 Hey, good morning, everybody. Lee Lowell here, smartoptionseller.com. Today is Saturday, October 24th, 2020. Welcome to another edition of the Saturday Synopsis. Hey, our free options trading information today. Once again, I got people asking me, Lee, how do I pick the best option strike when I wanna trade options? And so we will go over that today from the buying perspective and the seller's perspective, I'll go over what I think are the best option strikes to buy and or sell. Or just, what are the options strikes in general? What are your choices? What are your options, I guess I should say? So stick around for that after we go through the Saturday Synopsis, we'll get into that free options information. So what are we doing today? Once again, we always look at the charts, see what the markets have done over the last week and get a glimpse of what may lay ahead for next week. So let's jump right in and see what the charts are telling us. Start with the SPY, exchange traded fund for the SP500. This gives us a good overview of the market as a whole. So it tracks the S&P 500. What are we seeing here? Well, over the last month, month and a half, we've had this up and down move, right? We hit all time highs back here on what date was this? September 2nd. So it's been a month and a half, maybe about six weeks. We had this nice little sell off and this nice rebound. Now, what's happened in the last two weeks is that the market has had this little pullback right here. There's two weeks worth of trading and it's sitting right on support near the 20-day moving average and the 50-day moving average. You're both kind of converging. The 20-day is the blue line, 50-day moving average is the red line. And moving averages are a very big deal, very important because people track them, people watch them. So it sort of becomes a self-fulfilling prophecy when markets either pullback or bump up against resistance to the moving average lines. And 20-day and 50-day are very widely followed moving average levels. So we've had this pullback the last two weeks and they're sitting right on the 20-day and 50-day. I would think at this point, as long as there's no major news coming out, the market should start to rebound again. It's just going with the momentum that it's had and had the pullback, had the uptick again. Now it's pulling back. The path of least resistance has been higher. So I have to believe the next move is going to be higher again. We have a couple of big news items on the horizon, at least in the US. I've been talking about this in my newsletters. We have the US elections coming on November 3rd, so less than two weeks away now, about a week and a half at this point. We have the stimulus talks going on in the US to try to get some more money for individuals and businesses that were affected by the coronavirus. And we have Q3 earnings that are happening right now in the US. We've got and international companies as well. Third quarter earnings coming out and this is going to be over the next six, eight weeks or so, but a majority of the main companies are happening in the next month or so. Earnings announcements are big. So those three news items are going to affect which way the market goes. If the earnings come in better than analysts had thought, we will definitely see a move higher. And we're also coming into the most bullish part of the year. November through May, very bullish, especially November, December, January, those three months are very bullish. So if seasonality plays through, the market should see some upward movement. Let's take a look at the NASDAQ. We always look at all three indexes. The NASDAQ has been the strongest of all three, had the all-time top here. Once again, this was right at the beginning of September. So we have a little bit of resistance line right here. Market sold off, come back and just like the S&P 500 had the pullback the last two weeks, sitting right on the 20-day moving average right now, the blue line. So we're hoping that it's gonna catch its footing. It's had a breather now. So we're thinking that 20-day moving average will act as support and the market will move back up, try to take out the all-time highs there in the NASDAQ. Let's look at the Dow industrials, see what's going on there. Same thing, had the pullback the last two weeks, sitting right on the 20-day as well. Here's the 50-day, the red line. So it actually sort of bounced there if we can take a look. Let me widen this out a little bit. So we can see, yeah, the Dow just about bounced on the 50-day moving average right here on Thursday. So we're looking for it to go up again. Dow has to take out this level here and it still hasn't taken out the highs from back in February. So the Dow's got a little bit of work to do. So as it looks now, I have to believe the markets are going to catch its footing here on the support of the moving averages and move higher again. Path of lease resistance is higher as long as there's no major news, bad news events coming out of the US over the next week. So that's what we see for the indexes. Let's take a look at the VIX. We'd like to look at the VIX because we are options traders and the VIX is very important to us as options traders. It shows levels of volatility and levels of fear in the market. Once again, VIX shot up at the beginning of the coronavirus has worked its way all the way back down. This is the volatility of options prices. When panic ensued back in February, March and April, volatility went up. That means option prices themselves went up and as the market rallied, volatility came back down. So we've been sort