Option Swing Trade Using Conditional Orders | Swing Trading (Days to Weeks)
good day everyone so a few weeks back we talked about trail and stops and utilizing conditional orders on being able to exit an existing position we'll actually review one of those trades a little later on this session but our topic today is going to utilize that same conditional order platform on thinkorswim to be able to enter an option trade with conditions tied to the stock so stick around [Music] all right hey it's great to see those you that are live with us today uh it's great to be back we got vj todd rebecca oscar larry looks like uh bj there dina kathy lawrence and everyone else alfred david coming online thank you for being with us got my good friend james boyd helping out on the chat today any questions i am unable to get to he'll be more than happy to help as you know james has vast experience in the market very educational and entertaining as well make sure you keep an eye on his schedule particularly the the technically speaking trend trading weeks to months a great complement to this short term trading webcast as you can see swing trading days to weeks let's go ahead and take care of disclosures folks we'll get right into it contents intended for educational purposes only non-investment advice or a recommendation of any security strategy or account type options not suitable for all investors spread straddles other multi-leg option strategies often involve greater more complex risk than single-leg option trades also transaction costs are important factors should be considered when evaluating any trade your encouraged practice which you learn here today with tools such as paper money software keep in mind that successful virtual trading during one time period does not guarantee success of actual funds during later time periods market conditions change continuously make note as far as with both long and short options the risks associated with them long options the entire cost added option position can be put at risk also short options they can be assigned at any time regardless of the end of money amount as i mentioned transaction costs important factors should be considered when evaluating a trade now while this webcast discusses technical analysis other approaches include fundamental analysis may assert very different views and a stop loss order will not guarantee an execution at or near an activation price once activated they compete with other income and market orders keep that in mind as we talk about conditional orders there's my bio for those that are new welcome this class is maybe a little more intermediate or advanced depending on where you are this class does focus a little more on the shorter term time frames with the concepts of swing trading looking at relatively smaller moves or over shorter durations you can see my background and teaching other subjects as well and you can keep an eye on twitter at j mcnichol underscore tda i do have pin tweet with my schedule and you can also see that on the education tab on upcoming webcasts as well let's go ahead and bring up our agenda for today as we're bringing it up we'll go ahead and briefly look at current market conditions news events that could be some catalyst for the market this week tomorrow is the cpi followed by the ppi so some gauges on inflation that may allow the fed or see how the fed reacts on where they're going to be a bit more hawkish or as the market seems to be pricing in them not being so much although that may be changing here as we've seen a little pullback in the market today now we'll go ahead and define a swing set swing setup example uh utilizing a sample stock not a recommendation and we'll utilize the thinkorswim to place a conditional order on a single option utilizing the underlying stock and then we're going to review open position we did have a practice position we did a few weeks back on apple utilizing the trailing stop for those of you that did miss that webcast we'll go ahead and make sure that we put a link in the description and also if i'm successful i should be able to have a link up here as well but you'll be able to see it in the description as well as in the playlist as well and the reason why that was a few weeks ago i was on military leave a couple weeks two weeks ago was uh planning uh for training exercise at the end of the fiscal year and last week was closer to home another duty i've taken on is working with our homeland response force and fema our hazard response force a team that i have a command cell with we have about 261 soldiers about 40 vehicles we were certified so we're prepared to be able to respond be able to leave within six hours and once on site be able to set operations within two hours and save lives so pretty uh happy for the 260 some soldiers and airmen i had an honor to work with over the last week for that certification and uh certainly uh hopefully we don't have to utilize those services anytime in the near future so all right without further ado let's go ahead and take a look uh at the markets and get into our topic for today so looking at the s p 500 spx uh we can see uh some consolidation uh occurring uh not a a big movement either way at least while i was gone over this last week we're still kind of in the range from where we were going back to the beginning of the month really notice that price action is consolidating at some of those previous highs from early june now i know james uh you know talks about uh resistance as well as support bounces these are actually some common themes when it comes to swing trades when prices trade or in this case potentially close below the low