Example Trading Plan for 1 ATR Strategy | Long Options
so well good morning everyone welcome to long options it is monday at high noon eastern and we meet each and every monday unless it's a holiday monday so next monday everybody will be enjoying labor day and none of us will be laboring in our usual pursuits so there will be no live class next monday but you can you know binge watch the archives if you like um in any event i woke up this morning thinking okay what is the market going to throw at us today and what are we going to do with it so that's what we're going to talk about today is you know how to interpret um what is going on and how we might as long option traders choose to take advantage of that so stick around there's going to be lots of great stuff coming your way um i i'd like to thank everybody who is joining us here live um so hello to jeff who had you know signed in way early and and gary and fayez and seoul and rebecca and deborah and todd and ap514 and uh dunamis um and and the rest of the gang glad to have you all here um i love that you guys you know tune in early um in the chat and and start conversations and um i think it just really enforces the sense of community um that we all enjoy being part of um if you've got questions we also have connie hill who is a friend and fellow coach we call ourselves the dynamic duo actually you guys started calling us the dynamic dynamic doing duo and it just kind of caught on so connie brings a wealth of experience if you've got questions and you're with us live don't hesitate to type them into the chat and we will respond to them between connie and i as best we can um also know that if you are watching this in the archives you two have a voice you can just type in your comments down below i do look at those um each and every trading day and i'll get back to you pretty quickly the last way for connie and i to communicate with you and you with us at the armstrong underscore tda is my twitter handle so join us where the bluebird flies and um we are posting content on a daily basis that we hope you will find helpful and um connie's is at sea hill underscore tda i know that she'll type those into the chat as well so let's get through our important information so we can get out to the platform um where the magic happens and kalunda is saying i'm here and ready to learn so if you're here and you're new you're here for the first time please feel free to type a greeting into the chat so that we can welcome you also know if you are new um there's a subscribe button over here in the corner and just hit that subscribe button because you know by the end of this class i think you're going to feel that you won't want to miss it and so you can subscribe and turn on notifications and then you'll get a reminder every monday when this class is about to happen okay so uh know that this content is for education and informational purposes only none of it's to be construed as a recommendation on the part of td ameritrade all myself know that options involve risk aren't suitable for all investors if you're new to td ameritrade you have to apply for option trading privileges however in your paper money account you can trade to your heart's content any kind of strategy that you like i just don't want you to be caught off guard when you go to place your first trading your live account it's like hey how come it won't go through yet you have to apply for it also know that with long calls and long puts how much can we lose we could lose the entire cost the amount we paid to get into the option and we have seen examples where we've either done that or come close to it so we have to position size appropriately know that all investing involves risk including the risk of loss know that when we use a stop loss order it doesn't guarantee that we're going to get out at a particular price and we could be in for a bit of a rude surprise on occasion and end up getting out much lower than we anticipated um the paper money application on thinkorswim i think it's brilliant looks like smells like feels like real money but there are some differences and one is that you know we don't talk about short options in this class but a short option will not be exercised early in paper money can it be exercised early in a real account um a live account yes it can okay so what's on the menu for today and this always looks like you know do i change it and actually i do but you know we're gonna do a quick market overview we're going to place some new example trades and i want to spend a few minutes on trade management we also have some trade management mini sessions there will be another one coming up in the next day or so so watch for that it will be posted in either the long options class um playlist or i have a companion class to this called um trading a smaller account and so it'll be posted there if i'm doing anything other than long options now how do you find it i'll show you okay how we find that um and the other thing i do is i always post them on twitter as soon as they're available with some kind of crazy gif to catch your attention um so make sure you're following me on twitter and then you'll get a heads up on when those things are appearing okay so let's get out to the platform and see what is cooking in the markets okay so we're going to come to the s p and you know the market today um connie i'm going to let you get that question on weekly and monthly options and i'll point it out when we get to the trade tab also but um here's our s p so you know this is over the last nine months if if we look at year-to-date we are still down trending year-to-date but from june um you know to the to the tippy top like at one point people were saying oh we're no longer in a downtrending market because the market had come back almost 20 19 where are we now well we're still up 12 from where we were but year to date you know we're we're still in the hole um and and probably to the tune of about 10 so if i