of flatlining here. Volatility has been flatlining staying around this 27.5, 25 to 30% range right here. Here's our long-term average all the way down here. So it's still above the long-term average but well below the highs that were hit during the coronavirus. So volatility is sort of flatlined here. Even though the market has gone up, volatility has sort of flatlined. So not much happening in the VIX. Option prices are relatively stable priced. So let's take a look at some individual stocks. We'd like to look at individual stocks, see what happened. I want to showcase some stocks that I had talked about earlier. Intel was one of them. Intel was showing this nice W bullish shape pattern that if it broke through the resistance line, it was going to keep moving higher. And that's exactly what it did. It broke out a couple of weeks ago and started making moves up. Had this one big update on October 19th and then it fell back down again to the support line and then here big blow to the longs of Intel. Earnings came out the other day and it just dropped about $5 a share yesterday, October 23rd on Friday. It's a big blow to Intel investors. I don't like to see that looking to get long here. I had sold some bullish put option credit spreads here, take advantage of the move. I got out of those for a little bit of a profit before the big down move. If you're a short-term trader, you definitely don't want to play, have a position over an earnings announcement unless you're absolutely sure which way the market is going to go or the stock's going to go. In this case, if you were long on Intel, it hurt pretty bad right here. So now we have this big gap down in Intel. Not a good thing for them, it's unfortunate. So for the longs, it's unfortunate, but if you're a short-term trader playing options, you want to get out before any earnings announcements. So Intel off the table for now, what else do we have? Let's take a look at Oracle because we've had a position in that in our newsletters have had this on the chart and shown this for the last number of weeks. We had this flag pattern and we were waiting for the breakout of Oracle. It broke out to the upside and we had sold some naked put options, which is what we do, it's smart option seller. And even though the market, Oracle's gone up and just come back down, it's right here, last day right here, still right, it's come back right down to the middle of this triangle range. It broke out around the $58, $59 mark went up, it's come back down and now it's trading right around $59.60 again. So as option sellers, that's good, that works for us, you know why? Because each day that the stock doesn't really go anywhere, we are making profits as option sellers because the option prices start to decay every day. That means the option prices get cheaper. That's what we want as option sellers. So the market could remain stable, can go up, can go down, option selling makes money in that regard. Option buyers, not so good. You need the market to go in a sustained move one way or the other. If it goes up and comes back down again, your option contracts that you bought are not making any money. That's why we like to sell options. Let's take a look at Amazon. Amazon of course is always one of the biggies. Amazon had to move down, had to move up, sort of making a double top here and move back down again. Now it has closed below both the 20 day and 50 day moving average. That happened here during this pullback, bounced back above it and now it's back below both the 20 day and 50 day moving average. Just widen this out a little bit. So if Amazon's gonna get its mojo back and start going to the upside, it needs to get back above these moving averages. The longer that it stays below the moving averages, the less bullish people tend to get. So we wanna see Amazon start moving back up again if you're bullish. Apple, always look at Apple. Same thing with Apple starting to come below the 50 day and 20 day moving averages. We don't wanna see that. It's had the pullback just like the general overall market. So we need Apple to start moving back up again. Now a lot of these companies have earnings next week if I look at my little cheat sheet here. Apple's earnings are coming out next week on the 29th of October. Amazon, what day is Amazon coming out? I don't have that one written down. Oh yeah, the 29th as well. So we've got a lot of big name, the big name players are coming out with earnings over the next two weeks or so. So keep an eye out on that. And like I said, if you're playing short-term options, you don't wanna have a position over earnings. We really need Apple and Amazon and all the biggies to have decent earnings to get us going back to the upside. What else? Netflix came out with their earnings this past week and they didn't do so well. You can see the gap, you can see the gap right here. So now we have the gap. Netflix came down trading below both 20 day and 50 day moving average. So Netflix has got a little work to do if it wants to get back to the upside. So these are the pitfalls or the risks of taking a position over earnings. And if you don't get the direction right, it's gonna hurt pretty bad. You got this big gap move right here. Let's take a look at Tesla. We had drawn this big triangle pattern. It was coiling, coiling, coiling, getting ready to explode to one side or the other. Move to the upside, but now along with the rest of the market came back down over the last week or so. So Tesla's trading right back around to where it was right before it broke out. Sitting on the 50 day moving average right here. So Tesla's