Short Put Verticals | 11-18-19 | Barbara Armstrong | Trading a Smaller Account
Well. Hello everyone welcome, to trading a smaller account, my name is Barbara Armstrong, and I am delighted to be with you today today. My friends, we are talking, short pot verticals, if you don't know what a short put vertical is that's a okay because we're going to review what, a short put vertical is, why. Those, with smaller, accounts, might, be interested. In, trading. This. Options. Trading, strategy, and then we're going to get out to the platform and, put. Our, theory. Into practice and, place some example trades on the thinkorswim platform so, lots of great information coming, your way, stick, around. Okay. So. As I've already said we're going to talk short, put verticals, today let's get through our important. Information. And then we can get right. Out to the, thinkorswim platform and. Go over, our agenda and objective, for today as you, can see by the blue bird on my screen all, of the coaches at TD Ameritrade are, now part of the Twitter community would, love to have you join me, so consider this an invitation at, V Armstrong, underscore. TDA, okay. Let's, know that options are not suitable for all investors as. There, are special, risks inherent to, options trading, that may expose, investors, to. Potentially, rapid in substantial, losses know. That spread straddles, and other multi leg option strategies, can, have higher transaction. Costs, including, multiple commissions, so that, Commission. Fee is now 65, cents per options, contract. And that applies to all options. Trades so we, need to take that into account know. That in order to demonstrate the functionality, of the platform, we need to use actual symbols, and we'll look at several today, however. That is not to be construed as a recommendation. On the part of TD Ameritrade, or myself. We. Cannot begin. To determine the suitability of, any security, or strategy, for an individual, trader so, any investment, decision that you make in your live account is solely, your responsibility Oh. Okay and know that Delta, Gamma Vega and theta otherwise, known, as the Greeks help, us determine how price, time and volatility, can, impact, our options, trading, and last, but not least know that all investing, involves risk including. The. Risk of loss. Okay. So. What, are we going to do today so today. My friends, we are going, to look, at a couple of different positions, and. We are going to discuss short put verticals, so, we're going to go over what a short put vertical is, we're going to go over some, of the pros and cons of short, put verticals, and then, we're going to place a couple of example, trades so, that's what's on our agenda today.
And. What's the objective, is that you'll walk away from today's class with. A more solid, understanding, of what a short vertical is and, why, some investors, might be interested, in trading, it and then, you'll have seen a couple of examples, put. Into the paper money platform, which will. Solidify. That for you if you already know how to trade a short put verticals, this, might well be a good review and you might pick up a few tips along the way ok, so the first stock that we are going to look at today is visa. So. As we, can see now you know visa. You. Know has been up trending, right and. This. Is a nine-month chart, that we're looking at here and then. It kind of hit this period, of consolidation, and. What. We're seeing now you, know it's, hit the support, level, one to three, times and looks. Now to be. Heading. On an upward path, again, and has, just. Bounced. And moved to the upside, off this. Diagonal. Support, level. So. If. We were to look at a short put vertical strategy. What, exactly, does that entail. Well. What. It entails, is. And. Let me just pick this up again my, draw handy-dandy, drawing, tool what. The goal of a short vertical, is, is. To sell a put. Below. Where you believe the stock will, fall. So. If it's bounced, off this diagonal. Support, level here around 180. Maybe. We could sell something at, 180. Or below, it's currently trading at 180 205, so. If we sell this put. What. Does that mean, well it means we are obligating. Ourselves, to buy the stock, at the, strike so. If our strike is let's say it's 170. 750. We. Are obligating. Ourselves, to buy the stock, at that price at any time between now and expiration. Well. If we have a small account we don't want to end up with multiplier. Being, 100. Typically, having, to buy 17,000. Dollars worth of stock so what can we do well we can now buy a put, below, that. Let's. Say the put we buy is at 175. When. We buy that put what does that do well it gives us the right to sell. So. If, the, trade doesn't go according to plan and, let's.
Say Instead, of heading up as we. Are. Anticipating. What. If it comes, down, what. If the whole market comes down and visa comes down with it and it comes through our strikes how, much could we lose this. Is really important, to understand, so, what we could lose is the difference between our two strikes which in this case is two dollars and 50 cents less, we, what we might, get paid to get into the trade so. Let's say we, get paid 50 cents to share to. Get into the trade our max. Loss on one contract. Would. Be. $2, a share or. $200. So. If in this class we were willing to risk up to $400. On one trade that, tells us we could do, two. Contracts, so, what's the advantage of a short put vertical well, the advantage is one we, know what our max risk is before, we enter the trade. We know how much we can possibly lose, the. Other thing we know is how, much we can possibly make so. These are the two knowns and so. We've defined our risks we've defined our return now some people might say well I see that as a con because if I buy a call and it goes up you, know I could make a lot more than, than, $0.50, and and, this is a return on risk, you. Know if we're looking at return on risk and the way I've written this out a return. On risk is what can you possibly make divided. By how much you can possibly, lose, and in, this case it would be 50, Cent's over two dollars in this hypothetical example, and, we'll go and we'll see what the real numbers aren't just a minute now, so. That would be about a 25 percent return, on risk now. I had a question in the chat the. Other day on this and it, was well do you have a minimum, number and and, my. Answer. To that is some. Investors, absolutely. Have a trading plan. And. In, fact I would recommend, that you have some type of trading plan now your number might be, 20%. When volatility, is low it might be 25% for. Some investors that might be 30% if, we come out to the trade table, is. For, some investors, they. Would say well if I'm taking a trade that expires.