come down and say show price as a percentage you know we're still down you know 15 16 year-to-date and so you know that does not um warm the hearts of the bulls and so um you know what terry i've got a question in on that and i'll answer that in a minute okay um so you know when we look at this it doesn't warm the hearts of the bulls luckily for us in this class we can kind of be ac dc we can be bullish or bearish because we can trade long calls bullish or long puts bearish and it's been such a crazy market this year you know although in previous years we've done more trend trading using options where we could buy an option or where we might choose to buy an option and just let it follow the trend we haven't had a lot of confidence this year in trend continuation if you will so we have really focused a lot on a short-term strategy called the one atr strategy and i want to walk you through as part of today and i didn't put it on our menu um but as part of our first example i want to walk you through the guidelines are the rules that one might include when trading this strategy because i'm getting asked about that a lot in the comments um for people watching the archives and occasionally on twitter as well and so i thought that we could go through that today but the s p you know we had this really a rude pullback on friday you know after we've been just trending up nicely um you know and if you come to my twitter account if i come over here you can see at the end of um where am i here let me get i was scrolling through this morning looking at comments uh you know the nasdaq on friday was down four percent only two stocks in the green and you know all 11 sectors were down only five stocks on the s p 500 so 99 of stocks were down um oh i usually post what the percentage is i think we were down over three percent on friday so i mean it was a yeah it was a bloodbath on friday um so you know after we have this big thing on friday we close below the 30-day moving average on the s p 500 today it looks like it's trying to rally and so does this mean that this latest bull run is over not necessarily but it could be you know so what do you do with that well not necessarily could be it's like gee that's frustrating isn't it well we're gonna we're gonna have a look but so just kind of bear with me and she's saying like she sounds undecided well yeah hello how many of you are totally confident in what is gonna happen in the market in the next month how many of you are totally confident go ahead and type into the chat if you're totally confident because if you're not we're going to trade based on this strategy of we're not totally confident but what could we do rather than just sitting on our hands and there are days when it's appropriate to just sit on your hands and say i'm gonna wait um you know but you know we're seeing the same thing in the nasdaq over four percent down on friday you know it looks like it gapped down on the open looks like it's trying to rally um but who knows where it'll be at the end of the day we're still down 24 here today yeah yeah larry is saying ha like his f nope no one knows uh ap is voting for downtown down yeah yeah so you see i i am not alone and you know the russell looking similar right like 20 down 17 year-to-date we've had a nice rally pulling back it's just below the 30-day moving average trying to rally trying will it be successful who knows and we come and we look at the dow like and you know we were talking about this down trending range it's been in all year it is actually down the least of the four major indices but i mean it's still it looked like it broke out came back to retest it's like oh you thought this was a breakout yeah fake out yeah so you know here we go here we go back in this range and you know it's trying to hang on here and and will it be successful we don't know now the one thing we do know is the energy sector has been the strongest sector over the last month and so if we say okay well volatility's up again today was up dramatically on friday is this a surprise yet no and is it a surprise that you know it opened higher and is now pulling back a bit no because it looks like the market opened lower and is trying to rally and so you know when we look at energy though energy kind of seems like oh is the market like getting beaten up like yeah we hardly noticed because yes it was down um but it was down the least of all the sectors on friday it was the best of the worst so to speak so yes it was down a bit on friday but today i mean it's still above the 10 still above the 30. and so you know if we were looking for bullish opportunities and if we're looking at things like the s p 500 and saying okay yes down trending year-to-date but it has been uptrending it's pulled back to the 30-day moving average closed below but looks like it's trying to rally if we're undecided we want to when we come to individual stocks we want to take a look at what is the trend of that stock rather than just what's happened in the last couple of days and then we want to look at sectors where we believe um you know that there's opportunity um yeah i tend this year i've been using the year to date a lot but there are times that we'll back up and we'll look at like what's gone on over the last two or three years so i mean when we take a look at the last three years the shenanigans of this year is kind of put in perspective isn't it so really uptrending dramatically over the last three years and you know it's still if we take a look at the last three years we're still up 36 you know but this year you know so this started december 27th um you know this year one of the worst first halfs in market history yeah yep okay so moving along here i wanted to bring up a stock that might benefit from the latest you know do politicians and well there was a fed meeting in wyoming don't know if any of you heard about that because powell spoke on friday and the result was this pullback we saw in the market but