Potential Strategies & Risk Management | Trading a Smaller Account | James Boyd | 3-18-22

[Music] and there's the bell we'd like to welcome everyone out to this friday it's trading a smaller account my name is james boyd great to be with everyone actually here today yeah i got lou fez monsoor jules from alabama jules uh me and my two sons we're going to be coming down to alabama to see the utah state aggies beat alabama in tuscaloosa looking forward to that i don't know if you're a roll tide fan or a war eagle fan so let me know lou wrong brian and many others good morning to you we also have ken rose in the chat as well so we'd like to actually welcome him here as well fellow instructor we do post educational content on twitter barbara is going to be out uh for today and then next week as well so i'll teach this class trading a smaller account for the next two weeks now i have gone back and actually looked at the materials she actually covered so i think today will be uh consistent with what has been taught before now just real quick as we're getting started i want to remind you that the content is intended for educational informational purposes only options are not suitable for all investors special risk inherited trading options may expose investors to potentially rapid and substantial losses spread straddles and other multi-leg option strategies can entail substantial transaction costs you should review that and evaluate futures and futures option trading involves substantial risk and also remember that futures futures options trading services provided by charles schwab futures and forex llc we will demonstrate the function of the platform here today using actual symbols and also remember that when we talk about options remember that all investing involves risk and also when we talk about options be aware of what the option greeks are now last but not least also remember that when we talk about stop losses that is not a guarantee of an execution at or near the activation price now just real quick as we get going here i want to kind of talk about the three things that we're going to discuss here today number one is i want to kind of talk about strategies for a smaller account okay what might be some potential viable strategies the investor might consider with a smaller account okay now i want to talk about the why okay to maybe potentially focus on a couple uh and maybe ones to stay away from second i want to talk about risk management given the posit we're going to talk about an account size of maybe 15 000 okay so what is maybe some risk management talking about percentage losses that would help maybe an investor guide to proper position sizing or having an understanding of what that loss could actually be third we're actually going to talk about five trade examples yes i said five we're going to hit all five okay and we're going to talk about the valuation of risk and reward on those five trades especially as you're uh maybe starting an account or trying to trade an account you want to be very aware of what really what the numbers are to try to drive those potential returns and also be on top of the risk so let's actually go ahead and hop right in so first off what i'm going to do is i want to actually kind of just bring up just the s p first off just get a sense of where it is this is actually where the spx is we're opening up down about 12 points down about a quarter of a percent okay now we'll talk about the market as we go but i just kind of i'm not going to talk about it for five ten minutes there we will talk about as we do our trade examples but i want to go to agenda item number one where we actually talk about kind of strategies now if i were to ask you and again i want to kind of write this down and kind of take a little slower pace here but i want to kind of imagine that the investor says james i have an account size of fifteen thousand dollars and i want to kind of maybe cons what kind of know what might be some strategies maybe for that account size now i would like you to kind of type in strategies that you might think could be applicable for a smaller account size now i'm going to write some of these things down and the first thing that would come to really my mind would be verticals okay and i am talking about really long verticals and and short verticals okay and when i actually say this we're talking about bullish trades and bearish trades now if you go back and actually kind of look at what actually uh has been taught in this class before by barbara you'll know that she is taught bullish and bearish trades so maybe an investor might not shun away from doing bearish trades again in general but verticals would be probably the top one okay number two if i were to actually take a look at this and said what type what type of strategy might the investor and it's the dagger minus sign okay what type of strategy i would also say diagonal spreads okay now diagonal spreads are also what's really known as really a uh john mcnichol taught about this yesterday on what's called a poor man's covered call okay and so really that is long a call plus a shore call so the long call is kind of even the substitute for the long stop okay that could be that could be a strategy applicable now the other one is i would also include here maybe a short wide put okay and so think of this as a cash secured put cash secured put with a long put further out of the money in other words why is that because the investor is probably wanting it to be defined risk okay so that's like a vertical but it's just the long put strike is further out of the money to define the risk okay now we also said actually what's another one maybe an investor might focus on we actually might say a long or short synthetic okay and by the way what is a long synthetic just briefly long synthetic is just a good old long call plus a short put and you'll see us do that here today but if we look at that that's that's really what it is it's taking two bullish trades and putting them together long column short but we're also going