Setting Stops Could Be Dangerous | Trading a Smaller Account
[Music] hello and welcome to trading a smaller account my name is genius boys standing in the stead for barbara armstrong who's on vacation i mentioned last week i'd be covering her class for two weeks but she will be back next week alongside with me i got my good friend ken rose with us in the chat a fellow instructor as well want to say good morning to everyone we actually have godfrey but kerry uh lou van frank chuck there is the bell so we're right on time so just real quick welcome and good morning to everyone i normally teach at the uh 11 a.m eastern slot so uh you know teach a little earlier you guys are morning people so all right let's go ahead and get started so this class i'm trading a smaller account and we set the parameters for this account really being fifteen thousand dollars and we'll discuss that and we mentioned that last week but uh we'll continue that theme here today of the smaller account is example given fifteen thousand dollars now just real quick as we're getting started i want to actually remind you with what we discussed here today the content is intended for educational informational purposes only not a recommendation or advice of any security strategy or account type options are not suitable for all investors special risk inherited trading options also when we talk about uh investing in general all investing involves risk and also remember that options uh you want to be aware of the option greeks and how those really what those are really referring to like delta gamma theta and vega and if you say i need a little help understanding those next week on monday i will be kicking off a a four day uh at night uh online workshop that begins next monday goes to thursday with a q a on friday we do those online workshops every week we rotate the topic next week will be option strategies so if you feel like you need a little help there check out the online workshop now just real quick as we're getting started here i want to kind of give us a quick outlay of what we're going to really discuss so first off we need to take a look at the index and sectors briefly uh we're going to look at also the past trades from last week kind of look at a performance talk about strategy and the capital that's been invested also we'll talk about four new trades and i'm not getting off until those four are put in okay and i might flip flip the order around i might we might actually talk about new trades first probably will actually and so that's but that's going to be what we discussed now our focus again is going to be mindful on the numbers uh as far as the capital invested we also want to be mindful of what the risk is etc so that's going to be a big emphasis now the other thing is as we get started here today i want to i will give you a reminder of the strategies we said that this class will do in this fifteen thousand dollar account so with that said let's go ahead and take a look at the market conditions so first off let me actually just kind of change my screen here and so first off if you actually look at the s p now if uh if we zoom in on this so here we're looking at the s p 500 and you'll kind of notice that we've had a diagonal breakout if you're trading a smaller account okay i'm going to imagine that someone that's trading a smaller account is probably more bullish than they are bearish okay because if they have a smaller account they probably might not have maybe a ton of experience yet so let's just say the investor said look i'm more bullish i'm learning how to invest etc seeing the seeing the market here the spx get above the diagonal line have a moving average crossover and if you look at this we've kind of had like a one day down push back up one day down push back up and then actually getting to a short term maybe higher high here okay now bart uh mike says i hope barbara is okay barbara's just on vacation so uh she's probably sucking in a straw with an umbrella mike i doubt she's injured in any way okay all right teachers on vacation you know there you go so now if we take a look at this okay so seeing now by the way when you look at the rally we've actually had okay it's also important to look at the what type of potential price pattern that we're seeing we've seen a very strong run up on the s p okay to say the least and it ran up and that right there has been about an eight and a half percent rally going straight to the upside with a little bit of a pause now what's interesting is after that eight and a half percent move you've had odd down day followed by the update odd down date fall by the down day when you go up in a half percent and it only goes down for a day before investors come back in this move might not be done yet and i think a lot of people discredit that okay go look at nvidia you'll see that it had that same type of rally to the upside and then it had a big move yesterday and vinnie was up almost 10 doing the exact same pattern do not discredit well you can might not like the returns but when you see the stock go from low through the diagonal resistance moving average crossover this is setting up the pole now we have ken rose with us he is mr bull flack he knows all about that okay so be aware that you know some might say this move is overdone when you get a pull like that this move might not be overdone you might just be setting up the next potential target last one is we'll just take a look at the nasdaq same theme here seeing a decent reversal remember it's been a while since we had a bullish moving average crossover okay it was about two months ago where you actually got across the nasdaq being in the most kind of oversold condition it might try to go back up and re-test where it broke down from my comments today are going to be in the nasdaq stocks and uh at least two of them and so when we actually take a look at this uh we will kind of look and see can the nasdaq and the stocks maybe get some upside potential can we add to that area okay now what i want to also do is from the sector point of view i want to kind of just point out sectors wise when you look at sectors is anybody paying