there's this little stock called plug and you know it you know renewable energy in the renewable energy space it's an industrial stock i just heard the ceo speak and he said based on you know this focus on migration to more renewable energy they're expecting to become profitable um you know with what they're doing and investing in i think by next year and to have very healthy profit margins by 2025. so i mean they're definitely playing the long game but we're looking at a stock that's gone from a dollar a share you know where some of us would have said yeah a dollar a share is too risky we don't want to look at anything maybe under 10 a share you know up to 63 and it's kind of like humpty dumpty and so many other stocks you know had a great fall but it seems to be coming back around the corner and could we take advantage of that so today it's been kind of up and down a bit but it's pulled back to this um 10 day moving average and you know some i i've looked at it and it's been on again off again like a minute ago it was this was a bullish candle um and you know and then it's been bearish so but if we looked at this and said could we do a one atr strategy on this um and and these you know for the price of the stock these are very high premiums and so some might say well i would rather do a long call vertical to kind of mute the volatility of the stock but is it heavily traded when we look at the 30 dollar strike 11 000 contracts 466 traded today and you know it's three dollars and five cents we've got a seven cent spread so you know we heavily traded stock lots of open interest lots of volume and these are things that if we were to create a a guideline um or a trading plan what are some things that we might want to see well and so let's create a list here um so we want to see let me just come back close that we're going to take our scratch pad what is this okay so one atr plan example plan so we want to look for something and let me just make all of this bold so if we're going to do something that's a 1atr if and and let's do you know here's the bullish example and we're just going to flip this if it turns out to be bearish so we want to have a a technical entry on the charts and i'm not going to list all of those out but it could be a bow flag with a kaholt it could be a breakout above resistance it could be a bounce off support and if you're new um to technical analysis you might want to check out cameron may's class on it was the class before this on mondays at uh 11 o'clock eastern or what you might want to do is is do the stocks technical analysis course um i thought that was great and and i think i did it twice when i got started with this two we want a stock that has high volume why do we want a stock that has a high volume because we want options that have high volume and you know and that is you know expressed on on thinkorswim as open interest which is the number of contracts that were on the books when the market opened today volume is how many contracts have traded today now for high volume if you're an option trader you might say i want that to be 1 million shares or more some of you might want it to be higher than that i mean this is totally up to you um and then for options we may say okay we want it to be you know 20 times the number of contracts that we're going to trade um and some might say 10 times and some might say i don't care but you know in this class we look for volumes and we also are looking for tight bid ask spreads and we we talk about this in every getting started with options class um these things that we're looking for and so we might say you know less than or equal to do i have a less than or equal to ten percent so if this option is three dollars we don't want the bid ask spread to be more than 30 cents some might say well i want it to be pennies apart well you can make it your rules whatever you want and then for our one atr and atr is average true range when we come to the chart i put this on my chart if you don't have it on your chart if you're new to this class you come to edit studies type in atr and it's right at the top of the alphabet so you click on it add selected and then you're going to hit apply and okay now i already have this on my chart if you don't know what it means you can click this little question mark and it will give you a rundown a detailed example what it really tells us it just kind of the kohl's notes version is that about how much the stock has moved in an average day over the last 14 days so when i come and hover hover over today's candle it will say in our example um and this is our plug example it moves about a dollar eighty-two our one atr is a dollar eighty-two so in an average day it moves about a dollar eighty-two up or down i'm gonna make that bowl two and so our target is going to be the high of the day plus one atr okay and our exit and this is just how we've been doing it in this class now some might do this a little differently they might say i'm going to do it just based on the current price i trade when the market's open um i'm going to take it the low of the day minus one atr now some people can't join us in this class and so they say well you know what um they might base it on the closing price of the day or they might go with the high and the low and and you can test it both ways we've been doing this and it it it can give us a little more gain but it can also end up in in a little more loss okay and so here's our example we're saying it's one atr what's our high of today our high is 29.57 so for this to to figure out our target it's 29.57 is the high of the day plus a dollar eighty-two okay so plus i've got my calculator here it's just faster and please uh do the math along with me this is a play-along event plus a dollar eighty-two oops plus a dollar eighty-two thirty-one thirty-nine is going to be our target and then our exit if things do not go according to plan we're going to take the low of today and that is 2834 minus 182.