to add a uh long put to define risk okay and also reduce okay buying power okay and we'll show that now the other one is could the investor maybe buy a stock so that's i know this is a big one okay could they buy a stock i think if we're talking about a fifteen thousand dollar account the investor is probably looking at maybe stocks that might be in the ballpark of let's say maybe twenty to forty dollars okay i think if the investor goes over forty dollars uh that it's probably going to be taking a pretty big chunk of the account if the investor buys a stock maybe can they else also maybe do maybe also what we call a married put which is really long stock plus a long put yeah but it's probably going to have to be in that price range so it doesn't take so much of the portfolio now those are kind of some of the strategies that i actually thought about did i so verticals diagonals short wide puts uh like cash secured puts with protection long synthetics stock positions but they're probably stock positions in that 20 to 40 dollar range and if the investor did that could they actually do some protection type trades yeah i think they could married puts okay which is just long the stock and long a long a put for protection so the investor really has probably about five different types of strategies even though the investor really only has let's say fifteen thousand dollars now the comment really came up from b is an iron condor or a directional broken wing butterfly so typically in our classes that i teach i tend to be a little bit more directional because uh and by the way that's not the only way that the investor can benefit but if someone said james i want to be more neutral they might do more like iron condors and try to be more time and volatility focus my classes i teach i tend to be a little bit more directional if you said i like non-direction then that investor might add that to the list okay now let's kind of take a look at this is if someone is really having let's say fifteen thousand dollars is it really going to be more trading is it really going to be more investing okay well when we actually kind of take a look at this we probably say maybe it's a little bit more trading and i would really kind of say it's maybe more swing trading so i would be kind of thinking about days to weeks here okay days to weeks and when you say weeks i'm talking about it could be probably these trades would probably be 50 days or less okay could they go longer yeah but the probably it's going to be more of a trading account than let's say i bought the stock at four and now three years later it's now 15. okay probably not okay now i'm not saying it can't but it's probably going to be more of a trading account now are there any questions actually so far now i want to kind of just i'm going to see if there's any questions okay and what i want to do is i want to also kind of take a look at the last thing before we look at our second agenda item which is talking about risk management so if the investor let's say had a fifteen thousand dollar account and they said james i am willing to risk one percent of that well one percent is 150 is that realistic what about two percent if they were willing to risk two percent of fifteen thousand dollars well that'd be three hundred dollars is that realistic three percent would be 450 you get where i'm going right so what you're going to notice is as we go kind of further down what is kind of maybe something more what the investor might plan on okay well if we did this let me take one more and for five percent to kind of show you this is probably going to be about 750 okay so if someone said james i'm going to only risk in a lower dollar account one percent we would say that that's not going to give the stock a lot of room to move i doubt that's possible okay it's really small position size if it was but i think probably that the investor in a smaller dollar account they're gonna probably be in this this area more of let's say three to four percent in that area okay three four five percent so on any given trade they might be risking three four five percent okay now if the investor said well how many positions could actually do okay given that well you could do the math 15 000 divided by 450 and it's going to tell you how many positions could be in that uh if you if the investor was risking three percent etc so i think that three to five percent is probably going to be maybe a more average area of what the risk is okay so number one is we talked about the strategy types okay up top number two is we also talked about position sizing okay what's the acceptable risk per trade and then once someone actually knows what the acceptable risk is for trade what they could do is say look if the account size was fifteen thousand dollars and each risk was let's say 450 okay it's going to tell us the number of trades that the investor could actually do and if we actually did that and kind of drug it down what you're now going to didn't work but if we actually did that and i'm going to kind of fill this out so we can see the number of positions if the investment did 15 000 750 you're now going to see that someone could actually have quite a bit of positions and this is probably more realistic if it was really more like vertical type trades so this right here could be could be number of positions now i think that 33 number numbers probably really high i think realistically you know 20 positions assuming a 750 loss okay this is obviously going to be the high i'd probably think the number is probably going to be half that if we start talking about more directional type of positions that are more capital intensive but maybe that could be the highest it could be as far as the number of positions now let's talk about agenda item number three let's talk about these five trades that we're actually going to look at in context of these positions so the first trade example i want to kind of take a look at i want to kind of focus right now on the verticals okay and i want to come and talk about that