sitting right on support. It's gotta bump back up soon or else people are gonna start to worry. If it doesn't move quickly to the upside, they're probably gonna see some sell off coming here. So you gotta be careful with these high price stocks. AMD is another one. Now AMD has been eating Intel in this market. AMD has come on strong the last couple years as we just saw Intel. Not looking so good, earnings were bad. AMD is basically the go-to chip maker for computers these days. So we've got this nice support line for AMD right here. It's right around $74 per share. And along with the rest of the market, AMD has come off as well. It's fallen below the 50 day and 20 day, but I think yesterday it closed right near the 50 day moving average. So AMD wanna see it start to move back up again, but if it does start to fall, you have the $74 level right here. Now AMD has earnings coming out this week as well on the 27th, so that's earlier in the week. So keep an eye out on that. The 74 level is gonna be a big area if AMD falls and it gets through it, it's probably gonna see some more downside action. If earnings are decent, it's going. It's probably gonna try to take out in the next few weeks the all-time highs here around $94 a share. What do we got? Nike is another stock that we've been playing in one of our newsletters. You know why? Because it's balancing nicely right off the 20 day moving average. Had some sideways action coming up along the uptrending moving average. So we're looking for movement back up to the other side. We got a little some resistance here. Can draw a line here. Let me show you how we do that. We draw some lines along the tops, okay? That's how you draw the lines, draw some lines along the top here. And so we want to see Nike get above this resistance line, start making moves up to $135 a share if possible. And when you're in a bullish move, if you got momentum, you're always gonna see the moving averages sloping upwards. That's very important. Now I wanna just show you something else, stock like GlaxoSmithKline, pharmaceutical company. You can see the moving averages are all sloping downwards. And Glaxo just can't get itself, pick itself up. It's just bouncing off of the down trending, down sloping 20 day moving average. So stock like Glaxo, you wouldn't wanna be long here because you've got everything working against you. Okay, so that's just the difference. Moving averages and their slope of the moving averages is very important as well. Okay, so that's it for the individual stocks. Once again for next week, we'll pull up the SBY chart again. Had to move down, bouncing off the 20 day and 50 day moving averages. We need to see some upside action very soon over the next week to get people confident again. But we are coming on very bullish seasonal period of time, but we have these news events lurking in the background. Presidential election in the US, Q3 earnings and the stimulus meetings in the US as well. So keep an eye on the news. Anyway, so that's what we see. All right, so let's get on to our options information for today, free options information. Once again, we're going to talk about how to choose the strike price. What is the best strike price to choose? And that's very dependent on you and what your risk tolerances are and how strong you feel about the move or the impending move of the stock that you're looking to trade options on. So there's no black and white answer, right? There's no right or wrong. It all comes down to what are your feelings of where you think the market is going to go or the stock is going to go. And then you have to play that thought accordingly to the probabilities and how much money you want to risk. So we're going to take a look at some things today. I have my cheat sheets as we always do. Now, for those of you who may be newer, options trading, there's a lot of choices, right? That's why it's called options. There's lots of different options or choices when picking strike prices and expiration dates. So it can be overwhelming at first. It can be confusing. You're not, you just don't know what you should do. So to understand how to pick a strike price, you have to understand some concepts first. You have to understand how option contracts will react to these movement in the stock. And there are three different definitions or there are three different types of strike prices that you can buy. And this is the same for whether you're buying call options or buying put options or selling call options or selling put options. These definitions are all the same. So we'll first talk about the, how you characterize a strike price. A strike price is either going to be in the money, at the money or out of the money, okay? Now we'll talk about in the money calls and in the money puts, same thing. They have a very high delta. They have intrinsic and extrinsic value, okay? These are just some things that you need to know about strike prices. At the money strike prices have a 50% delta and they're only made up of extrinsic value. Every option contract is made up of intrinsic and or extrinsic value. Out of the money options, very low delta has only extrinsic value as part of its option price. Remember, every option has a price or some people call it the premium. And that option price or premium is calculated using a formula that has certain inputs and it's classified as either intrinsic value and or extrinsic value. Now, any option that has intrinsic value has real value to it and those are in the money options. In the money options will always have intrinsic and extrinsic value. The extrinsic value is what's