a significant decrease in house
prices all over the US, and most homes were worth less than the original mortgage
loan, which led to further defaults.
This all had a big impact on Wall Street, where investment banks and hedge funds
had invested in mortgage backed securities. Huge losses, bankruptcies and resigns
happened, most notable was the fall of Lehman Brothers. The US government
bailed out numerous huge banks and insurance companies, but it could not save all.
It also gave out a $800 billion stimulus package to help the economy get back to
where it was pre-crash levels. In 2009, the financial crisis hit Europe as well.

Will another crisis related to the banks happen again, that we are not sure of.
After 2008 the US government implemented the Dodd - Frank law which increased
transparency and prevented banks from taking on as much risk. Simply put,
the law placed strict regulations on lenders and banks in an effort to protect
consumers and prevent another economic recession.

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Options Trading Guidebook
Market Trends and Movements During Trading Hours (9:30AM – 4:00 PM)

DISTRIBUTION
As the market nears the top, sentiment moves from bullish to mixed during
the distribution phase. Prices begin to trade again in a range similar to the
accumulation phase, which can last weeks or months. As we’ll see in the next
phase, after the distribution cycle has ended, the market usually reverses its
direction, but keep in mind that it may not always happen.

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Options Trading Guidebook

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Options Trading Guidebook