long vertical or short vertical and when we say long that would be a debit the investor is paying if we actually said short the investor is collecting there's a credit okay now i'm going to actually bring up the stock and i'm going to kind of start with let's say caterpillar now we know it's cousin lately when i say cousin i'm talking about john deere let's take a look there's john deere hit a new high this morning and i want to actually go back we talked about industrials yesterday and i want to kind of take a look at this from our perspective so if someone wanted to be kind of more on the probability side they would probably be doing more of a short vertical okay with a short vertical the stock doesn't have to move to break even and some investors like that they like there to be more leeway now remember if it's higher probability there's lower reward okay so there's a trade-off there okay now if the investor said james i'm kind of now let me kind of look at this on a weekly chart if we zoom in what you'll notice is this is trying to get a crossover for the second time and it's maybe trying to now longer term you might say this kind of looks like maybe like a potential flag as well from a longer term basis let's say the investor said they got a 15 000 account they have earnings upcoming which might kind of guide the stock price up or down and let's say the investor said they want to kind of maybe sell a put and buy a put below so we're talking about a short put vertical so let's say the investor comes in and says look i want to sell a put and i want to buy a put now i didn't mention this but i'm going to mention this now okay when we talk about these type of trades of doing verticals the investor on a smaller account is probably going to be more focusing on dollar wide to five dollar wide spreads why is that well because when you actually have ten dollar increments the max loss is even gonna be bigger than probably that five percent that we showed before the investor though might say look the other weeklies that are liquid and i'm not seeing anything here if we're talking about weeklies that really look that liquid at least as far as that time frame if we go to the ones that are eight aprils and i'm seeing something a little bit better but still not really wide excuse me narrow these are still showing pretty wide here so the paperwork account is just going to show this for purpose of kind of talking about what that max loss is and if the investor said james i want to sell the 210 and then maybe buy the 200 and do a short put vertical this is kind of your classic credit spread okay now remember we got to think about this is how much money is it tying up what's the maximum loss well what you're going to notice in this trade and why an investor with a smaller account might focus on dollar wide to maybe five dollar wide spreads is you're going to see that the max loss is really 803. so when we go back to that sheet of paper there what you're going to notice is this is literally and i'm going to kind of write down number one here okay number one trade example we're talking about let's kind of talk about reward let's talk about risk this risk right here is about 803 okay that reward should be at 197.

and let's kind of put this together let's it's actually 196 but we're close so if we look at this trade number one what you're going to notice is this risk is higher than even that number and let's go back and kind of write this down when we kind of talk about verticals that investor might focus on dollar wide one well one dollar one to five dollar wide spreads purpose is actually to make a max loss potentially lower okay and i want to show you this on purpose if the investment starts focusing on these big 10 wide strikes all of a sudden the risk balloons okay you get it now it's very important because if someone's just doing 10 wides all the time it doesn't take a whole lot of trades to beat that account does that make sense now if we actually talk about this let's say the investor says how many trades could it really do it can really only do one contract okay this is even pushing the five percent threshold i'm only doing this to really show you if the investor focuses on 10 wide spreads there's not going to be that many positions the investor can really do and then if there is a loss it is going to represent a big chunk of that account size if the investor does lose eight hundred dollars on fifteen thousand that's going to be over five percent of the account and it's five point four percent so it's a little bit more but i'm only showing you this one example for the purposes we just discussed okay so first trade example is going a short put vertical now notice the stock's at 218. so the stock can actually go down to 208 20803 okay and now what you're going to notice is if we take a look at what's called ror okay and this kind of goes back to the investors mentality so i'm going to talk about percent of that portfolio value pv okay percentage of portfolio value but i'm also going to write here ror okay ror what is ror ror is just taking a look at the 197 divided by that risk and now what you're going to see is and by the way we have ken rose actually here with us why is he not talking about this okay so usually investors like to kind of see a minimum threshold a certain percentage or more now why am i showing you this on a little sheet like this the reason is is because when people put positions on they don't really know what the potential gains are they don't know what the cumulative risk could be and i want to show you that today in our trade examples so if we look at trade number one we have a reward of 197 ish the risk of 803. we're going to asterix this and why because it's a ten dollar wide ten dollar wide spread this might kind of be on the outer banks of what the investor might be comfortable with okay now if we actually go back to trade example number two okay so we're gonna actually now by the way when we look at the commission this is a multi-leg selling the put buying the put and