attention based materials hello right if you look at base materials they've been on a rocket ship uh same thing we actually saw on really the s p was down for a day and then push right back these basic materials been very strong okay you look at kind of where this moving average crossed over about right on the 16th 17th it's been almost straight up okay if you look at the energy isn't falling apart not necessarily if you look at energy what type of price pattern do you actually see on the energy okay well if you actually look at ixe you actually have a a high and equal high with an upward trending diagonal support now when we say basic materials and we say let's say energy we're really saying the word commodities that is still there and so we're kind of saying that that is still more like that ascending triangle pattern now one of the other areas that some investors like dividends and one of the areas that's been surprisingly strong hitting a doink a brand new high here today is utilities okay some investors kind of like companies that are more stable for the revenue and earnings per share and if you look at utilities hit a brand new high year today it doesn't really have like a u pattern maybe a cup and handle the typical it doesn't look like that it kind of has more like a v pattern where it's sold off aggressively it rallied aggressively and you're going to see that it's actually getting above the old horizontal area of resistance now some people like to buy the sector which isn't the option they're buying the basket or they might try to buy individual names in the basket of the utility space even utility is getting a little rally here maybe some investors liking those income stocks through the dividends the last two i'll point out obviously if you look at technology we already saw the nasdaq there it is and the last one we'll actually point out is discretionaries now when you take a look at let's say discretionaries it's bullish like to see that maybe do a close above the high the low day on march 23 okay or the third 23rd that's the lowest most recent red candle like to see today could that actually get above that area now let's kind of talk about any questions you have so one of the questions i saw before is and this question was for barbara but i'll answer this okay the comment was a you know does this class not like verticals well so first off and i talked to barbara quite a bit i i wouldn't say that barbara doesn't like uh verticals okay uh so i would not come to that conclusion when we talked last week this was a screenshot of what we actually mentioned last week as far as the strategies and i want to kind of hit this because this is going to go into our first trade example we said in this account fifteen thousand dollars that one of the first strategies the investor would actually look at perhaps might be verticals and we mentioned last week in the class long verticals so the reason why someone may be in a smaller account might focus on long verticals does anybody know why they might focus on long verticals well it it's because there's a higher max gain okay there's a higher match gain still has to define risk but if someone did a short put vertical the way that position really benefits the most is they typically have to hold down closer to expiration so if someone want to be more of a trader and have a higher max gain they might focus maybe more on long verticals okay so i would not take away that barbara didn't focus on short put verticals so therefore she doesn't like i don't think that's it i think just a trader might say i maybe like long verticals more because i of a higher potential max gain okay to move the overall account now if we actually so i just want to reference this so if you said james i didn't catch that class last week and let me kind of show this one more time if you said i didn't catch that what type of strategies is this class gonna really be focused on and let me actually refine that we we actually said it would be really focusing on let me actually grab that we said we would be focusing on verticals diagonal spreads cash secured puts long synthetics right we said stocks that would probably be in maybe a 20 to 40 dollar price range but i'm going to talk about an example where maybe the paper money account might even go more than that so let's take a look at our first example here today okay so what i'm gonna do is i'm gonna look at a stock like microsoft okay and speaking of verticals okay now if we were to actually take a look at this okay so here's the stock of microsoft and he actually had a triple top of let's say 342 and then the stock sold off and kind of had like a triple quad bottom here okay and if we were to kind of draw the diagonal line and kind of see the slope the angle you might kind of say hey james we're kind of seeing that maybe that's the the downward line of resistance and could maybe microsoft be breaking out now we might think that a stock that's 303 dollars the investor that's 15 000 come on they can't invest in this can they well let's take a look okay so let's kind of start off with the vertical and we're going to look at a long call vertical now the what's interesting about these bigger dollar stocks is they might have dollar wide spreads five dollar widespreads ten dollar wide spreads and that actually could allow the investor to really try to play one of these bigger names but kind of control the risk that they're taking so let's take a look at a bullish example of microsoft we're gonna go to trade tab and what we're first gonna do is gonna go down and let's say look at the kind of the liquidity if we look at the liquidity we got 755 785 i'm just looking at the at the money strike just to kind of get a temperature of what that liquidity is if someone looks at the bid ask spread 30 cents a quarter and when you look at the second thing we want to look at is what is the open interest there's open interest there as well now if some of you said james i might want to go a little bit farther out uh those are also liquid as well you got to remember it's a 300 stock so that that bid ask spread is about 45 cents and the higher the price of the stock typically the wider the bid ask spread typically okay now the paper money account is going to focus really on the april expiration and the other thing i want us to notice on is look at the strikes 295 297 and a half 300 302.50 so we have strikes every two and a half dollars why does it matter well because if the investor said i have 15 000 and i wanna kind of control my risk having a narrower having narrow strikes really can allow the investor to control the risk so let's say the investor said james i'm bullish on microsoft and i want to do a trade where i could do like a long call now let's stop there long call means the investor's buying a call okay and if we said a long call vertical that actually means that the investor is buying something and selling something well with a long call let's say the investor buys a long call at 302.50 well