called the time value and it's made up of time, time left to expiration and the volatility of the stock. And I also call it the hope factor. When you buy an out of the money option, that means you're hoping for the stock to move really far in the direction you think it's going to go, whether that's higher or lower. Now the delta, and I've talked about delta before, I've made videos about delta. Delta has a couple definitions as well, but the most important definition of delta is how much the option price is going to move in conjunction with the stock price and how the stock price moves. So if you're gonna buy an option, you want the option price to move, right? There's no other reason why you would buy the option. You want the option price to move and you want it to move big. And if the stock moves big, you want your option price to move along with it. Well, delta is what tells you how much your option price should move along with the stock. And every option strike that you choose has its own delta and in the money options have a very high delta. So in the money options gonna move right along with the stock and at the money options gonna move about halfway of whatever the stock price moves. If the stock moves a dollar, the option price will move about 50 cents. And an out of the money option has a very low delta, maybe 10, 20%, meaning if the stock goes up a dollar, your option price is only gonna move 10 cents or 20 cents a contract. Is that what you want? Well, you have to decide. Now it also comes down to probability versus how much you're willing to spend. Obviously, out of the money options are the cheapest, dollar-wise, so they're not gonna cost you that much. But on the flip side, they're not gonna move that much either because they have very low deltas. In the money options will cost a lot more, but they're gonna move a lot more when the stock does. So you have to weigh, what do I want out of a trade? Do I want a high probability that my option price is gonna move when the stock does? Or do I wanna spend a little bit of money and give up that probability? So it really comes down to probability versus your wallet. Now this is all for options buying. Option selling, on the other hand, like we do, we always wanna sell out of the money low delta options. And the reason is because there's a very low probability that the stock will move to that out of the money strike price. And we wanna have the probability of success on our sides. And I'm going to show you using the probability calculator in a second. And so let's take a look at the other cheat sheet that I have here. And these are just some numbers that I've written down. So you can understand how they end the money and out of the money options work. So we're gonna look at a stock. This is a fictional trade. We're gonna look at a stock that's $100 per share. So the $100 call and the 100 put options are at the money. And at the money means that the strike price is set right at the same level that the current stock price is. So the 100 call and the 100 puts are considered at the money and they have a 50% delta. And let's just assume in this situation the 100 call and the 100 put are worth $5 per contract. And that is made up of all extrinsic value. There's $0 of intrinsic value because if the stock's at 100 and you bought a $100 call or you bought a $100 put, there's no real value in that option yet because it's not in the money. So all of the $5 is just made up of purely extrinsic value. And you always wanna know what your break-even price is when you buy an option. So if you bought the $100 call and it costs you $5, your break-even is $105 that the stock price has to move to. You take the call strike plus the cost of the option and that gives you your $105 break-even price for the stock. Now, if you bought the $100 put option, you have to take the strike price of 100 put and subtract out the $5. So that gives you a $95 break-even price for the stock. So if you bought the call, the stock has to move up to 105. If you bought the 100 put, the stock has to fall to $95 just for you to break-even, okay? So that's made up of all extrinsic value. So let's look at the in the money options here. Now, if you bought a $90 call, the stock's at 100, you bought a $90 call strike prices all the way down here. It has $10 of intrinsic value already built up into the stock into that option. And why is that? Well, if you were to exercise the $90 call, that means you could buy the stock at $90 a share and immediately turn around and sell it for $100. That's a $10 profit. That means it has $10 of in the money or intrinsic value already built into that option price. So the $90 call in this case has both intrinsic and extrinsic value, very high delta. It costs you $11 per contract. And that means the break-even price of the stock is only $101 a share. The stock only has to move from 100 to 101 in order for you to break-even. And the $11 per contract is made up of $10 of intrinsic value and $1 of extrinsic value. The in the money $110 put option is also in the money, also has a high delta and has intrinsic and extrinsic value. If you bought that $110 put, that means you could sell the stock at $110 and immediately turn around and buy it for $100. That means you have $10 of profit or $10 of intrinsic value already into the contract. So just like the 90 call, the $110 put has 11, it costs you $11 per contract. And it's break-even price is $89 per share. I'm sorry, that is in, yes. Hang on for one second. I apologize, I have to fix my numbers here. The break-even price is $99 a share, not $89 a share. If you bought the 110 