now what you're gonna see is there's the additional commission of a dollar thirty how much buying power is it tying up well whatever the max loss is 803 okay now what we're actually going to go ahead and actually do is practice in this paper money account let's send the order through practice and there it is now the one thing i want to make mention of is when you come back is we're going to put these trades right in the section of where it's a smaller account okay so in that smaller account we're going to put those trades in there so we can actually see that so if we actually go down and say hey uh you know with that trade that we actually just did on caterpillar let's actually put that in that area right here we're going to highlight that right click we're going to go to where it says move to group and we're going to say smaller account there it is now if you actually said well how do you put that in there if you right click on any of your stocks right click move to group you're now going to see where it says unallocated or some of the group listings you have or add a group now the key to see this okay is you want to go over here on the right hand side and say new layout okay old layout if you do this right click move to grip you could still do it but you really want to kind of be on that new layout so what it does is you can put your trades in categories or folders okay how do you put it there again right click if you don't have any groups nate like add a group and name it okay i did that earlier this morning i just label a smaller account any trade that we actually do we're going to put it right there in the smaller account and i actually listed it as their 15 000. okay

now let's take a look at trade example number two trade example number two is ump now ump is actually one of those stocks where it's trying to kind of break out of maybe this i don't know symmetrical triangle or wedge now there's some investors here that don't like to buy on a red candle some investors like to buy on a red candle because some investors don't mind buying a red candle as long as the stock is still above support the red candle is just coming down closer to support now what we're going to show on this as we talk about verticals let's say the investor said james i really kind of want to have really a more directional type trade now we got to go back and kind of verify something does ump have 10 dollar wide spreads or is it more of a five dollar wide spread let's go take a look together well what you're going to notice is on the monthly options for april okay there are five dollar watts well why is that maybe potentially interesting well what you're going to notice is uh it would mean the max loss would be less now i'm actually looking at this i got 825 by 945 and then when you take a look at the maze double checking that those are still a dollar wide okay now the ones that kind of look a little bit more liquid might be let's say the 255 and the 265. now in the option strategy workshop we talked about really the spread being no wider than 10 percent of the marked value of those options okay so if we actually looked at this and said geez for a thousand open interest this is kind of making me wonder if there's maybe some pending news with that type of open interest you would think that this spread would be a little bit lower than that okay so if someone is actually going to practice this which we're going to it's very critical that the trade is actually placed at the mark which is in between so first off if the investor says look i'm going to do the 260 265 that's really long that call and then selling the 265 okay now what does this really look like okay now by the way if the spread is a little wider you know is the trade probably going to fill us fast probably not it's probably going to take a little bit longer to fill now one of the things that's interesting about this is with a long call vertical a bullish trade okay you can almost think of it almost like a cover call in a way you're going to see that whatever the investor pays is what the max loss is and what you're going to notice is it's a 5 wide spread less the max loss and that's going to give us really the max profit so let's write this down so now we see in trade number two we got 242 got 258 okay now if we said hey if the paid money portfolio we're going to risk 258 what percent of that account would it really be well that's going to be about 2 now i'm going to tell you right now people with lower dollar accounts typically are not looking at the numbers okay we're watching the numbers okay this is very important and when we actually take a look at this that we that return on risk it's gonna actually be higher well because it's in this case let's go back and look at that there it is why is it actually higher well this is not your classic credit spread this is a debit spread okay so let's kind of write that down debit spread okay there you go now so that actually has more of a balance between reward and risk there okay now let's take also look at the break even on this the stock is at 260 170 and the break even is at 262.58 so the stock only has to go up about 80 cents or so if you will maybe 90 cents just to break even to really get the maximum profit it wants that stock above both strikes okay now james why are you not talking about management here well because we don't have any trades on for this class yet i teach other classes like on monday tuesday wednesday thursday i would normally talk about trade management but maybe you didn't go to those classes and so if i showed you the management you might say well it's not very helpful because i i don't really know where you got in etc okay so these are going to be trades that we're going to follow through next week as well and kind of talk about building a smaller account now what you're going to notice is the cost of the trade the buying power effect the commission what you're now going to notice is that is if we go back to that cheat if this trade lost it would lose 1.7 of the portfolio value i just