of the high day so we're seeing a resistance bounce now keeping in mind that price action is still kind of in that tighter range a little more of a rectangle some traders may refer to this as a flag in a stiff breeze uh if the uh the cpi uh doesn't necessarily come in hot uh you know there may be some potential for the bulls to rally although there is concerns for slow down uh if things are are still hot on top of uh potential for a slow down there there could be some potential for prices to continue pulling back here so some traders may be keeping an eye to look to see a breakout of this range and that's kind of along the theme for our topic uh utilizing a buy stop or a conditional order you know on a stock that may have a similar characteristic to see if that price actually breaks through likewise if there's some weaker stocks one may be looking for some bearish plays to the downside if we have some time we'll be able to possibly squeeze one of those in let's go ahead and take a look at the nasdaq ndx now notice of nasdaq relatively stronger we did take out not only the highs from june but the high highs from may here and potential for that broken resistance uh to act as new support so notice previous highs acting as support now that that's a a good topic to keep in mind or it's necessary a topic but a tip when it comes as far as with swings when we see swings make a higher high that pullback if that pullback is able to hold a previous high that has a tendency of helping support that trend it doesn't mean that the price can't continue pulling back we haven't seen an example of a bullish bounce which would be prices trading above the high of that low day now based off on how the market has been a bit choppy back and forth some traders may look for prices to trade above the high that day or look for prices to actually break out above the higher range of where prices have been over this last week looking at the dow djx similar to the s p although the dow a little shy of that high range from the end of may there more of a consolidation a little bit in the lower part of that previous consolidation in the end of may however some characteristics of what traders would refer to as an ascending triangle this is a topic in our breakdown and reversals class that we'll be talking about tomorrow at noon eastern time we're seeing kind of a flat consolidation at resistance rising support based off of price we can also see those moving averages rising with it and so again looking for that catalyst to see if we see that breakout pop or do we see prices revert and roll back into that range finally with the russell a little fibonacci action on there let's go ahead and remove this couple interesting things to note uh similar to the nasdaq the russell small caps were able to take out that previous june high and looks like settling back to potentially act as support also as we look at the descent of the russell over the course of the last year going at least going back to november we are seeing a potential trend break now i also talked a few weeks ago uh in breakouts and reversals of you know is this a bear market rally or is this a uh a actual bullish reversal well we are seeing signs of that bullish reversal based off of prices taking out some of those previous highs traders may want to be keeping an eye on volume to continue seeing the volume is positive to the upside and we have seen some signs of that as well uh but you know the the traps uh can still be set there and there's certainly no guarantees that this is a bullish reversal of the market as there are concerns on some of the slowdown going into the end of the year uh we'll see if that's going to come to fruition or not but technically we have seen a break at that downtrend all right uh and finally looking at the vix vixx is in a relatively lower range looks like it's trying to hold at around the 20 level that generally has been the lower range since going back to a good part of the beginning of the year we did dip down into around the 18 18 and a half level so whether from a contrarian standpoint if there's room for volatility expand post cpi as well as ppi there and yeah so to the question looking at the chat as far as a a false breakout false breakout or a fake out so to speak is when it comes to some of the bullish reversals that we may see with trend prices may break out of that resistance but in a lot of cases and a technical term is kind of a blowback where it may blow back and not just retest that breakout but kind of blow back into that pattern now that's not necessarily a fake out swing traders may not be very happy of that if they fail to reach their target and those gains have been taken back but typically what some traders may look at is look at volume to see if on those up days if that volume continues to support that move there may be a less likelihood for some of those fakes versus if it was a breakout on lighter volume now keep in mind we are in the summer months volume does have a tendency of being lower so one may not necessarily get that confirmation uh it's it's one of those trade-offs there price still has a vote and that is something to consider let's go and take a look uh at an example of a swing setup here by bringing up the thinkorswim platform in our example uh lockheed martin which is a defense contractor and uh you know not a recommendation or endorsement even though i've been doing military stuff for the last two weeks but if you want to learn more about the company you can go ahead and you know look at the analyze tab look at fundamentals one of the largest contractors a lot of their products are in the news both in the