Option Golf Bag | Technically Speaking: Trading the Trend
[Music] [Music] hello and welcome to technically speaking trading the trend weeks to months my name is james boyd welcome everyone here today we got dan fez orlando amun bill doug lisa grace we also have cameron may in the chat so we welcome him just real quick as we're getting started i want to give you a quick reminder we do post educational content on twitter check that out and uh we'll actually show a little bit of that here today so just real quick as we're getting started want to give us a quick reminder that the content is intended for informational educational purposes only not an investment recommendation or investment advice of any security strategy or account type options are not suitable for all investors special risk and entertaining options may expose investors to potentially rapid and substantial losses also understand that when we talk about or if we bring up futures futures and futures options trading involves substantial risk not suitable for all investors there's a separate disclosure for that and when we demonstrate the function of the platform we will use actual symbols so what that actually said and also when we talk about options here today which we will remember the option greeks dealt the game of vega theta and i've actually been doing the options strategy workshop this week and i will be in uh outside the san francisco airport coming up later september i think it's september 30th october 1st i will be live in that area san mateo i believe now just real quick as we're getting started i want to kind of give you the lay of land of what we're going to discuss here today so we you know occasionally we have some surveys that actually go out randomly i don't know when they're going out but i actually read uh a survey where uh a person mentioned kind of understanding strategies so what i want to do is i want to kind of talk about strategies immediately and why an investor might pick one versus another strategy okay so what i want to really do here is i just want to hop right into that then what i'm going to do is going to talk about new examples using the strategies and then we're going to talk about some management which we need to discuss because some of these uh are pretty big winners one of them is a loser we need to talk about the loser and i want to also talk about rolling so we got a work cut out for us here today but i know we can do it so just real quick as we're getting started what i want to do is i want to bring up kind of a little sheet of paper now i can't pre-make anything so what i'm going to do is on the fly is i want to kind of just give a super quick analogy and then we're going to actually kind of go to work here and kind of talk about picking the strategies when we look at examples now uh the biggest actually thing is uh my son and i we recently started playing golf okay and and you know how you know if you've ever played golf and i'm not saying you have to be good at it okay but you get a set of clubs right and you got the driver you got the three wood you got the fairway wood you got the putter right and you might look at that claw that bag of clubs and say i don't really know when to use one versus the other now what i'm going to tell you is it's there is no one magic club there's no one right answer sometimes there can be two right answers okay and so what i want come to is today is was we talk about option strategies in context of trend trading i want to really talk about really kind of what are some of the strategies that are in the golf bag and then when an investor might use one versus the other and then really talk about why so no further ado let's hop right in what i'm going to do is up right at the very top i'm just going to kind of label uh spv actually i'll write it out fully so there's no confused short put vertical now if you don't mind i'm going to kind of type quickly here or try to i'm going to label this long call vertical okay and i'll space these out in just a moment short put okay and so what i'm really doing is i'm kind of writing down some of the strategies that we cover in our classes okay and i'm almost done long synthetics and i got long stock okay now each one of these columns here really represents like a club in the golf bag okay now what i want to do is on the left hand side i really want to kind of talk about delta whoop delta i want to actually talk about theta i want to talk about vega i want to talk about what potential upside okay potential uh upside i'll put that right below upside i'll talk about potential risk and i want you to see it on a table okay now also when we actually do this uh i'm gonna leave it right there so when we actually look at doing a strategy okay uh this is kind of what's going through my mind okay and you might be thinking well it took you forever to think through it no it really is kind of something in my mind i'm just naturally thinking through so when i actually do like a let's say a short put vertical the intention is really i'm just going to label as plus but i also want to kind of label this and when we talk about it plus that's a positive strategy positive delta strategy and i'm thinking the delta is between about 10 to 20 per contract okay it's actually weird so it's a positive i'll say positive delta and i'll label 10 to 20. okay so when i say 10 to 20 i'm really talking about 10 to 20 delta per contract okay same thing actually over here when we actually talk about let's say a long call a long call vertical in this case is positive delta i'll just label it d and it's 10 to 20. now the short put it's same thing it's positive delta but in most of our examples we're probably talking about examples where we're