labeled it as pv portfolio value so that's not very big now here's what i want to kind of pay attention to though right these two trades so what's kind of damning about trading a smaller account if both of these trades lost okay if they both lost they would be down the portfolio would be down 7.1 percent now that would stink right but you got to understand in the smaller dollar account everything typically has a bigger percentage because it's a lower dollar account but you're using the same thing that someone does at a bigger dollar account level let's say at 100 000 or at a million the percentages here are just bigger okay it doesn't mean that someone was a bad investor it's just that's the way that it is and that's why i said that someone is trading a smaller account they're probably risking three four five percent in any given trade that's probably pretty normal so in this trade example let's practice on sending it and what i want to kind of do is let's kind of take just a quick timeout are there any questions okay now the reason why i bring this up as far as writing the strategies down talking about for example kind of looking at the math is because these are the habits that the investor wants to get if they're trying to get an account off the ground not paying attention the numbers is just seeding a potential disaster because it's probably over position sizing and when they have max losses not if when that account could probably be severely hammered by not paying attention to the numbers okay very important and i want you to also not pay attention to just what the individual position risk is but what's the cumulative effect of these trades as well okay now taz that you said an unsecured option will take up a lot of buying power let's talk about that okay so remember we actually said that one of the things and let's go back to the sheet okay one of the strategies we actually kind of talked about is that maybe what about a short wide put so i said right here this would be actually something that maybe would actually have a cash secure put with a long put further out of the money so it's like doing cash secure put but i think the one thing we probably want to add to this is maybe this would be on let's say lower dollar stocks that would probably be in that 20 to 40 dollar range now what might be a little hard here is could you go a little higher you could but i think this is what maybe some understanding that maybe the investor doesn't really want the shares of the stock okay maybe they just want to try to get the premium so example given let's say the investor said james i'm looking at a stock like wells fargo now i want you to notice something here that wells fargo is not a 20 to 40 stock this is a 50 stock let's kind of talk about this let's say the investor says james i'm kind of thinking that maybe the interest rates over time might go up and maybe the investor says james i'm kind of actually thinking that some of these banks might kind of be in a situation where they might try to bounce off this longer term well longer term trend line now the price action right now is trying to go up through the horizontal resistance which it fell down through well let's kind of use this as an example so here's kind of that diagonal line i know right now it's hit the 10 and the horizontal i understand that and now if we actually go back and take a look at this let's say the investor says they want to sell a put because they're thinking that maybe in this area there's a lot of areas of support at 48 anything between let's say 48 to let's say 50. so the investor says in a smaller dollar account they want to try to do cash secured bullets but with an understanding how much is this really going to tie up can they really do it what's the pros and cons well let's go look at let's say something like the april expiration and let's imagine the investor says they want to maybe sell the 50 strike now james if the stock's at 50 that's kind of like selling something at the money yeah noted and we'll take a look at that and if we the investor said well james i'll maybe want to consider maybe doing the 4750 and then maybe doing something further out of the money well let's go take a look at this now by the way what are the what's the delta for each 47 29 okay so you're probably thinking i want to see that okay so there it is now let's say in this case that the investor says look they want to sell the 50 which is being more aggressive okay and by selling the 50 they're really saying look i have more of a bullish outlook on the stock and one of the investors said you know what james i want to sell the 50 and i want to buy a strike below now why are they doing that well when someone sells the 50 and then maybe buys the 42 and a half it really makes it more like a vertical type trade 50 47 and 42 and a half there's the credit and now what you're going to notice is when we pull this up let's evaluate together what's the break even okay 48.36

the stock could even go down a little bit max profit max loss there's the there's the uh commission and there's the buying power effect so could someone in in this type of account fifteen thousand dollars do maybe like a vertical yeah but more of the examples are probably going to be on lower dollar stocks between 20 to 40. if we're talking about something that's 50 it's probably going to be outstretched okay but if you notice what the risk is and let's write this kind of practice it kind of review this what the cumulative risk is and people probably don't do this that's why we're practicing what's the reward well the reward is really what the net credit is 164 okay 164. what's the risk well defined it's 586. so now if you actually take a look at this is it is a defined risk trade now when you actually said what is the percentage and this wasn't one of the questions that came up we're saying if the portfolio lost 586 dollars of the 15 000 how much would it be and the answer is it's four percent okay so what you're going to notice is could someone actually do a cash secured put