let's right click on that 790. let's actually go to where it says buy and then go right to here to where it says vertical okay so all we now see in this case is let's kind of start with these strikes okay so it's buying a long call with the forecast that the stock could go up and that is actually 7.95 now what you're gonna notice is it's also selling a strike above so this is very cover call like where someone has an underlying position okay the call and then selling a call above and that what you're going to see is the debit here is the most the investor could lose so for someone that has a lower dollar account let's say 15 000 if we called it that that's the most they could lose in the position now what you're gonna see is if the spread is two dollars and fifty cents the sp the spread there 250 less whatever the the debit is a dollar 33 that's the most the investor can make per contract okay so 117 dollars now let's say the investors said and i will i will refer back to this in just a moment but if we said james i want to go back and maybe open this spread up to maybe let's say 307.50 i want to maybe widen out the
spread just a hair well now what you're going to see is this 2.53 cents represents the most the investor can risk okay so i want to kind of let me just see if i can't find that again there it is i knew it hid somewhere okay so remember last week we talked about there we go okay so now what we actually said let me actually take it back a hair so i can get that curse there we go see i just want to move it out of the way so we have fifteen thousand dollars we said if the paid money portfolio was willing to risk one percent it would be one percent of fifteen thousand would be a risk of a hundred fifty dollars two percent of fifteen thousand dollars would be three hundred dollars three percent of fifteen thousand would be 450. now james why why does it actually kind of have it where as it goes three percent four percent five percent the numbers are turning red well because maybe the investor says typically they might only risk one or two percent but if the investor starts risking three percent or four percent or five percent now all of a sudden you better know what you're doing because this is gonna make a bigger it'll be good or bad depending upon if the trade worked out so let's actually go back and evaluate this trade and say okay what would be the maximum loss well if if we're talking about doing a one contract 302 50 to 307.50 you're now going to notice that the debit is 253. well if we actually go back to this and say well if you lose 253 that's like risking 2 of the account value and that's true now the other reason why maybe barbara might consider maybe long call verticals over short put verticals it also goes back to the greeks okay if we analyze this trade and we actually took a look at the risk profile one of the reasons why an investor might say i like maybe doing long call verticals perhaps maybe a little bit more is they tend to have a little bit higher uh and not not always but they tend to have a little higher delta and that just means that the the investor would have a greater sensitivity to price movement now what you'll notice is the con of a long call vertical is it doesn't have that positive time decay like a short port vertical does but the investor's saying that's secondary the investor is typically thinking i want to have a greater exposure to trend and in this type of trade the vega is more neutral okay so when someone actually picks a long call vertical they're really kind of saying look i am more confident in the direction of the trend and so they're trying to pick a trade that really has a greater chance of having a higher max gain so let's kind of look at these numbers one last time so it's a five dollar widespread 302 and a half 307.50 you're going to notice the max
profit max loss this is more of a one to one and we see the break even okay now remember for the for one contract what you're going to see is it's a dollar 30 for commission and if the investor we're going to say well how much money is this really tying up well it's tying up 253 dollars so if the investor says i want to do that and we're going to put that in the smaller account we're going to go ahead and send it now if i want to kind of write this down as we go and one of the things i want to do in this case is if i can i want to actually write this down so the trade number one is we actually talked about let's call it trade one okay this was microsoft and i want to look at the capital okay so it was 253 dollars that is really what we call the max and by the way that for this case it's the max loss 253 okay now member of the portfolio size okay if we said hey how much is that of the portfolio well it's going to be about two percent so what this is actually allowing us to do is even though we're actually doing a number of trades it's really not tying up a lot of capital okay it's really about 1.7 percent of the capital now let's kind of take a timeout so trade number one was microsoft i actually hit this one first because the question came in is i don't see this class doing a lot of short put verticals i don't know historically exactly how much she did versus long call i do talk to barbara and i think she might be thinking that she might