aircraft as well as missile air defense and with a lot of things popping up and all around the world there's certainly a potential demand for those products and traders maybe investors may be looking at that from a fundamental standpoint uh as well as looking at some of the numbers from a technical standpoint you know we're seeing similar price action to what we saw with the overall market as we saw prices make some lows lockheed martin seemed to find a critical area of support and positive on earnings a nice counter trend rally notice we still have a downtrend here but similar to the s p testing those previous highs and potentially setting up for a break of that downward trend if things were to be positive now could prices roll over and trade down certainly let's look from a setup if the price was to break above a certain level if we zoom in let's say the focal point is looking at these previous highs here on lockheed martin which is around the 435 mark if i put my cursor and we got 434 96 it was a high this high 434.65 so this would be the highest high of this pattern now something we teach in our technically speaking breakdown reversals one may see a little more of a potential larger pattern as price action is making lower lows uh a higher consolidation here making higher lows the semblance of the inverse head and shoulders traders may measure the distance whether between the shoulders from a shorter term standpoint or from a little more intermediate to longer term the head you know to identify a potential price target breaking out of that neckline now as we can also see from a shorter term looking at it from a standpoint of a swing here's a smaller consolidation right here here's a previous swing to the upside as prices broke out from a higher low hit that resistance we may be able to utilize this as an example of a set in another potential price target what we can do is we take the drawing tool on thinkorswim we'll take the diagonal tool and measure from the low to the high go to that resistance looks like that's a about it a 10 percent move and dollar dollar move looks like about 39 dollars look at the data box gives you a visualization of that and if i could go ahead and drop that and then i can right click duplicate that drawing and then go ahead to the lower part of it looks like a little more of a flag or a pennant pattern and use that as a projection going off that low now notice there's a bit of confluence here of that swing going to a previous high up around that 456 mark so we have a potential price target if the price was to break higher now we need to determine well what would be the trigger to possibly enter the trade some traders may go ahead and anticipate and look for a price to trade above the high of the low day but notice we did see that it happened yesterday it faded it even did it a little more today kind of faded back again so notice again there's that congestion there so it may make sense to look at that higher point near that 4335 and set that as a trigger let's say we were set a trigger about 20 cents higher than that 434 96 that would be a trigger of 435 16 i believe so i'll go in and take a horizontal line here we'll plot that now to be exact once you drop your line you can right click on line edit properties i believe i said 435 16 0.16 up uh yeah that's a little bit higher so that's that's pretty good we're overlaying just above that so i got to mark that orange as a potential trigger point now the other consideration is uh setting a stop now again those of you that joined us a few weeks ago uh one may set a stop one percent below that low uh we also utilize tools such as atr and my good friend barbara armstrong has as well as i believe james says too we have utilized atr average true range as a way of potentially setting a stop that takes us outside of that normal trading range if i want to go ahead and add that on the chart we'll go to studies edit studies we'll bring up atr for average true range now the default setting is 14 periods you know some traders may look at that period uh others may uh set it a bit tighter more recency such as a five period let's say we'll use a five period uh for this instance click ok click ok and if we go in we take a look showing the atr as 9.39 now what that implies is the
average range of that stock on a day-to-day basis is upwards of around nine dollars and so therefore a stop theoretically if one does not wish to get shaken out of a particular trade although there's no guarantee of that is that stop being outside of that normal range and so we may take a multiple of that such as one for the daily range or one and a half times as we did with our example on apple a few weeks back uh traders of a longer duration maybe in the trend trading aspect like james is talking i may be looking at it two times or three times that uh to basically keep an opportunity for that price action to continue to move okay so let's say in our example uh we'll set it based off of uh and 9.39 cents below that breakout point so that would be uh 435 16 or we'll just do 435 being resistance i'm gonna go ahead and bring up a calculator we'll go ahead and we'll take 435 minus and i'll round it uh to the nearest cent 9.44 cents that should be a stop of about 425 dollars now notice even with that one atr it still puts us in this range here now some traders may be happy with that if they fail they want to fail fast other traders may want to give a little more room you know if i did one and a half uh that would actually put us uh a little more closer to the 420 mark okay but let's say we'll we'll leave that for now i can go ahead and drop another line on the chart 