In 25, days I want it to average, out to at least 1% a, day that. Way if they're looking at a 25. Day trade versus a 35. Day trade it's, a way to make it more apples to apples now is that saying that they, want to get an absolute 1 percent a day return, no but, what they're saying is their goal is about 25 percent so what's. The other thing. That is appealing, to some investors about. This. Type of strategy and. And then we'll go over and we'll place a couple of example, trades so, one of the things that's appealing, is that if this goes up do, we have a successful, trade, yes. We do and are. We expecting, the stock to go up well. That's the idea but. If it continues to go sideways do. We still have a successful, trade. Actually, yes we do if, this thing hovers and if in we, have a 25, day trade and if in 25 days it's still at 182, and we've, sold, a. Put, at 170, 750, and and done a short put vertical with. Buying the put at 175. To define our risk we, still have a successful, trade in fact it can even drop, a little bit we can be a little bit wrong. Or. An investor, can be a little bit wrong and, they've got a buffer, and in. Fact in this case they'd, have you know about a four or five dollar. Buffer. And. So it can even come back a little bit and. We. Could still end up, with an investor, a successful, trader or an investor, could still end up, with in a, successful. Trade and this. Is the appeal my friends, of. A short put vertical is that it. Doesn't, have to move directionally. For, you to have a successful trade although, the. Faster, it moves up the faster, one might meet their target, so, what we're doing is we're selling something we're getting paid when, we get in and the goal is for it to ultimately. Expire. Worthless. Now. Does that mean we're going to wait for it to expire, worthless before. We exit the trade not necessarily. Some, investors, if in a week they've got sixty five percent of their max gain no exit the trade or you. Know once they hit they'll put it and an exit, in before they even answer the trade and say hey when I've got 80% of my max gain I'm I'm. Willing to I want to take my risk off the table okay. So let's go out to the charts. So. Here, we are looking at the. Sorry. The trade tab on Visa and we. Have some choices now as far, as timeframe, goes, what, are people looking for so, often, people are looking, for something. Between. Twenty, and fifty days, now. What's the advantage of a shorter timeframe is that time decay, is going to kick in and chip away at the value, of the, stock of this option, more quickly. What's the downside is, that if the trade goes against, you it has less time to recover and come back up where you want it to be. Also, the further out you go the. Higher the amount of premium you might earn but, the longer, you're in the trade, so. These are things we have to consider so, as a rule. Of thumb a lot, of in, the, you know or at least some investors, that trade this strategy will look somewhere between, 20. And and, you. Know 40 days so if we look at the, December, what. Are some, of the things we want to look at well one does, this straight stock, trade a lot of shares yep. Do we have a lot of open interest, and is there interest, today, on trading, this yes so, if we looked at this one 77 50, strike, and then we want to pick a strike, below, a current. Support level remember it's trading at, 182. 31, could, we get enough premium, to do the 177. 50 and the, 175. And you. Know the easiest way to find out is to tee up that trade and then, what does Delta tell, us well Delta, gives us an approximation. And, this can change these are fluid numbers and they can change day to day but what this is saying is as, of. This moment we have about a 71. Percent chance. That if. We, sold. This put did, this short put vertical that it will expire worthless. So. We've got a 71, percent chance. Of. Earning. Our max gain on this and could that change tomorrow. Absolutely. So, we're going to right-click say, that we want to sell a vertical. So. And then this is saying well the December 20th which would mean we'd be in this for 31. Days, if. We stayed until expiration, we'd. Be selling, the 177. 50 buying. The 175. To define our risk a 52. Cent credit so. What is our potential max gain on that then, well, if we come back and we look at this remember, our return, on risk. Is. Equal. To the amount we're getting paid -. What we're risking so what are we risking 250, -. The 52, so, divided by 198. And. So. If I've got a little calculator, here 52, divided, by 198. That would be a 26. Percent return, on risk. So. In how much are we risking, 198. Dollars a contract, our multiplier. Is a hundred, so, if this meets, your. Guidelines. Of acceptability. And, let's assume that it does. We. Are going to do two. Contracts, and. We. Might say you know then let's, put in the example. Of having. An exit, in plan before, we even get into this so. We've. Changed, our single order to first trigger sequence, we're going to come up right click create, an opposite, order and say when, we've got 80% of our value, which is about 10 cents, out, of.