like maybe long call verticals because there's more directional exposure or higher delta but it doesn't mean that the short verticals are bad but on the short put vertical and now let's kind of bring up and i'm gonna i'm gonna hit questions first but let's kind of just show what we've actually done so far in the last two classes and i'm just gonna only look at these but if we actually look at this this is our fourth trade in a fifteen thousand dollar account now my point in bringing this out is the following this is four trades and one of the cons when someone trades a smaller account they think well i can't really have that diversification but if someone knows about options that's not necessarily true you can have 10 or 15 positions on a 15 000 account but historically people think well with 15 000 i can only have two three four positions that's if you're probably doing stock okay but if you're doing options you might have eight ten twelve positions even though the account size is only fifteen thousand dollars i want you to remember that now kevin actually says james in a small account is it common to risk more than like three percent four percent or five percent well kevin that's why i did write that down i said that could be possible in each one of our trades here today we'll look and see how much these trades are really taking okay but i i don't think it's uncommon on a smaller dollar account to maybe risk more than one or two percent if you look at our material in the online courses we talk about risking one or two percent but i think on a smaller dollar account it might be three or four percent because at that you know since it is a smaller account value it's not hard to get to three to four percent but i said if it goes over five you better know what you're doing right so i think now let's monitor and i'm going to kind of show this next trade let's say the investor said james up until now we've kind of talked about option positions wonder if the investor said i don't really want to do an option position i want to do a stock position but i still want to adhere to what the paid money account is risking well let's talk let's kind of say the investor said i want to buy the stock and we're going to look at trade number two and let's say the investor says i want to do something what's called like a married put and a married put is really long the stock so this investor says look i don't know that much i'm just getting started i want to kind of maybe buy the stock i want to maybe also maybe buy a put to really try to define the risk and the reason why i'm actually saying this is because if you take a look at this if someone were to actually buy a stock that's 64. and so if we said hey a 64 stock in the investor let's say bought a hundred shares that's sixty four hundred dollars and if we said the cat the portfolio size is fifteen thousand dollars let me change that back to dollar amount if we actually said the portfolio size was fifteen thousand dollars what i need you to really understand here is that is hogging a lot of the account now james on that previous you said before that typically if it were to if this portfolio were to buy shares of stock it'd be trying to actually look at let's say stocks between 20 to 40 how can the portfolio perhaps get around that but still define the risk well let's show you i think this would be an interesting one to go over so let's say the investor says hey james the stock is at 64.20
and let's say the investor says they're gonna go long the shares of the stock long stock okay now how does the investor define the risk well one way they could actually define the risk is they can go long a put so if the investor buys stock and then buys the put as well that's a married put okay now i mentioned this on the education day yesterday you've already done this you bought a house you bought protection you bought a car you bought protection right you bought a phone you wanted to protect it so just in case you dropped it right you bought protection on the phone you can do the exact same thing with stocks so let's go into kind of bringing up if the investor said james i'm most concerned about buying the stock and being wrong initially because when the investor buys the stock let's left click on the ask and if they left click on the s let's say they buy a hundred shares of stock now we know that stops setting stops there's pros and cons the problem with the stop is you don't know exactly where you're going to get out that's number one and the number two thing is if the stock actually goes down to that price level stomps out the position a lot of times not all the stock can go right back up and the problem is the investor locks in that loss boo right i mean that's kind of not great now the long put works a little differently let's say the ambassador says i'm concerned and i want to buy a put just for a short period of time just to see if this position can get off the ground okay in other words go up let's say the investor goes and looks at the 14 april and they say james i really want to maybe buy the put for let's say 62-62 and that put really has a delta of let's say 31. now remember when someone is trading a smaller dollar account okay we're going to click on first triggers seq first buy the stock in sequence first buy the stock then number two then buy the put someone is trying to move the account when you look at this position it doesn't have a capped gain on it okay do you understand that this position has unlimited upside okay when we talk about let's say a like a long call vertical a short put vertical while it's good that they actually have you know max gains they have max losses but the problem is with both of those they don't have unlimited upside but if someone buys a stock and they buy a put there is a capped loss in this trade and you can see in the bottom left-hand side what is that max loss well the max loss is 317 even though the investor is actually tying up 43 of their capital in one position when we actually talk about what the max losses it's only tying up 317 which is interesting because that's only 2.1 percent if they were to lose and take