picking a strike that has a delta between let's say 30 to 40. now what we can asterisk that because that might be dependent upon where the investor might consider buying the stock at at the strike price with the long call i would think about typically buying something at the money or in the money so i'm thinking positive okay d for delta probably thinking about a delta initially of 50 to 60 and then if i actually look at a covered call same thing when you actually buy the stock you sell the call you're probably going to have right around about a 50 60 net delta when you buy the stock and you sell the call probably going to be very similar to a long call a long synthetic is going to be really probably about i'm going to label it as let's say 80 to 100 why would it only be 80 well because sometimes the investor doesn't necessarily sell the put that has the exact same strike as the long call and we know that if the investor buys shares of stock and let's make an assumption that they buy a hundred shares then we know on that that in this case you got a hundred delta you got 100 shares of stock you got 100 delta okay so what i want to do first off is i want to kind of go down to the bottom let's draw a quick picture and so when we actually look at this okay now let's think back to the golf clubs okay so when i actually look at this when we said kind of think back to the golf club analogy and i'm going to go over start to the right first if someone is going to do let's say a long synthetic or really like a long stock i'm really thinking that this is like a driver okay so if you nail that sucker oh boy it feels good when you nail it right down the fairway i think that is like the driver and i really think of that long synthetic like a three wood or a driver if you pick that strategy you're seeing down the fairway and you're saying i am going for it i'm not trying to kind of poke the ball down the fairway i am going for that upside potential if you don't share that enthusiasm in that trade or in that trend then why in the world would someone do a long synthetic and a long stock okay unless it was paying some nice dividend and they just want to try to grab the dividend now so let's actually go down here i want to kind of write this this is actually probably when the volatility is dropping okay and if the volatility is dropping that probably means that the trend is more neutral to bullish okay so if we actually saw that the volatility let's say is dropping on many examples we're probably going to really see that the trend is more neutral to bullish and that would be helpful for strategies like a long synthetic and a long stock now let's kind of just summarize this real quick theta tell me what i should put in in the theta column theta what should i do is it positive theta negative theta what do we got here for the short put vertical fill this out for me so it makes sense for you is it positive theta or negative theta well short put verticals can be positive theta okay we'll just label as pause okay if i actually said well what about that long call i'm gonna say it's really more neutral okay a little bit more neutral maybe negative slightly if we actually said what about the short put it's positive theta okay if i actually said what about that long call we know where that goes it's negative okay negative time decay covered calls what do we label it as well what do we label as it's positive theta if we actually said let's say a long synthetic a typical long synthetic what would it typically be it's more neutral which is kind of nice and if we said what's the time decay on the stock the answer is it's more neutral okay now this is where it becomes very important you really understand this next row and this is maybe where the confusion is really coming in that someone doesn't really understand when i pick a certain strategy do i want the what do i want the vega or the implied volatility to be well if we did a short put vertical what would the vega be okay short put vertical what would it be short put vertical now let's let's kind of actually bring it up and say matter of fact can we can we look and kind of double check can i cheat yeah let's cheat so if i actually go and say uh costco okay if i pulled up let's say costco and i said what is the vega of a short put vertical it's slightly negative you know it it's not dramatically negative but it's slightly negative okay so i'm actually going to do this i'm going to go back and i'm going to kind of write that i'm just going to kind of write more neutral okay to negative and i'm going to go ahead and actually put that right there now when we actually do a long call vertical this would actually be more neutral to probably positive okay because you got that long call when we did a short put we would actually see that the vega is what well vegas negative because you sold it okay so we're gonna write negative okay long call if you buy a call and the volatility goes up now it doesn't matter if you buy a long call or you buy a long put and the volatility expands is that a bad thing no it's not the volatility increasing jacks up the option premium jack's up probably is a little strong but you know what i mean now for a cover call that wouldn't be good because then the investor sold the call okay and then we actually talked about the long synthetic neutral and then we got neutral okay now when we actually come back and look so we kind of that's the hardest part i think really understanding okay vega and you could even kind of think of it as the implied well i'll say vega but the biggest actually thing is when we talk about strategies here today we're gonna refer back to this chart now super quick when we actually say uh the short put vertical it's