This 80%, of our max gain we would like to close, down this trade so, we're, going to make that exit, good till cancelled. We're. Going to hit confirm, and send now. When we get to this. Order, confirmation. Page. Some, investors, will read this just, right out loud so we're going to put this into our trading. A smaller account, bucket. It's, we want to sell to, verticals, the. 20, December, expiration. The 177. 175. At 53, to open, we, want to take, our risk off the table. When. The value, of this. Vertical, gets, to $0.10, how, much are we risking. Max. Loss. Three. Hundred and ninety-four dollars. What. Is our max profit a hundred. And six. So. We're. Going to go ahead and, send this in and then of course there, are some transaction. Fees sixty-five, cents a contract, to get in 50. 65 cents a contract to get out, okay. So. There's, the first one let's. Go, and look. At another example. So. That's our, visa, let's. Go and look at Facebook. And how. Does one find these, well, one of the things you can do is bring up a watchlist so, if we come over to our watch list. And. We. Can bring up. Come. Down to public and, what. We want to look for is maybe the nasdaq-100, we, know that these are all well. Typically. Pretty large cap stocks and we can just start clicking through the list and, what are we looking for if we want to trade a short put vertical we're. Looking for something that's up trending, bouncing, off a support, level or breaking, through a resistance, level and you. Know if you link. Your. Watchlist. To. Your chart tab and make these both a 1, or. Any, number, may just make them both the same number. Then. You, know as we, click through the list, we'll see our watch list so. The next one we are going to bring up was, Facebook and. So. Again, we've, seen that, we have a stock, here, that, once again has been trading, in something. Of a sideways, range. Right. So. And, today. It looks like it's breaking, out. Or. Some, might look at this and say. With. The drawing tools, whoops, let.
Me Just get rid of these. Okay. It doesn't want to. These. Do not want to go away for me. There. We go, okay. So or, we can come to our drawing tools. And. If we look at this. We've. Got something. That is breaking. Out of a previous, resistance, level but also bouncing. Off this, diagonal. Resistance. So. If we look at this and say okay, could, we perhaps. Sell, something. Below. Once. Again could. We perhaps sell, something, below you. Know this one 89 it's currently trading at $1.99. So you, know could we sell something below that 193. Kind. Of level. And. Then. Buy something. Below. That. So. We're selling a put buying, a pot. Okay. So. Let's, come to our trade tab and. Again. We have lots of different explorations, to. Look at we, can see this is pretty heavily traded, right I mean already Facebook, has traded over 12 million shares today some. Of these contracts, the 190. Which has a delta of 23. You, know has almost 30,000. Contracts, against. It, you. Know that have been that, are on the book so if you want to talk about running with a crowd there's, a 2 cent difference between, the bit off spread so which is something that. Some. Investors will look for they want that to be pennies apart, so. If we look at this this, is a 77, percent. Probability. According. To this Delta that this. Could. Expire worthless now, is there enough premium, in it for us well let's go out and see so. If we said let's sell a vertical, this. Is a two dollar and, fifty. Cent spread. We get 50, cents, 49, cents, so. Just, eyeballing, that you know that's close, to about a 25%. Return. You. Know if I round up to 50 cents on $2, that's. A 25 percent return, so, and and this, is nine, dollars. And 47 cents above where it's trading, now now. So some investors, might come out to this and say well. Let's look at this a little more, closely, maybe, I'd, be comfortable. Enough to sell the 195. Or, maybe, I'd be comfortable enough to sell the 193. And, others would say I would rather be more conservative, and, I will stick with the, 190. Thank. You very much where. I have a higher probability I'm, going to get a lower return. You. Know so if we come here and we say well what if we made this. One, ninety two fifty and one, ninety. See. We're going to get a higher credit, but then there's a higher probability of. It, coming through our strike isn't it so. If we just leave this at the 190. And the. 187. 50, 49. Cent, credit and, the. Question, that an investor, has to ask is, is that. Enough of a credit you. Know let's say we want to, sell. This up 50, try and get 50 cents we're. Again, going to, go with that, example. Of let's, put. In an exit. Before we even get in when. This is worth about 10 cents so that's 80%, of its value now, if this really went up a lot in the next week and all, of a sudden it's worth 15 cents but looks like it's about to come back down and investor. Might say you, know what I've changed, my mind, I think 70 percent is enough and, I'm. Going to exit. This position, so just because you put this in doesn't. Mean that you can't change this, so. Again what are we we. Did one contract, we meant to do two so. We're going to change that to two. So. What, is our risk here. Well. We're risking $400. Which is the most we were, willing to risk on any one, trade and. Then. Our. Max profit, is a hundred so our return on risk would be. 25%. And. Again, we can decide which account we want to put this into now, you, know you may have this organized, and you may have a short, put vertical group, on your page because. We meet weekly in this class I've created a group for our trading a smaller account, and so, I'm going to put that one in there. Okay. So we're doing well on time. So. Let's, look, at one. More. So. If we look at our Disney. So. We saw Disney, again, something, that's been kind of going sideways in, fact seem to be pulling back a bit had. A great, announcement, when they announced.