full max loss even though they're actually putting in 40 percent of their account in one position it would only be hitting their account about two percent which is kind of going back to what kevin mentioned is you know you know on these type of trades are we actually thinking that they might be risking more on second trade example it's really only risking about two percent even though it's actually time putting in 40 of the capital in a stock position now james can the investor maybe set a target okay so let's go ahead and actually let's say the investor sends this and they say they're going to buy the stock and they're going to buy the put married put can the investor also notice the commission is not on the stock it's on the option okay if the investor actually does this they have unlimited upside the stock is purchased and now the put is purchased so do i have to go to sleep tonight thinking wonder if it goes down no i'm gonna sleep like a baby because now the investor knows that from now until expiration they have a contractual right to sell those shares at 62. if the market were to crash it doesn't really matter okay if it went all the way to expiration if that stock were down at 52 this big money account can still sell the shares at 62. if the investment says how can i actually exercise that number two ways you could call the broker td ameritrade and say i'd like to exercise my right to sell the shares at the strike price they'll help you do that or if the trade were to close below the strike anything that's in the money should be automatically exercised in this case if the investor is long the put that's a right to exercise to sell the shares at the strike price what's different about a stop versus let's say a long put is if the stock goes down to 62 it doesn't get out it just still has a right so if that stock were to go down to 61 go down to 58 a stop would trigger to be sold in lock in the loss but that's not how the long put works it's just holding that right or can't hold that right to expiration i bring up this point because when investors have a smaller account they tend to set stops and what happens is they lock in those losses and they have drawdown for some investors that know that they hate stops and so they actually use protective puts as a way to control the risk but not lock in losses that draw down the account so if you kind of think about this someone that buys a stock and sets a stop they have unlimited upside a and then someone like this buys a sock and buys a put they still have unlimited upside but what's the con the con is this this investor b they need to stock to go up by whatever they bought the put for so let's kind of now talk about a target if i were to actually give you this chart and say what would you set the target at well you might kind of be thinking that james doesn't this kind of have like a sideways range and if we actually said that maybe when we have these sideways ranges can't maybe sometimes these stocks break out okay maybe in this case can't they break out maybe from support to resistance so if we look at this and say well the width of this is like seven dollars okay so what you'll notice is if we said the width is about seven dollars if that stock were to break out could it try to break out by the width of that channel could this when i say this it's going to be about right about 690 i think is the number right there could that 69 60 or so area be the targeted area absolutely now if the stock were to go up to that 69 area what would the value of the put be worth answer jack squat because as the stock goes up the probability of that put being in the money is becoming worth less and less or it actually has less probability to be in the money and it's actually devaluing the put value what would be worth something the stock would be worth something so what's going to happen is if that stock were to go to 69.71 the stock value goes up put value
goes down and the investor is really getting the net of those two the key difference is an investor buying the stock and setting the stop loss versus buying the stock and buying the put is that b investor they need to start to go up by at least what they bought the put for to break even now i want to go back to this question is a riff says why can't why we cannot just put stop loss instead of buying a put i'm gonna give you one answer okay and it's gonna come right between the eyes okay if you would have actually bought stocks and set stops in the first quarter of this year do you think he would be upward down this year so far and i would push back and say that investor i bet is down for the year given the volatility in our market that we've actually had okay setting stops has been absolutely treacherous because there's been excessive volatility would you say that's true so what you're going to notice is the investor can when someone talks about setting stops that stock can actually go down initially so let's say someone said hey james let me reset that and i'm going to answer this question let's say someone said hey james i've got in the stock here and i set the stop well what happened the next couple days the stock actually goes down and let's say the investor says dad gum it i got in right here and i set a stop and now i'm down 500 that account now is drawn down what happened well now what you're going to notice is the stock went right back up like the whole thing never happened and the investor who set a stop locked in the loss and that loss could have been three four five percent and they're down on that one position someone who actually got in here with the protective put yeah the stock went down the stock went down but the value of the put went what up and it offset each other it would have still been down but a it would have never locked in the loss and two it never would have been down and locked in the loss okay it would have had some drawdown to it but not in the same extent if we're comparing a to b a is an investor who buys a stock and sets the stop loss b is an investor who buys the stock and buys a protected put okay and that's that's the bad part if someone did that three four trades in a