defined okay that upside is defined to credit and when i actually say this i'm talking about the vertical when i actually say the long call vertical it's the spread minus the debit okay short put is credit received okay now when we say the long call it's unlimited covered call capped long synthetic unlimited long stock unlimited so you can kind of really see how many times i just said the word unlimited so if we take actually strategies that are really more to the right the investor is more confident upon the direction now let's just do this okay before we go any further let's just kind of take a stock if you will and let's kind of talk maybe about an example here okay now what i want to do is i want to actually kind of bring up and i'll bring up the spx right now okay sbx what's the spx doing spx is down about six points it's kind of up near that area of resistance okay and what i'm to do is i'm going to bring up a stock i'm going to label it as axp and the reason why i'm pulling this one up is it's kind of it looks very similar to really what the market is doing now this 156 is kind of a pretty major area now how many of you when you have a stock that is right up against resistance how many of you might be a little gun shy to really say geez i'm just gonna get in whole hog okay well this this is not gonna influence the decision okay if someone says i'm up near an area of resistance and i'm a little bit more concerned that maybe that stock might not necessarily break resistance that investor is probably saying i don't want to really be at risk of direction as much so if i go actually back to that little sheet that we actually had and i said well what does the left side do well the left side we're really going to be focusing really more on time so that focus is more on time so focus on time and when i say time we're focusing on time decay second we're looking for volatility high and dropping oh okay now why would the volatility be dropping well if the volatility is high and it's starting to drop that probably means the stock is actually going where that stock is probably going up okay now if we actually said well on these type of trades on the left-hand side do they really focus on direction as much we would say less direction why is that it's because they have a smaller delta per contract okay i feel like my cursor's always in the way okay so what i want to do is i want to draw like a line down through here and that line so if i kind of said where's the tipping point of where we go from being more non-directional to more directional i would say if someone's goes past a short put you're really starting to pick strategies that are more directional how do you know they're more directional they have a higher delta okay now let me let's kind of go back to super quick to this analogy let's say the investor just went out to to play golf and they only had one club how do you think they're gonna score what if they only actually took the putter with them you think they're going to score like a couple pars maybe a birdie probably not the purpose of actually using the different clubs is to try to maximize the hits or the strokes and actually get on the green as soon as possible to put that white ball in the hole okay in the hall so the biggest actually thing is we're trying to maximize our potential returns or maximize the likelihood of potential profit now let's go back to axp so when we actually look at axp we're looking at this and saying geez what strategy am i going to pick now here's what i'm going to tell you there's not one right answer there's probably two okay now if i actually said james i'm not making resistance i'm a little nervous that maybe that stock might not break resistance now the one thing i do want to write on this when we look at that short put vertical the short put vertical is more about probability probability why is that well because there's a lower break even steven now if we actually said with a long call vertical it has a higher profitability okay and it actually has a higher break even okay now if you're up near an area of resistance and you're a little concerned about maybe is that stock really going to go up that investor might say james that short put vertical is looking pretty good right now okay now if i actually go back and actually i evaluate i actually say okay let's go to trade tab so remember when we talk about using options we like to see about a million shares on average as well currently it's sitting current we're not talking average we're talking today's 1.9
if i actually come back let's say the option table down below and i say okay what does the open interest look like 600 1100 500 so there's something here and then when you actually look at the bid ask spread currently 15 cents 10 cents so there's look some liquidity now when we actually talk about this let's say the investor says i want to sell the put okay we're talking about short put vertical why are we picking a short put vertical well because we're not so sure about the direction why are we actually talking about the short put vertical well because i actually want to lower breakeven i want a higher probability of being right now if i actually said i'm going to sell the 150 the 150 is where the investor is really saying i think the stock could stay above that strike so if the investor actually said in this case i'm gonna sell okay the 150 and i'm gonna buy the 145 and this goes back to when you evaluate the trade you're really trying to really make sure what is the ror okay so when we actually talk about the ror here we're taking 121 the potential max profit divide that by that potential max loss and the answer is about 32 percent if you want to get real geeky it's 31.926 okay so