Their Live, streaming. Service, a big bump and you know and a bump then on earnings, just a few days before that and, then. You, know. Let. Me just hone in here so, there, are many. That would look at this and call this a bull flag and, yesterday. This. Bullish, engulfing pattern would, have been considered, an entry, and then we've got confirmation on, that today. So. Could we come back and sell something at. Something. Like 145. Or or below, 144. Or below. Anticipating. That, Disney, is likely to stay above that so. Let's come out to the trade tab and. Again. If we look at this December, 20th date. We. Can see just, today I mean 2,000, contracts, have been put on the books at, the, 1:45. Strike, and it's, a little lighter but as a rule of thumb. Some. Investors, will have a rule around volume, and open interest on the options, they want to see at least 20. Times the number of contracts. They're trading, so in. Our case if we were to do two contracts. Then, we'd want to see at least 40, contracts, on the books and all of these you. Know have at least 40 contracts. So. If we said well could we do this. 144. Or 143. Even that has the 26. Delta, which means it, would give us a 74%, chance, of expiring. Worthless. And, again this is just a guideline it's, not a guarantee. So. We got our 50 sets it looks like on. Facebook. So. This automatically. Defaults, to the smallest. Possible. Spread. Between the bit strike. We're selling in the strike we're buying so. If we come out to 141. We'd. Get 48. Since you're saying well the last time we got 50, but, the spread was 250. This. Spread is $2, so we're looking at 48. Cents. Here. So. We're looking at 48. Cents. Over. $2. Well. 49, cents so, I mean, over, a dollar 50, - I, know. We're live in the market so things keep changing so, if I take my, 48. Divided, by 150, - that's. Almost a, 32. Percent return. On rest 31 point six. Percent. Return. On risk so. If we go with that and. Say okay we're, willing to do two contracts, on that one also. And. Let's. Say this time we want a 90, percent. Return. On this if. We come up to first two years sequence, then we'd say you know when this is worth a nickel, get. Us out so. We're gonna create an opposite, order and say, when the value of this is worth about five cents, just. To give. You a different example of, an accent. Don't. Want to have two periods. In there make that good till cancelled, confirm. And sound so. We wanted to sell two verticals, on Disney, 143. And 141. Where is it currently trading at. 148. 80. Almost. 149. So, we have almost. A $6, buffer. That, it could pull back by almost six dollars, five, dollars and, 86, cents to be specific, we'd still have a successful, trade if it, goes sideways we're okay if it goes up we're, okay our max, profit. 96. Dollars max. Loss. 304. And so, let's put that in our our. Trading. A smaller account, and. There. We go so. Guys the goal today.
Let. Me just. So. Our objective. Today was. To, look. At short verticals. I know we've looked at these. Trades. In the past, but. To give you an overview of what a short put vertical is. Understand. The pros and the cons the. Skåne the max loss if this is a new strategy for you you may want to check out getting started with options, on Fridays, at. 11:00, you can go to the archives, and look up the. Last time we taught this strategy, also John. McNichol teaches a class every, Wednesday. At. 3. O'clock Eastern. A whole hour just on vertical, so you may want to check that out as well so, guys that's a wrap for today I hope you have found this helpful if you. Have enjoyed it I encourage. You to smash. That like button below. I'm. Just going to come back to our disclosures, so smash, the like button below subscribe. To our channel, if you haven't already and, feel, free to join me on, our. Twitter. Community would, love to have you on board keep, in mind that all investing, involves risk including the risk of loss and. We. Did use actual symbols, today several, of them however. TD Ameritrade, does not make recommendations. Nor, do we determine, the suitability of, any security, or strategy, for an individual, trader so, without what I challenge, you to do is get out there on the paper-money platform go. Through a watchlist. It could be the Nasdaq, that public watch list or the Dow or the, S&P 100, find. A couple of stocks that are breaking out of a sideways, range or moving. To the upside and bouncing, and, practice. This strategy. And then again, whether. You're new or seasoned, there are a couple of other webcasts, you may want to tap into as well, and you're always welcome to come back and watch the archives, so with that my friends thank you so much for joining me today best, of success with your trading and enjoy your week I'll see, you in a webcast coming up soon take care everyone bye for now. You.
2019-11-26 00:57