row and had that happen which can't happen that investor was trading a smaller account absolutely could be down 10 15 20 and it could have happened in a week now if you see if you say i still like that i just want to do that go ahead but i think the biggest actually thing is a lot of investors would say that's happened to me and what what investors that that they don't understand if the investor said james i'm going to get in the stock at 64. and i'm going to set my stop at 62 because i feel like i'm controlling the risk let me bring up one number that i want you to ponder on okay if we were to look at this and say the investor buys a stock at 64 and set a stop at 62. statistically if the investor were to do that trade from now to expiration they would have a 67 chance on getting stomped out so the investor buys the stock at 64. they set the stop at 62. we already know what the odds are getting stomped out is in the next 20 days the likelihood of this stop being stopped out at 62 is 67 chance a riff if you did these trades if you did these if you did 10 trades just like this 67 of those trades in 20 days would be stomped out okay if the market would go down that number would even be higher so a rift would actually say what was wrong with me you could get caught up in volatility and actually a riff or that investor would actually lock in those losses guys and gals i'm just sharing with you things that i've learned there's this paper money account outside showing examples of how stop works it doesn't actually bot it doesn't set stops outside just showing example of how they work it uses puts or callers as a way to define risk so it doesn't prematurely get stopped out okay and also by buying puts or collaring it defines where it gets out at the strike price okay now guys this is gold okay a lot of times people talk to you about like oh i'm gonna set stop stops can be good and bad okay and the bad part is the investor locks in those losses and has drawdown okay now now here's the question uh mary says don't you get a volatility crush from buying the married put okay this is interesting you mentioned this okay so let's all of us now if if the volatility were to go down and this is a fair question okay if there was a volatility crush and let's say all of a sudden that volatility went down a lot okay let's say that volatility went down 20 oh my gosh i hope it does okay so mary you're getting me excited here okay let's say volatility goes down just it down 20 and what happens to the value of the put well the value of the put maybe goes from let's say a dollar and it goes down to 8 cents so how much did the investor lose well it's defined to whatever they paid for if they bought it for a dollar or seven and the volatility crushed it went down to eight cents so in one hand you're right mary i agree with you that option would have lost a dollar but if you get volatility to go down where does the stock typically go mary everyone well if you get volatility to go down typically that means the stock has gone up so in this case let's say the stock just goes up three dollars the stock goes up three dollars but the option loses a dollar three gain one lose and the investment is up too if they're up a net two so mary if that happened i think that would be a positive for a stock that would be a negative for the put but you got to remember a married put is not just the foot position it's a stock position but if you got that type of volatility move on the put that typically means the stock has gone up okay okay that was kind of a trick boy yeah okay good so now let's kind of look at trade example so we actually did trade number one was microsoft trade number one name trade number two here was actually a stock position with a married put let's take a look at trade number three here okay now by the way let's kind of just show how the portfolio is kind of building here so if we go back and kind of say uh and let's go back and just make sure that uh monitor and i think actually what happened is let me actually go ahead and actually just put that position back on so i'm going to buy that i just want to make sure we put it in the right section so i'm just re putting that back on and i want to make sure we put that right in the section where it's a smaller account okay same trade but i want to just make sure that it goes to that section and what you're now going to see is here's the positions okay so aig was today microsoft was today there's caterpillar now i want to speak just briefly what type of trade this was the trade from last week okay so if we said what type of trade is this well this right here is a short put vertical how do we know that well it sold the higher strike and it bought the lower strike okay now i want to also uh if so if we took a look at this and said well what was the credit received well it collected four dollars but it paid two so the net credit was two dollars okay now what was the max loss ten dollar wide spread credit of two max loss is eight now what you're going to see in this case is this still has 20 days remaining and it has an unrealized percentage profit of 59 percent so some investors don't try to get all of it they try to get a majority of it now do you like to ever eat ribs now when i eat ribs i i gotta admit i just try to get the easy meat okay the white meat maybe a little dark meat but i don't try to grab all of it now some of you like to almost take down everything now if you look at this the investor might say james i just want that white meat for 50 the easy meat i don't even have to go searching for it really but to get past 50 to get to 65. it's