28 34 okay so that's 26.52 so how would we put this in well we're going to come here come over this is our trading a smaller account account we can risk up to 500 on any one trade so in this example how much could we lose we could lose 300 how many contracts can we do we can do one so we would come anywhere on this line actually we're going to buy a single and then to put in our targets we're going to change uh you know what i've done the math rg i'm just going to go with 182. um if i got that number a little off somebody was saying this number should be 185. so hopefully we'd hit our target a little sooner anyway first trigger sequence right click opposite order so i'm buying one i want to sell one when do i want to sell well i want to sell and you'll notice it'll say hey if you're putting in a market order it has to have a day time in force but we're putting in some conditions and what are the conditions well we've already figured that out when it goes above 3139 we want out or if it goes below 2652 we want out uh 26.52
okay save confirm and send and then we're going to put this in our long call bucket and put a note in here it's a one atr target and exit one i'm gonna kill my picture it's saying my video okay hopefully that will be a little better okay somebody was just saying it was buffering okay so here's our here's our order note it's saying due to potentially wide markets or liquidity risks when you want to get out it may be substituted with a limit order and what that's just saying is td ameritrade will work to get you the best possible price if the market is going a little haywire or this particular stock is going a little haywire but when this is triggered whether it is at our target or at our exit it's not a guarantee of of getting out at a particular price and we aren't basing our exit on the price of the option we're basing our exit on the price of the stock yeah and so if you are wondering how much this might end up being worth there we go we can do that with theo price so if we said okay well if it comes up and hits what what is it at now so theo price first thing we do is we hit reset and then we say okay if it goes up our target was 31.39 so if it goes up 250 will that get us there 31 that's pretty close so call it 260. if it goes up 260 it will hit our target let's say it does that by tomorrow what might this be worth well we paid about three dollars to get in it would be worth about 440.
so that means we'd have about a dollar fifty a dollar forty gain on a three dollar investment so if i take a dollar forty and divide that by three that's a forty six percent gain potentially yes we'll do another example okay and then it but what if it goes the other way what if it goes down and hits our stop instead which right now is at 26.52 so let's say it goes down by 260 instead of going up perish the thought that would be 26 18 so 220 okay so this gets us in the ballpark well we'd have lost you know again we paid three dollars to get in if we were to get out tomorrow it would be about two dollars so we'd be down about 35 and this is not a guarantee on either price because i'm not i'm not adjusting volatility i'm assuming we're getting out tomorrow one way or the other we could be in this for a week or two weeks and this one i've come out to october and you might say well why are you going out so far when you only intend to be in it for a couple of days well we could look at a weekly and somebody said how do you tell the difference well if it's a weekly option it has weekly in brackets beside it also you can see here you know we had you know what a 12 000 when we come up here we had almost 12 000 contracts if you come to the weeklies there tends to be far fewer contracts 106 eight as opposed to 12 000. so we tend to pick um the monthly options typically because we have so much more volume and the bid ass spread they tend to be tighter okay okay so if we wanted to do another bullish example we could come over to the energy sector and look at uh well we've got devon you know which seemed to pause on its uphill move we've got and you know we could use that as an example we also have phillips and phillips we're looking at the chart and saying what might be more appealing we have this kind of inverted head and shoulders and i had posted an image of that on um on twitter or kind of this cup and handle pattern where it's broken out a one-day pullback and now it's you know looking like it's moving to the upside again so could we do that same type of strategy could i lower the scratch pad oh yeah okay so we're going to just do another example to set up and then what i'm going to do is go over now that we're in it what do we do between getting in and getting out because that's pretty important too ah just one sec okay so let's come to the trade tab and it's like do we have volume um here do we have high volume over a million chap what's the volume like on the options well we've got 200 not quite the 12 000 that the other one had but it were at 93.67 so if we look at this 95 um we you know 490 to 520 and i think we have a long call vertical on here let me just check and the reason i'm checking um is because i don't want to end up creating messing up another order and call vertical on psx okay yeah so i've we've bought the 95 strike the reason because if i'm buying another 95 strike that's great but i don't want to inadvertently put it in order to mess up um this vertical that we put on in another class so it was another bullish trade so if i look at this and say okay if i wanted to buy this 95 um just double check that again did i buy the 95 on psx yes i bought the 95. i'm buying it to close it out i'm going to come to a different time frame here because i'm going to mess it up i'm going to put it in the other account okay so if i look at this and we say okay we're going to buy this 95 and we're going to do the same thing so can we afford it 490 to 520. in this