let's just say 32 we're good now what you're going to notice is there's the credit per contract less the commission so if we're in an ira account and we said hey the typical risk hypothetically is we could take let's say a thousand dollars actually two thousand dollars worth of risk we'd probably be doing in somewhere in the neighborhood of about five contracts now by the way could you kind of write that down on your sheet and kind of say what's that ror that you'd like to get let's kind of write ror min and whatever that number is for you go ahead and actually type it in for our class example we're going to say we would like to see let's say a min number of 30 or more all we did is we took the credit potential credit divided by the potential max loss and like to see let's say in our example greater than 30 percent now we actually go back let's evaluate what is the maximum loss which we didn't put on the sheet but we're going to well it's going to be the spread minus that max the credit so we'll put that there i'm going to label it as it's defined okay it is defined okay so let's label that as defined when i say define i'm saying as a vertical okay and i'm going to label it it's a spread minus credit okay so there you go now here's the key i said defined as a vertical if this if the short put was assigned then that risk changes so that's very important you actually understand that we're talking about as a vertical so when we actually do this first trade here we're going to go edit we're going to change the number of contracts we're going to actually push to about five let's verify when we look at this we want to make sure that the risk is not more than two thousand and what you're now going to see is it's 18.95 it adjusts the commissions and the potential max profit has been adjusted the break-even is the same okay now whenever we talk about a vertical trade let's go back to that little sheet here what is it that the investor is really trying to get so if we kind of said is there kind of like any potential profit maybe like a percentage goal question mark okay now this is up to that investor this really goes down to their experience i'm going to label here 50 65 80 of that maximum gain now how do you know what the number is for you well that comes through practice okay comes through practice if you said james i tend to hit quite a few 50 okay you might up it and try to go to 65. if you say james i don't want to be
as active then you might be trying to go to 80 of that credit all right so here we go trade number one gonna go to confirm and send now what you're going to actually notice is we're going to go ahead and say send the order we don't see anything in red down here we're going to put this in the ira account and this better go through send the order cross the fingers okay it's it's queued up to go now what i want to do okay here's what i want to do i want to kind of stop for a second and let's look and see what the questions are now fayez actually says a bull calls uh buy a call spread on american express so let's get some understanding of why fez would say that okay so why would fear say that the deltas are going to be pretty close to the same he might not mind to be more neutral than negative on theta he might be thinking that the volatility might expand now wait why might the volatility expand is there earnings coming up on that chart and the answer is no we don't have earnings coming up on that chart okay so that's probably not where the volatility is going to expand and if we actually said well why is maybe fez actually think about the potential uh the that type of trade well this type of trade has a higher profitability but the caught about that is there's a slightly there's there is a higher typically a higher break even so if fayez actually chose that long call vertical he's saying look i don't want to do probability as much i want to go for higher profitability okay now remember i said to you there's not one right answer there can be two right answers i me this paper money count could pick the short put vertical someone else could do a long call vertical and if that stock went up there's just going to be different payoffs okay that's all it is and different risk both of them could win okay both of them could lose so i wouldn't view this as finite and saying there's only one right answer i would never come to that uh conclusion ever okay now let's actually uh uh now fez also says the iv rank is 27. perfect okay now a riff says i don't see you recording on twitch okay sometimes they actually try to come up they try to post those within the day uh or the next day i'd expect it on there today now uh the other comment is how do you calculate if you get assigned again well that's the that's so that's the key is you don't there's not a percentage probability of getting assigned there's a percentage probability of being below the strike price okay so we'll actually see now there's two ways you could do this you could say delta is a proxy for the probability of being in the money at expiration by a penny so as of right now it's a 33 chance the stock will be below the likelihood of being assigned is technically random so it can't statistically say what's the probability because i don't know if someone in let's say south bend indiana calls the broker today and says i would like to exercise my long put or whoever has the opposite side of the trade and then i have to buy the shares of the stock it's that's random okay i ca i can't forecast that but you have to just kind of understand in this case that that can actually happen at any time okay now if we actually take a look at this so what i want to do is let's look at the second example here and then we're going to kind