going to take a little bit more time and to get to 80 it's going to take a little bit more time on that some of you are saying james you're making me hungry so the paid money account is going to say look the most they could actually make here is two dollars if the investor said james my goal is to try to really in this case grab 65 percent okay let's say the investor wants to set a target they might say james if this ever went to where the profit was a hundred and thirty dollars no wait how did you get that the credit was two dollars if the investment said they want to get 65 percent of the two dollars that would really mean that the overall gain would be a a dollar thirty or a hundred and thirty dollars so we're going to right click on this create closing order and work we could actually type that in and say look if it could ever buy it back for an amount okay the investor could actually get out now i won't do that for the time's sake but the investor is probably saying look if this position gets just 10 more dollars they would have 65 of the maximum gain even though that trade has only been in for a week the only way you get the last you know 40 is you have to hold this closer and closer to expiration then you're right peter that is a huge gain on a short put vertical even though it's just been a week now if we were to take a look at this okay if this paid money portfolio was up to i think if you look at these trades you're only really probably tying up if we're talking about like say max loss you're probably only talking about two thousand dollars of max loss so if you really look at this the investor might say how much is it up relative to what that max loss is or look at what it's up relative to what the account is if this portfolio is up 200 on an account size that's 15 000 in a week that's about 1.33 percent even though we're nowhere close to investing the full amount let's take a look at this last position paid money account is going to go look at a stock and it's called amd now amd is one of those stocks that is also we're going to talk about this from the from a short vertical perspective where there is upcoming earnings now if we look at this trade some investor might be thinking james could amd be trying to maybe make a move that nvidia did yesterday i don't know we're going to find out okay if we look at amd we're talking about the semiconductor space and if we zoom in and go to the trade tab let's say the investor we're going to go back and say i want to try to sell a short put vertical now what's interesting is the implied volatility on a stock like this is 57 that's a lot that means that the credits could actually be kind of potentially interesting as well let's say the investor said james i want to try to do a short put vertical where the investors may be trying to sell a put where they think the stock could stay above okay so if i said only that that's a cash secured put if the investor said james there's dollar wide strikes here that is interesting because what you're going to notice is the investor could kind of control the risk and kind of pick what they want to pick and if you look at the option table and look down there are some spreads here that excuse me some strikes that really have more liquidity now let's say the investor said james i am not comfortable going to 116. i want to go to 115 because there's also more open interest there i'm fine with that let's say the investor says james i want to do maybe the 115 and maybe they want to buy the 110 sell vertical and if they did the 115 110 why did the paper money account choose those it shows those from the standpoint is that's where the strikes 115 and the 110 had the most open interest so now if you actually go back and kind of say well that is the maximum credit but what is the maximum loss well the maximum loss on a one contract basis is 339 dollars if we go back to our little sheet of paper here 319. 339 right there is really barely over the 2 so i want to go back to kevin here my newfound friend kevin a lot of these trade examples we're looking at are really right at two percent even despite the account size is only fifteen thousand dollars so is that doable i think it's fair i think it's probably that most examples on a majority basis are probably going to be in between two to three percent so the paper money account actually chose one contract max profit max loss and then there's the commission how much capital is it tying up it's only tying up 339 of the fifteen thousand dollars wanna make sure we put this in that smaller account right there send the order and now what you're gonna notice is if we go back to that section these the section that we've been working on got six trades aig okay which was a really a married put position that we'll make sure that that fills you'll also see that amd which we just put in right now was a short put vertical a five dollar wide spread caterpillar microsoft was a long call vertical so what you're going to notice is it's very well with what we said last week is this count is going to be very focused on verticals and that's why we said it first diagonal spreads short wide puts maybe like a cash secured put we said stocks or a married put we showed an example of that as well so what you'll notice is the investor could still do quite a bit of positions and still not tie up a lot of capital while still defining risk okay now that is interesting because i think a lot of investors think with a lower dollar account you can't get diversification that's not necessarily true if you know what verticals are and some of these other strategies okay now i'm out of my time here today i want to thank you so much for your comments and your participation and also uh remember with what uh with what we talked about here today it was done for educational informational purposes only our goal we wanted to look at indexes and sectors keep in mind that those commodities still look pretty strong keep in mind also that the tech and discretionary space you know that could be a sign of risk-taking behavior could that continue we also talked about for example uh three new examples to put it in the portfolio while still keeping eye on the numbers of the position size and the risk so i'm out of my time here today stay tuned for our next webcast coming up right at the top of the hour again i want to thank you so much for your comments and your participation barbara will be back next week she's doing fine she's just on vacation so with that said thank you again so much and thank you ken as well thank you and have a great day take care stay tuned for our next webcast coming up right at the top of the air bye-bye
2022-03-28 00:49
