Tailoring Leverage and Risk Management When Buying Options | Trading a Smaller Account

[Music] good morning and welcome everyone my name is cameron may it is 9 30 eastern standard time on a friday morning and that means that it's time for the ongoing weekly series of discussions called trading a smaller account i'm filling in for barb armstrong looking very much forward to this webcast i'm excited because we pretty much all started here with that smaller account learning how to manage things in in sort of a different way maybe for those with larger portfolios but trying to help those along the front end of their own personal learning curve if they are managing that smaller portfolio i think it's a great topic with wide appeal so i'm looking forward to it today we're going to be talking about options trading and we're going to be talking about how a trader might select an individual strike once they've settled in on a stock to trade and and we want to discuss how that might influence the placement of the stop how that how the exit might be managed so should be a great discussion uh we'll set a more precise agenda for it in just a moment but first of all let me say hello to everybody that's chatting in from all out all around the country we already have over 100 people watching the live stream so that's great to see hello there jules doug uh bj george sarah krishna chuck uh sea gardener richard kai marcy red solo cup ken lamar peter jeff neil mansour osborne boy this is a big long list everybody heartman85 janice i'm just gonna say that'll do it dom good morning great to see everybody i recognize the vast majority of those names so it's great to see familiar names even though i'm sort of the interloper here if you happen to be here for the very first time though i want to welcome you as well if you'd like to chat and let me know that this your first time in one of these live webcasts i always like to see who the first who our new audience members are and give them a little bit more of uh tailored welcome but also if you're watching on the youtube archive after the fact enjoy the presentation be aware that you're invited to join us in the live webcast 9 30 eastern right at the opening bell is when barb typically kicks things these things off and as a final heads up we have my very good friend ken rose hey hanging out there in the chats he's going to be helping us with any questions that i can't get to during the presentation ken and i have worked together for almost two decades so a great resource to have there thanks ken all right so let's get right to it first thing that i'm going to do is give you an invitation if you're not following me on twitter that's the best place to have a personal interaction with your coaches so at cma underscore tda is my twitter handle we also need to consider the risks associated with investing we're going to be using some real real trade examples here so this is important information content we're about to provide is intended for educational or informational purposes only it's not investment advice or recommendation of any security or strategy or account type options are not suitable for all investors as a special risk inherent options trading may expose investors potentially rapid and substantial losses all investing involves risks uh while this webcast discusses technical analysis other approaches including fundamental analysis may assert very different views having success in your real port pardon me in your paper money portfolio is not a guarantee you're gonna have success with your real funds as market conditions can change uh and they can change rapidly all right so looks like uh first timers hello there revival academy great to have you uh i mean you who else is here denise welcome i know that you are going to be in great company i'm sure that there are others who are brand new to this we have about about 40 minutes to dedicate to getting better at being managers of a smaller portfolio we're going to put some limits on the trade size that we take but let's set an agenda for today all right the opening bell just sounded so i think the very first thing we do need to do is to go have a look at what's going on with the stock market and that's going to establish the framework for the trade that we discussed so that's going to lead us to our strategy discussion for this strategy discussion we're going to be trading a long option just buying an option in other words and we're going to be talking about how a trader might choose strikes and how that might influence their stop placement so that'll be the bulk of our strategy discussion but we're going to make sure that we tie it all up with a bow we place an example trade so you don't just come here to hear the theory of trading but also how it might be applied on on the thinkorswim platform okay okay so let's go have a look at it let me pop back over here to the thinkorswim platform and you can see that uh that i have the s p 500 as sort of the stand in for the markets now obviously other traders might use other indices we might look at the dao or the nasdaq or maybe if we're trading some smaller capitalizations uh the russell things like that but i want to have a look to see what's going on with the s p 500 and as i look at this i want you at home to be thinking along what would be my bottom line conclusion for what i think is likely to happen with the s p another thing that i want to point out is that we're going to be planning a trade today for april 15th that's