of fill this out so by the way does this kind of help in kind of seeing the breakdown now what i'm going to kind of do is i'm going to pick a different example and i'm going to kind of look for maybe those two strategies where maybe the investor might say you know james i'm going to pick that now i'm going to go to a stock and i'm going to look at something like boeing now this should kind of get someone uh i don't know just maybe uh probably thinking boeing well there's a reason why i'm doing this okay so what you're now going to notice is boeing has been in a downward trend and what you're going to notice is boeing had a resistance right here and what you're going to notice is it got it is actually trying to get above that and as of lately it's actually really kind of started to come come alive a little bit travel demand is actually picked back up you broke a diagonal resistance you got about the horizontal resistance the stock as of lately is run up and then actually pull back run up and actually pull back and now let's kind of actually incorporate volatility into this okay so what we're going to do is going to go the trade tab and we're going to look and see what is that so first of all we can actually just look down the table and when i look down this table in my mind i'm actually thinking about kind of the ranges of implied volatility okay so when i actually kind of look down that table in my mind i'm kind of thinking these numbers okay if i see maybe like low iv i'm thinking like 15 to 24. if i see like medium iv okay i'm thinking 25 to maybe 34. if i see let's say high iv i'm thinking 35 plus who ca who who gives a crap well don't say that okay because remember if we come to the table and we see the iv is high that's probably going to make maybe investor think about well maybe could the investor maybe look at which side of this table focuses on volatility okay well what's up what part of these trades collects premiums well this actually could benefit from higher wall this could actually benefit from higher wall because if you get a higher volatility bigger premium bigger premium lower break even so we did the example of a short put vertical and if we actually said well maybe could the investor look at maybe doing a short put let's kind of remind ourselves it's a positive delta strategy the investor picks kind of what's talked about in the online course we actually talk about a delta 30 and 40 selling a put that's out of the money now fate is positive if the investor said james that is a focus of mine well that might kind of narrow into the kind of maybe picking one or two of these that vega is negative what in the world does that mean that means that the if the stock were to go up and the volatility falls it means that the investor might potentially be able to buy that put back for cheaper thus increasing the potential gain or unrealized profit nice the we know the potential upside is the credit received now what's the risk the risk is the stock could fall to zero okay is there a minimum acceptable ror well i'm going to kind of label this 1.1
2.5 3.5 now so and i'll even kind of back this off and some investors might even say james i'm willing to take only one percent premium now that you know that might be someone but in our examples we're kind of thinking that one and a half low two and a half medium three and a half high now this goal of what we said 50 65 80 percent of the credit received that is still in effect okay what's in a short blood vertical and a short put we do not have the downside protection the other part of this is we're gonna need to actually set aside more money for the potential assignment okay and we're actually more at risk of what vega is okay now let's take a look at this we're going to go down to the september expiration 20 to 50 days to expiration we're going to go look at maybe considering selling let's say that 160 strike okay now if you look at this why did i pick the 160 strike well kind of based on kind of the little sheet here we kind of talked about maybe selecting a strike that really has a delta between let's say 30 to 40. does someone have to do that no we know if they actually pick a lower strike they're trying to play more of the probability okay if we pick a higher delta there's well bigger premium but a greater chance of the stock closing below the strike okay now what i'm going to do is i'm going to go over here and i'm going to click right on that bid now when the investor sells the put they need to be thinking what have i just done what is the ass what's the risk well let's go back to the sheet let's sum it up the potential risk of the stock can actually fall to zero can the investor set a stop you better believe they can but the also the other thing the investor could do is they could say you know what james could i actually maybe sell a put and what else could the investor do here what could they do to define the risk now robert actually says with cash secured puts you should not mine in owning the stock that's exactly correct now we're talking now we're connecting well the investor could sell that 160 and they could actually say james can i buy a safety net just in case the stock we're gonna drop so what i mean by a safety net is they could buy a put like out of the money what we talk about is really buying a put with a delt of let's say 10 or less and why a delta tailless well it's i think it's pretty obvious when you start going a 10 or less the puts start becoming cheaper by a lot and what you're going to notice is it still is a decent premium as well it's still 4.80 so what is the risk now the risk is not to zero the risk is actually down to 135. the investor has an obligation to buy the stock at 160 sell at 135.