put, it costs you $11 contract. That is your strike price of $100. You have your $110 strike price minus the $11. That gives a break-even of $99 per share. So the 110 puts, like I said, is made up of $10 of intrinsic value and $1 of extrinsic value. Now let's take a look at the out-of-the-money 120 call and the out-of-the-money $80 puts. Both of those are out-of-the-money, very low delta, and their price is made up of all extrinsic value. The 120 call and the $80 put both 50 cents per contract. That's all it'll cost you, it's $50. And if you bought the 120 call, your break-even price is $100 and 50 cents. You take the strike price and option contract price $120. So the stock has to go from $100 per share, all the way up to $120 and 50 cents per share in order to just break even on that option contract. You think the stock can move that far in the amount of time? Who knows? But that's the chance you take with an out-of-the-money strike price. The $80 puts also costs 50 cents per contract, but the break-even price is all the way down at $79.50. Stocks at 100, stock has to drop all the way down to $79.50 by expiration just to break even. You're not even making any money at that point. So you have to weigh the probabilities of the stock moving that far versus how much you wanna pay. Now it only costs $50 to buy that contract whereas with the $100 put or their $90 call, it's gonna cost you $1,100 per contract. $1,100 versus $50. So it's your wallet versus the probability of the stock getting to that price. With the $90 call, the stock only has to move from 100 to 101 just to break even. So you have to weigh what you want out of the trade. Like I said, high delta in the money options, the stock doesn't have to move very far just to break even, but it's gonna cost you more. I like the high delta options if I'm buying because I wanna see the option price move and so I'm willing to pay a little more. Now on the flip side, like I said, the delta, I mean the probability for option selling is we like to sell low probability trades because you win a lot more with low probability trades. So as option sellers, we'd like to sell out of the money options. We would sell an $80 put as an option seller because it has a very low probability of working out for the option buyer, but a very high probability working out for the option seller. Let's take a quick look at our probability calculator. Now on our website, smartopsonseller.com, we have this probability calculator and I will show you where to get that in a second. Now if you were to buy a stock, just if you bought the stock at 100, what are your odds of winning or your odds of losing? It's 50-50, right? If you bought a stock at 100, based on the next tick of the stock, it's gonna be either higher or lower than your cost basis or buying level. So that only gives you a 50-50 chance of being correct. And let's move this out to December. Let's fix these dates here. December 18th, 2020. And we'll take a look at some examples. Now, if you were just to buy the stock, stock's at 100, okay? And your targets are $100. Let's see what happens. The probability calculator tells you, and it's 25%. So the odds of the stock finishing above or below $100 is 50%. Both of these bottom boxes right here. Finishing above highest target is 50%. Finishing below lowest target is 50%. Here's your targets, it's 50%. You bought it right at 100. And we can even go down to one day in time. And it'll still come out to a 50% probability, okay? So that's what you get when you buy stock. 50-50 chance. Now, if we were to buy an out-of-the-money option, so let's just say we have 30 days left and the stock's got 25% volatility, let's go to our out-of-the-money call strike, the 120th, and see what our probability is. As we know, you want the stock to move from 100 all the way up to 120. What are the chances of it doing that in the next 30 days? Not very good. You have less than a half percent chance of the stock moving that far. Conversely, 99.5% chance of the stock staying below $120. So if you bought that out-of-the-money call, you're not doing so well. Same thing on the downside. Let's see what the chances are of the stock dropping from $100 to $80 per share. Same thing. There's a 99.9% chance the stock's gonna finish above $80. So buying those $80 out-of-the-money puts not such a smart thing. So that's why we like to put options in the smart option seller because we would have a 99.9% chance of winning. That's how we do it, okay? So let's go to show you, I'll show you a website real quick, where to get the probability calculator. Here's our website, smartopsonseller.com. Once again, click on Put Selling Basics. It is our free report on how to sell put options. All you have to do, put in your name and email in the box here and we'll send you a free copy. Learn about put options selling. Anything else you wanna know about us? We have our services tab. We have two newsletter, smart option seller. We sell naked put options, vertical spread trader. We sell put option credit spreads and our 101 coaching if you need some personal attention on how to learn how to trade options. Now, the probability calculator, you go over to the More tab and you click on Helpful Links and it will be right here at the top. Very first one, click on Probability Calculator and we have some other websites here that are good for you to look at as well. Okay, so that'll do it for me today. I was a little longer this video. I wanna make sure you understand everything. So I want to wish everyone a good weekend and have a great trading week ahead. This is Lee Lowell, signing off.