425.60 edit properties i'll make this red so what we're doing is basically planning a trade trading a plan so so far we got our potential entry i'm going to remove these fibs here since they've served their purpose so we see a potential entry see where a potential stop may be if it uh blows back and where the potential target may be we're going to highlight that now notice as we take a look at lockheed martin it is a 430 some dollar stock now some traders may be comfortable trading a more expensive stock but with an option if we are looking at an expectation as far as a price move within a certain period of time we may be able to utilize an option to lock up less capital and also define the risk although that risk still can be significant so let's go ahead and look at an example of an option to select i'm going to go to the monitor tab or correction we're going to go to trade tab let's bring that up once on to trade tab we're going to take a look at the option chain and when we look at duration even though this may be only several days one may want to make sure that they're not necessarily in a front month contract because the time decay is going to impact these options much more than they will if we go further out one can always sell back time which is a consideration there so one of the starting points may be looking at greater than 50 days and if we go 350 days that pretty much puts us out to around 73. even though we may have no intention
of staying in the trade that long again we can always sell back that time or potentially sell back that time now if you scroll down take a look you know which option to select another consideration to simulate or kind of make a similar to a stock replacement is looking at a delta that's a little more in the money such as a 60 to 70 delta those of you that follow me in some of the options webcasts that i teach as well as the workshop know that that's an example of a starting point if i go uh let's say here around the 66 delta somewhere in between 60 and 70 this option is going to cost about 30 now that's significant 30 times a hundred uh that would be three thousand uh however that is significantly less than for instance four hundred dollars times uh a hundred so let's use this as an example i'm going to right click on this example and we're going to do a buy custom with stop which is all this is going to do it's going to create a buy order and it's going to go ahead and create a sell order against it now we're going to modify this utilizing conditional orders now let's start off with the buy order now one of the considerations too is look at the spreads we'd like to see the spread to be no more than about 10 percent of the ask price notice these spreads are relatively small for a 30 option it's only about 40 cents other traders may look at the volume and open interest as well now interestingly enough the volume in open interest is relatively low that has a tendency of happening when one goes a little further out uh the spread again can be an indication of some of that liquidity as more options may be created as we get closer to that date i'm gonna go back and change this to delta gamma theta and if i go back to this particular order i'm going to make this a market order now keep in mind when we make this a market order we don't have control over the price so when we enter this theoretically this option is probably going to be worth a little bit more a few points more since the price action is going to be a bit higher than the current price now we can potentially guesstimate that if our potential entry is going to be at about 435.16 if i go to the trade tab and under this layout we can bring up what's called theo price and mark if i click on that we can theoretically put in the date you know let's say tomorrow i believe is the 10th so we can factor in the time we can also factored in the result in price now i believe our price was somewhere at around 435 that looks like that's about eight dollars above where we are right now so there's 435.53 give or take about 20 cents so theoretically this option assuming everything lines up we may be paying upwards of about 3 500 for one contract there if we get a fill close to that resulting price and volatility is not necessarily through rising volatility is lower this premium can actually be a little less all right so with that in mind we got an idea on defining risk risk being we pay for the option is what it's at risk even though we're going to utilize a conditional order to get out prior to that option depreciate into zero but we're still going to utilize a max loss just to factor in a worst case scenario so with that in mind we got that taken care of there now we're going to go over to the right here and notice that there is a little gear that appears that is our conditional order if i click on that conditional order it should bring up a pop-up although it looks like it popped up on the other screen there we go and with this pop-up here we can add our conditions and since this is an entry it's looking to buy at the market right here we can click on the symbol there's the underlying stock so this order is going to be tied to a condition tied to the stock we're going to go to method it's going to be mark that's equivalent to the mid price or the last price for the stock since typically the bid and ask is pretty close there on the equity we're going to say the trigger greater than or equal to and then we're going to put in that price that we had marked on the chart which i believe was 235 dollars and 16 cents we'll hit enter we'll click save and so now we enter the conditional order for the buy now this would be kind