okay now what you're going to notice is we're going to confirm and send and now we can see those parameters displayed break even 155 20. where'd they get that what's the 160 less the credit break even okay we know that max profit is 480 i thought the max loss was down to zero oh not if you buy the long put and and what you're going to see is this is really vertical but it's wider but why in the world would someone do this well hello we're in an ira account and we know that if we're in an ira account how much of that how much of that strike price are going to want the investor to set aside and the answer is a large chunk of it if the investor says i didn't really want to set aside a huge let's say fifteen thousand dollars per contract i was kind of thinking about buying the put and maybe using the other money to kind of do something else well there you go okay now notice when we actually buy the foot two there's that extra commission okay 65 cents but you might say james had i not bought the put that buying power effect would have been 15 000 since i bought the put i defined the risk i paid 65 more cents but i freed up 13 000 so it's up to you kind of you to weigh those and say is that something that you might think is worthwhile now if the investor said well james given this account size might the investor actually take two contracts confirm and send now you might be thinking well what on earth does this have to do with trend trading well the biggest actually thing is every time you get into a trend trade it doesn't mean that you have to buy a stock position you actually might pick a strategy that might be trying to use time and volatility because see if you ask your friends at work you ask your aunt uncle cousin brother or sister whatever most investors don't know anything about time and volatility they just pay time and volatility they don't know anything about okay they're trying to typically just make money from direction but the direction isn't constant okay and a lot of times they might get the direction wrong so what we're trying to do is we're trying to increase the probabilities by introducing time and volatility investor in this case we're going to do two contracts now let's think through what is the obligation let's say it's 160 stock let's times it by two it's about thirty two thousand dollars worth of stock that is acceptable in the ira account we're gonna take that i'm gonna go ahead and actually send the order and then try to get a fill now uh let's actually go ahead and actually go back and let me kind of look at one more example now i'm going to kind of uh just let's kind of finish this up for just a sec okay so if i actually looked at this i'm going to say the long call vertical what's the potential risk typing in what's the potential risk it's the debit paid okay the debit paid if we actually said what's the long call risk the debit paid so when i say the debit what you paid for the stock could actually fall to zero same thing with the cover call the long synthetic stock could fall to zero and the long stock what could happen the stock could fall to zero so what you're going to notice is when you start going further over to the right all of a sudden that risk becomes more evidence right it's kind of like you're going for the glory okay yeah you're sh and you're just swinging for the home run ball and sometimes you nail that home run and other times you're like man swinging a miss swing badass okay you just miss okay and that's what makes those sides of the trade it can be hit or miss it could be boomer bust now so uh are there any questions here okay now hollywood chiropractor associates says why not break why not wait to get in the trade when it pulls back or breaks resistance now here's the deal so first off and i'm glad you brought this up right now and i'm not just saying that so when an investor sees that there's a stock that broke out it has made a higher low and has made another higher low again they might say you know what i'm going to pick a strategy this that is not as sensitive to direction well what would that be well we're gonna go look at the left short short put vertical long call vertical short put okay these type of strategies the investor might try to get into those prior to the breakout occurring because they're not as sensitive to direction now let's kind of play this going forward let's say the investors said you know what james i saw this stock break out okay then it actually pulled back and then it bounced again now wait okay you just saw it break out it made a brand new high and it made a higher low so all of a sudden we're actually going back to now so so here's the deal okay i want you to imagine you're playing golf and there's just a whole bunch of trees in the way you really can't see where you're hitting well you're not hitting a driver okay you're probably gonna hit with the wedge okay you're just to try to put it back in the fairway but if you saw that stock break out make a higher high and a higher low and you're sitting right in the middle of the fairway you're probably thinking about hey could i now add to the position could i do like a long call cover call long synthetic long stock can i add to the position and the answer is survey says why not right well what what changed what changed from today to maybe let's say next tuesday the key is did the stock break out of resistance and this is why we kind of talk about dollar cost averaging if you actually kind of see stocks that kind of go through that next level and they're showing more proof of higher highs and higher lows then that's when the investor might start to shift to the right because they actually kind of see more potential upside and it's gaining more momentum and a stronger trend okay now here's what kind of a lot of investors do sometimes they just do one thing and and uh they don't really ever really see that the trend is materializing more