sure but probably the reason why we kind of said is the investor's probably trying to buy that long put further out of the money to define the risk when the paypoint account is showing that example what you're now going to notice is when we kind of take a look at what is the cumulative effect of the taking of the risk well if we add this all up what you're going to see is if all of these traits lost all of them if the cumulative effect is the portfolio would have a draw down about of about 11 now i want to kind of speak to this just real quick some investors might be uncomfortable with ever having that number greater than maybe 10 15 20 why because if all of these trades didn't work then the investor would actually have a pretty significant drawdown at one point in time some investors might say look i'm only going to put on one or two or three trades at a time to try to get the trend to work in my favor before i start adding more positions so i want you to think about this as really portfolio heat and i also want you to kind of think about this as maybe a draw down okay percentage so if everything lost it all they all lose the portfolio would actually really be down dollar wise sixteen hundred dollars what's the percent of that it's 11 i want to kind of highlight that number okay now have you ever evaluated what you're okay with actually drawing down most individual investors don't know the answer that question we're actually identifying this because in a smaller dollar account you're going to see that if the investor just keeps stacking on positions stacking on more positions stacking on more positions if they actually lose they they could easily have a month where they might be down 20 and they had not a clue but that's not us because i'm showing you that okay so the investors said james in any given month i don't want to have any losses greater than 10 of the portfolio value when this in this case given these trades that investor would say i'm going to need these trades to go up a little bit before i start putting on new positions does that make sense now what one position is kind of really making it very top heavy uh it's the one that i actually kind of cautioned on whatever trade has a wider spread like a 10 wide spread that is probably going to balloon uh kind of what the risk is and and you already know that because we talked about that okay so could someone with a lower dollar account maybe actually do a cash repair put yes but maybe buy the long put too but we also kind of need to caution that if the investor were assigned now what does that really mean to be a sign well a sign means that the investor buys a hundred shares of the stock at 50 from now until expiration regardless of the in the money amount now if the investor was assigned to buy the shares the reason why we kind of talked about maybe stocks in a lower average range is because the investor needs to say hey if they had to buy the shares at 50 that would be like a third of the investors account for the short term if they were assigned to buy those shares do they have to hold on to those chairs for any length of time no they could sell some of the shares they could sell all the shares if the investors said look i've got fifteen thousand dollars a third of my account is in wells fargo they might not want that and so they could actually say i'm just gonna sell the stock so that might be something more short term in nature that happens but remember the investor who owns the shares at that time can sell the shares okay now you want to evaluate what the liquidity conditions are at that time but if it's a pretty liquid stock and you know if they're trying to sell the stock over a couple days pretty likely that they could sell some or all the shares now what you're now going to see is in this case is let's say that the paid money account goes down to where it says smaller account so now when we actually put these trades in we're actually going to put them in that smaller account section now what you're going to see is it's going to send and there it is so so far what we've actually done we actually talked about three trades caterpillar okay unp by the way i got to go back down to ump where is that ump right there and i want to see so what's happened is it hasn't filled yet and so that's why it's not really actually in that section yet and we also talked about the example of wells fargo okay now i want to also go to questions real quick and let's do one more example the question was as follows are there single leg option strategies that are relevant in a smaller account boy this is this is heavy okay so given the i notice i did not say anything about a single legged option position okay put someone actually do that on smaller account the answer is yes the biggest actually thing is given the market condition where the vix has been greater than 30 those long puts are probably going to be pretty expensive or long calls okay the long puts or long calls are probably going to be pretty expensive if the investment said i'm willing to risk all of the premium you might be greater than five percent okay now are we saying that all stocks actually have high implied volatility no but they're probably going to be pretty affected by the by the vix level in the market okay that's probably going to be pretty normal so what i would actually say is someone could actually do let's say long options long calls long puts but got to be very careful as far as actually uh you know what the what the investor is really paying for them and what the time decay is okay now in our trade examples number one caterpillar number two ump number three as well as fargo let's take one more now what i'm gonna actually show in this case is i'm gonna also go back to a stock and it's called t-mobile now if you let you take a look at t-mobile t-mobile has been one of the stocks that's really been trying to reverse now i want to verify this just real quick since the market is open now that's what it looks like on the daily chart here's what it actually looks like on the