account we could do two of these because we can risk up to 1200. if we were doing this in the trading a smaller account class we could only do one okay so we're going to right click and then where are our targets so psx one atr example so what is our one atr so if i hover all it's at 289 in an average day over the last 14 days this stock has moved about 2.89 what's today's high 94.26 plus 289 94 26 plus 289 97 15. and then our exit would be the low of today which is 9181 minus 289 91 81 minus 289 88.92
and you know guys this is going to be archived oh is this buffering again let me just kill okay um yeah so this is you know a ritual and it is archived so you can back up and watch it again so but when we look at this and we say okay 95 we're gonna buy single we're gonna buy two single order first trigger sequence right click opposite order and then i'm going to make it a market order good till cancelled it's going to bring up this little message no worries my disappearing reappearing sprocket to say when it goes at or above i always put the target in first it's just creature of habit i think you're less likely to make a mistake when you do things in the same way each and every time exit 88.92 88.92 okay fire in the hole save confirm and send how much are we risking one thousand and forty dollars how much can we make it saying infinite um you know but really it's not infinite in that we're putting a cap on it we're saying hey when phillips gets up to 97.15 we want out or if it falls and goes below 88.92 trigger a market order to sell and again if it gaps no guarantee um you know at what price we're going to get out and that same warning message is you know if there are you know wide markets or liquidity risks um you know that td ameritrade will you know try and work to get you the better better price but there are no guarantees so how much are we risking one thousand and forty dollars we could lose the entire amount okay okay so now coming back to our rules and we have an example and i'm going to do a a mini management a trade management mini session on this on amgen uh oh sorry i meant to put that here where what happened was we got in and then it went it it kind of lolly gagged about well maybe it wasn't amgen um but you know it didn't hit the target and it didn't hit the exit for a while and so our one of our our mid management rules is that at the end of every trading day you want to move the stock up to and you can pick a number now if this is a very expensive stock um you might say a dollar you might say 20 cents so you know it just depends i think on the price of the stock so some might say well i'm gonna do it 20 cents if it's if the stock is um under a hundred dollars under if the stock is under a hundred oh sorry um i'm going to make it 50 cents if it's um 100 to 200 100 to 200 and i'm going to make it a buck you know and this is these are your rules you know so you can make it whatever you want if the stock is over 200 a share okay and so you're going to move your your exit i'm calling it a stop or you can call it an exit but had we done that we got in this day if at at the and this was a if this was a bullish trade we were expecting it to go up at the end of this day we would have had our stop 20 cents below we would have been out here and we would have maintained a lot more of our option premium we ended up getting out here and and it was expensive you know we you know we had a we had a big loss on that one so it it's and you know i have been guilty of doing and i don't know if you guys can relate to this you know my son one time i was talking to him about something totally unrelated and i said to him um you know hey conor what are you doing and he said you know mom i'm too busy watching what you're doing to hear what you're saying so uh that really struck me he was about 18 at the time it's like oh i hate it when they use their own lines my own lines back on me um but you know i am going to start because i haven't been very good at the mid management rules within this paper money portfolio so i'm going to start at the end of the trading day you know with my two o'clock you know it's two o'clock mountain here um to just going in and tightening up these exits because it would make a big difference and if you're doing a bearish trade then you know if we were expecting something to go down and i did have a bearish example which we won't have time to go through today i thought we could look at sky works um you know where it's tried to rally and it's