by making higher highs and higher lows and the stock might be using the 10-day moving hours as support and the stock breaks out if you start to see more kind of confirmation signals of trend that investor might just add to the position now the comment from orlando is says when do we use the putter well it's kind of funny you should say that because when i actually if i were to label like hey which of these is you kind of view as a putter i actually think of uh really the short put vertical as really a putter i think of really like a long call vertical it's just kind of more like the sand wedge and if i actually think about a short put i'm thinking like this is like a a nine iron okay so really that's kind of as we top off this analogy okay that's really what i'm thinking so if you said well what would be like a putter well and so with the whole idea with the putter is even if you try to whack it you're probably not going to hit it 100 yards it's more defined to space right now let's actually take one more example so what i actually want to do is i want to actually go back to an example now what i want to do is let me kind of pull something up for just a sec one of the ones that i actually want to look at is i'm going to kind of take a standpoint here okay i'm going to kind of go back to a stock like nvidia and nvidia has earnings coming up now why am i bringing that up okay well if there's earnings coming up that is in let's say the next three weeks i might kind of be thinking about like which one of these strategies might benefit if volatility were to increase well let me highlight the long call vertical can benefit if volatility were to increase the long call can benefit if volatility were to increase okay so i'm thinking automatically if someone said james i am forecasting volatility to increase which strategies could benefit from that now if the investor said you know james i don't really like to buy like long calls because there's that negative time decay if that's what the investor said they actually might say james i'm kind of thinking about more like a long call vertical where there could be potential higher profitability but with that also does come with a slightly higher break even let's go to work so now what we're going to do is we're going to go actually to the trade tab and we're going to go look at that september expiration say okay which call is in the money now why do we actually pick that one or two strikes in the money the reason why we do it real simple is we want some of this premium to be intrinsic value that's the main reason and if we said what's the second reason the second reason we want a greater chance for the stock to be in the money at expiration okay so we're always kind of looking at the example of one to two strikes in the money for the long call side now if we buy that 190 and let's say we could sell the 200 well not by the way if we looked at the 190 195 debit is 248 remember the debit is that's what the potential max loss is given a vertical now if the investor said well james i was kind of thinking about doing a couple contracts right here and i was kind of thinking about opening up the strikes well you open up the strikes you actually make the debit bigger but when you actually look you when you widen out the strikes you also make the max profit bigger okay so is this a bullish or a bearish trade let's go back to our little cheat sheet now you got a it's a positive delta trade typically has a delta 10 to 20. we'll verify that now if we actually said theta it's probably going to be more neutral to negative which influences the break even the vegas probably more neutral to positive okay now if we actually look at this and said okay what do we got here per contract well we got a break even potential max profit potential max loss and we actually said well what is that buying power effect per contract 470. so if we actually said how many contracts could this ira account do it's really going to be about four contracts now let me actually kind of pull something up so if the investor buys the 190 as a delta 55 if they sell the 200 the dealt is 44.
so if we said per contract what is that plus 55 negative 44 each contract really represents a delta of negative 11. no positive 11 okay because you're long the 190 55 and you're short to 200 okay there you go right there now all we're going to do in this case is we're going to take that and say confirm and send it now the break even does not adjust but the potential max profit and loss do and so does the commission we're trying to make each one of these losses less than two thousand dollars now what i want to do in closing here is i think it would be a really good idea for people to really kind of create a cheat sheet okay now remember there's not one right strategy i think there's probably two that could be really close to each other okay now when you're looking at these strategies like short put vertical long call short put long call cover call long synthetic long stock you might be thinking well james that that's quite a few clubs there and you might say well i'm not necessarily a master of hitting all those clubs yet and the answer is well maybe not yet and maybe you might say a certain club i don't like but i like this club instead you might take out the long call and put in the diagonal spread you are ultimately the person that will find out for themselves if they want to use that club the way you actually find out if that club is really for you is you actually uh example given you actually go out and practice and you play rounds of golf to find out i'm out of my time here today but i want to thank you so much for your comments and your participation with what we discussed was done for example illustrated purposes only if you enjoyed today's session reach out and smash that like button and also subscribe to our trader shocks channel with that said thank you
2022-08-05 19:49