of similar to if one did a buy stop on an underlying stock if the price hits a certain level it triggers sends a market order competes with other income and market orders and gets filled maybe a higher price maybe the exact price may even be a little bit lower depending on how it moves so there could be a little slippage there now with this we're utilizing a conditional order if i hit the confirm and send we're not finished with the sell order but just so you can see the buy order we're buying one option for october 410 strike it's going to be at the market to open on the condition that lmt lockheed martin is at or above 235.16 that trigger price 20 cents above that resistance okay so basically planned that potential entry now let's talk about the exit or the initial potential exit i believe we calculated that if we look at the chart was that around the 435 or four twenty five sixty we'll go to the trade tab again notice your order will be minimized down on the bottom here and what we'll do is we'll do the same thing here we'll make this a market now this is going to be gtc for good till cancel and then notice there's another gear that'll appear once we move our cursor there i'm going to click on that brings up another condition now here you can put up to three conditions so one being if the stock is less than or equal to and i believe we said that that was 4 25 point 60 well 60 we'll hit enter and if we click on the second box we can add another condition if it's greater than or equal to and let's see if we can bring that up sometimes i usually try to have the chart up there i'm just going to save this for a moment let's bring up the chart so we can visualize that and i think for our example we had 456 67. let's go and bring that up we'll click on that gear again 456.
67 may have been 57 but that's all right we'll click save and there you go now if we were doing this earlier in the trading day you know we may consider leaving this a day order however if we're looking for this to trade above that resistance at any time then we probably want to make this a gtc otherwise this buy order will cancel at the end of the day if the condition is not met so now we have a gtc for the entry as well so if that condition is met tomorrow the next day following day it will potentially trigger and enter that market order so let's go ahead and review this order and we'll address some questions see if we planned uh the trade is going to potentially be executed as planned again the october option we mentioned about the trigger point for the individual stock at or above 23 235 16. if that's filled it will trigger a sell order that will be working gtc and notice there's two conditions now if the stock goes at or below 425.60 or the stock goes at or above 456.67 so i'm going to go ahead and take a look here and let's make sure that i got things right here someone noticed uh that i may have i may have had a mathematical error which is not too far from the truth uh and uh as i'm reading it uh it's obviously uh no let's see 425.60 456. i think i got it right
oh i got it up to 235 thank you there we go and i will uh as i change this i'm going to click on that let's make that 4 35 16. that's why we measure twice or in my case three or four times before you cut thank you let's save hit the confirm and send again and there we go so a little bit of teamwork going on there board 35 16 trigger point there's a potential stop there is that potential target all right let's go ahead and send that through and there we go now notice that did not trigger right away because that condition's not met so we'll continue monitoring this to see if we meet that so full disclosure so i i told you the great news was on my uh our task force team that got certified uh the bad news is uh i got covet along with uh most of our little command cell as we were sitting in that tent so a little uh little groggy uh fortunately uh my uh my symptoms are weaker compared to some other people uh but uh nevertheless uh just had uh my heart rate went up a little bit uh had the sweats one night and uh i'm on the upswing now so but thanks for backing me up on that as you can also tell my voice is probably just a slightly groggly and let's double check any other questions outside of the correction there and looks like i think we've gotten that taken care of thanks james for helping out on some of the questions and i think we got that down pat thank you james yes things are good i also had it in january and it was a little worse in january so i think i've built up my immunity uh pretty good so thanks i know there's a high probability of my travel to leavenworth kansas and hanging out with over 100 some people and then a follow-up week on hanging out with about 300 people and being part of the command team you circulate and it happens so but i appreciate all the well wishes and support let's go ahead and take a look at our apple position and we'll wrap up with that here today so let's go ahead and bring up thinkorswim now remember this is a practice position we did three weeks ago uh utilizing the uh trailing stops on a potential exit and so we can bring that up up up up up up up all right we had 50 shares of apple uh this is actually still in the trade so it's been up on a positive swing for the last two weeks if we go and look at the chart and bring up apple aapl and zoom in now what i'll do here is we did have a trail and stop that's still on here right now now to view that you can go to the monitor tab under work and orders and here's apple right here uh if i go ahead and usually should be able to click on it otherwise sometimes there's a pop-up that comes up