now broken below this little support level then we just you know so if you wanted to do an example of a bearish trade you know you could do you know just kind of the opposite um of what we've done here you still want stock to have high volume you want the options to have high volume you want tight bid ask spreads your atr target would be the low of the day plus your atr and your um oh sorry your exit would be um the high of the day so it would be the opposite and then the mid management would be just the flip at the end of the trading day you'd move your stop up to 20 cents above um the high of the low day and this is the end of the trading day to 20 cents um below the low of the day so that you're expecting it to keep up so you're with our trades we were expecting it to continue to go up and if it does bob's your uncle but if it doesn't then we're gonna move the straw we're gonna move the straw okay yeah no i've got it guys i'm i'm moving it i'm changing the screen yeah so here sorry here's sky works so with sky works you know if we go for this bearish example um you know it's broken below the support level and we're going to flip it sorry guys i you know got off screen there for a minute so here here's our set of potential rules you know at the end of every trading day you know we aren't going to just wait until it hits our stop or our target we're going to move our stop if it's bullish up to 20 cents below the low of that day if it's a bearish we're going to move it up to 20 cents above the high of the day because we're expecting it to fall so today we ended up to doing two bullish examples which may have been surprising here's an example of a setup on a you know a bearish setup but what you want to be sure you're doing is trying to take advantage of trend so if i look at p car for example oh p car i can type honest engine you know we've seen something it was getting beaten up but it's been up trending and you know just because two down days does not a bullish trend necessarily make so it's come down to this support level and it we we don't have a definitive bounce yet but we don't have really a trend reversal yet necessarily either so you want to be when you're looking at your examples you want to pick something where the trend supports the direction that that you believe the stock will go and are we going to be right 100 of the time we are not i mean that we know for sure but this mid management piece is as a it's as important as all of the other pieces and i just want to re re reiterate that re re reiterate that i feel like tony the tiger this morning okay let me just go back and have a quick look at the chat um yeah so c gardner is saying wouldn't it have been better to focus on long puts versus calls and um we could have done that but you know what when i started looking through the stocks on the nasdaq um i i wasn't seeing as many long put entry opportunities as i would have expected yeah you know and there could be a reversal so these are very short-term trades and we're looking at these in this way and i'm just kind of going through the the chat um i'm looking at them in this way because we're doing a short-term perspective and so we're looking for something that is moving in a direction with some momentum and that's why we chose the examples that we did for today's class so i think we've done what we set out to do we've looked at um the markets and what's going on we placed two new example trades we did one on philip 66 psx we did one unplugged both were surprisingly bullish and we did the one atr target we also did a review of what a potential trading plan might look like for that strategy and it's just an example trading plan you can tweak it any number of ways um and you know we have done that in the past but that mid management piece is critical um so that's a wrap for today guys i really appreciate you joining me i know that we have had um a few line speed glitches today so i keep you know taking my picture kind of on and off and that's why but if you're new to this class my ask is hit the subscribe button you'll want to link arms with us and join us on a regular basis on mondays up next will be getting started with fundamentals you're going to want to check that out if you enjoyed this class please hit the like button it lets me know you found this content valuable but more importantly it lets other people who are out there in youtube land know that you found this content valuable as well there isn't a survey today but if you're watching this in the archives and there are things that you would like to see um or if you're watching this live you can type them into the chat um things that you'd like me to cover in upcoming classes don't hesitate to type that in so guys that's a wrap for today know that everything that we cover in this class is for education and informational purposes only none of it to be construed as a recommendation on the part of td ameritrade or myself know that all investing involves risk including the risk of loss and that stops and targets don't guarantee we're going to get out at a specific price so that's a wrap for today enjoy your day and we'll see you in a webcast coming up soon take care bye for now
2022-08-31 05:43