three-year weekly trying to get across on the weekly go back to the daily i'm going to actually pull up the option table i want to verify where these spreads are these spreads are actually better than what they were on um let's say the investor wanted to have a higher potential upside and whether this is a 15 000 account 150 or 1.5 million it doesn't matter the portfolio is trying to smather different types of trade zone why well because some of these trades are more about raw more about probability like that one which was caterpillar this trade was really more about let's say profitability this trade right here what's really more about probability okay and really kind of about maybe uh income potential okay positive theta trade number four we're actually going to look at here is really t-mobile now this is the last one so if we actually go looking let's see t-mobile the option let's say the 14 april 27 days expiration let's say the investor said look they want to buy that 125 that has some intrinsic value and now what you're going to notice is if they go buy and then vertical you're now going to actually see what the debit is it's going to write that in now remember is this a 5 wide spread it is if it's a five dollar wide spread we know what the max loss is we know if we look at ever like return on risk if we did it like this that return on risk is going to be higher so what you're now going to notice is if that number is that high this obviously tells us these are debit spreads okay now if we actually said if the paid money portfolio lost 229 dollars of a portfolio okay value that had 15 000 what would be that drawdown well it'd really only be about 1.5

now i want you to kind of look at what we just did here in these four traits there's a potential reward okay now notice on these traits there was only if we actually take a look at there were none of them that really had a map like an unlimited upside none there were no long calls there were no long synthetics none but they all had defined risk total 1800 and what you're now going to see is what is the portfolio heat if all these trades were to go to zero they all take a maximum loss the portfolio drawdown would be about 12 and a half percent we want to watch that okay if that number is getting too high the investor might say yeah i might have more capital to do more trades but i am not okay with taking more trades given that portfolio heat or a drawdown percent okay so in this last example when we actually take a look at this the paid money account is only now by the way if we actually say well how how much is it really risking 229 dollars where is that that really means that it's taking a smaller amount and that is normal given a debit spread okay that's more normal when you do more of a credit spread you're probably going to kind of be down in this area right here okay now if the investor says okay they evaluate this the break even the max gain loss uh and puts it right in that smaller account notice the commission if that's okay send the order and now it's gonna actually see if the trade fails so we said we wanted to actually do five today we did four they all filled and so what i got to do is actually got to wrap this up okay but also for example is in the chat we do actually have a registration link for next thursday we actually have what's called the education day we have a variety of topics that we're going to be discussing you're going to see that for example when i click on that link myself and slide it over i want you to for example click on that link and it's going to take you to where you can register for the sessions if you actually scroll down it's actually going to show you for example what are those sessions what is the description of those sessions make sure you're aware of that now what you're going to notice is it'll break it down john mcnichol connie hill etc talk about etfs takeaways for stock investing in retirement passive income with dividends etc okay make sure you're aware of that also in the chat there is a quick survey ah and that survey looks like as follows if you can actually click on that there's five undifficult questions about how you enjoyed today's session we had a goal of number one is talking really about really strategies for a smaller account i think we did that we talked about that in detail number two we actually talked about risk management what might be more applicable in a smaller dollar account we talked about risking between one to five percent and why that might vary given the strategy difference we also talked about we said five trade examples we did four okay so i i know i'm hurt i okay we got dad going close on that some of you were thinking there's no way we got closer than you thought didn't we okay so i'd like you to actually fill that out and anything you actually write i read and i appreciate that in advance of filling that out i also want to thank ken rose for actually helping out as well and also i want you to be aware of our next coming session right coming up right at the top of the hour as well remember with what we discussed it was intended for edge information educational purposes only remember when we talk about options here today options have risk okay be aware of that risk and i think today we actually did a pretty good job of kind of identifying per trade what the reward was what the risk is and we're just using this as a little sheet of paper okay anybody can do this and just kind of and i'm just doing this in the class the purpose of seeing this is what's the cumulative effect of taking risk not just individual it's not good enough just to look individual looking at individual position sizing looking at the trades combined is really where you actually see the bigger picture of how you're building a portfolio so i'm out of my time here today thank you so much for your comments and your participation stay tuned for our next webcast coming up right at the top of the hour thank you so much take care bye

2022-03-23 07:33

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