on it doesn't seem to be coming up there you go if you click on the gear you can see what the condition is it says waiting for condition if i click on what that condition is i actually had this as an atr trail and stop trailing by one and a half atr versus the one uh that we had put on initially on lockheed martin now we may come back and add a trail and stop on lockheed if the stock makes a significant move let's say initially breaks out and makes about a quarter to about a third of the move we may adjust to a break even or add a trail and stop but in the case of apple if i want to apply that trail and stop indicator on the chart so you can visualize that we go to studies edit studies atr trail and stop notice there's a question mark you can learn more if this is the first time you've seen it i'm gonna double click on it and remove some of these other indicators here now the default setting uh came up here as a five period uh three and a half i'm going to go ahead and click on the gear and change this to 1.5 for the factor that'll line up to what i had on the trail and stop click ok and apply now this was initially entered on the breakout here or actually i think we looked at on the bounce uh it may have triggered the next day on the 20th looking for apple to break out and so with that entry knows you can see the atr below and it notice it doesn't drop it only rises as the price goes higher the atr will trail and rise with it if the price pulls back it holds price goes up it goes higher so that's where that current atr trailing stop is right now as we go into cpi tomorrow and you can see where that current stop is i'll probably talk about some other tools next week such as parabolic sar which is a another trail and stop that may tighten up even more when you're at or near price targets but just wanted to show you on our example for apple and how that example is still in play all right that's just double check see if we have any other questions from anyone hopefully you found this informative folks and would encourage you to practice what you learned here today take a look at a stock that you may be interested in and whether trade that stock on paper money utilizing you can utilize conditional orders as well you don't have to necessarily utilize the stop or the limit function on the platform but that is another way of doing that if you're interested in practicing with an option you can repeat similar steps with another practice stock once again we'll continue managing these practice positions each and every week and i encourage you to join us next week as well now i think i may be out of town uh next week i have a very busy busy year you can watch the news and uh they're they're keeping us busy so that's all i can say um but uh i encourage you to follow me on twitter as well that's another great way of seeing what i'm up to you can see that actually at the bottom of the screen at j mcneckel underscore tda even though when i'm away i try to reach out from time to time too but i also want you to remember folks as you go ahead and do good things and practice what you learned here today so remember that in order to demonstrate the function ad oh one last thing i forgot about this we actually have a promotion going on i did a lot of things on the thinkorswim platform today and some of you may be still trying to familiarize yourself with this so looks like we actually got a few things going on folks i noticed there's a survey at the bottom of the page i think it's first time i saw that so first click on that survey if you can so that way we can get some feedback on this session two for those of you that are listening to the archive session you can vote as well by just clicking like that'll let me know that you enjoyed the presentation for those that are clicking that survey now and filling it out you can also vote twice too after you fill out that survey you can go back and click like too there's also a comment below on the comments all right likewise if you want to learn more about the thinkorswim platform you can get a one-on-one conversation on how to optimize thinkorswim for yourself you can also discuss about some of our educational courses and planning your education keep in mind though the walkthrough is not going to be specific strategy or stock recommendations nor is it tied to technical support we do have a technical group that can help you with that this group is basically focused on helping you understand the platform better a team dedicated to do that i'm going to push a link for those of you that are live and for those of you that are listening to the archive session you can go ahead and look at the description and you'll be able to see that come through now looks like i ran out of space here let's see if we can get that through there you go i believe that little bitly link came across and uh there's a one-on-one reservation system to enable you to do that all right sorry to throw a lot at you at the end there i didn't recognize that survey so remember folks as we looked at those current market conditions we went ahead and defined that swing setup we went ahead and utilized the thinkorswim hopefully effectively the place added additional orders in fact effectively thanks to your help and then we went ahead and reviewed our existing position on apple now remember folks in order to demonstrate the functionality platform we had to use actual symbols keeping in mind td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility once again thanks james for helping out and pushing out that survey click on the link click like and we'll see on twitter folks have a wonderful day bye now [Music] you