the third friday expiration for those april options those are the monthly contracts they tend to have the greatest liquidity when compared to let's say the weekly contracts the march contracts we already have a number of positions on those and you can see that's coming right up that's not very far away only only next friday so there we go we're looking out here to april 15th and the question now now becomes where do we think the markets are likely to be as we're planning a new trade here we are right here do we think the markets are likely to head lower from here or higher from here we could also structure a trade that has a sideways bias but i'm going to go with the directional example today so what i'd like to know from you is well where do you think markets are likely to go higher or lower and the way that i'm seeing things yes we've had a nice little pop-up today but i think that's positioned us in an interesting position here's the way that some technical traders might see this yep we've been coming up but has that just positioned a position to say positioned us closer to a potential price ceiling i think that's a possibility you can see that uh that there's an old resistance stretching all the way back to the middle of summer right there we'll see if that holds right you can see that we're just about right there okay laura you say downward with the frowny face yeah yeah for the bulls in the audience i definitely hope that the markets go higher right the bears might have their fingers crossed that we go lower but today's discussion is going to be for a bearish trade let's just assume we're going to bump our heads against this price ceiling go a bit lower maybe it's going to be down here to these these uh recent lows it might only take us a few days to get there and you can see that that seems to be the next apparent area of horizontal support if we draw that in okay all right so that sets the technical stage that's a that's a habit that some options traders have when they're about to place a trade they won't don't want to place that in a vacuum instead they go have a look to see does the trade that i'm about to place align with my own personal market convictions so let's go look at a stock that seems to behaving to be behaving in sort of a bearish fashion and the one that i've selected for today's example is going to be salesforce i think yep it had a little pop-up just like i just like we saw on the s p but i think you can see what's been happening with salesforce it's been falling and popping up a bit falling and then popping up a bit down down down down you can see that and also this recent activity seems like it might have positioned us maybe back up against a horizontal line of resistance stretching all the way back here can we see that let's let's pop that in here we could draw that line there we might come to more recent resistance levels and draw it across here but in any case it looks like we might be up near a price ceiling and it's also awfully close if we go to the annual lows right there it looks like we're just coming right up against that possible price floor as well all right so let's just assume that a trader thinks that that that we we have a bearish set up and you can you can kind of see that we're fading from today's open you can see that red candle extending lower maybe adding a little bit more technical credence to an outlook like this in any case it's not a guarantee of performance that's certainly not the picture i'm trying to paint here i'm just trying to set up a hypothetical scenario for a bearish trade well if we're bearish on options what are two of the most basic option strategies that might be employed well we could sell a call that's bearish or we might buy a put i'm going to be buying a put today and we're going to be tailoring that to a smaller portfolio we're going to be assuming number one that we have a portfolio of about five thousand dollars and number two we want to make sure that we don't put at risk let's say and i'm trying to be consistent here with barb's rules that she employs weekly within this webcast let's not risk more than about four hundred dollars on this trade now that doesn't mean that we're not going to invest more than four hundred dollars there can certainly be a difference between risk and investment now let me make sure that i make this point clear is investment precisely equivalent to risk well if we don't have a plan for exit it very well could be however when when buying options some traders even though let's say they might invest a thousand dollars maybe they have a plan that they're not going to risk more than 500 of that 1 000 they're not willing to watch their 1 000 investment go to zero so maybe they have a plan in place to try to minimize that downside okay keep it a little to a little bit less than the investment there so investment not always equivalent to risk another way to put that is we buy let's say we buy a stock 100 bucks and our plan is if the stock falls to 90 we're going to sell well in that case we've re we've invested 100 bucks but what's the actual risk in that trade about 10 now if we're using a stop order it's not a guarantee that we're going to sell it at exactly a 10 loss might actually turn out to be a little bit more than that what less than that whatever but uh but yeah risk and investment not exactly the same okay so let's go start to piece together a trade on this so let's go to our trade tab i'm going to open up my left column and we're going to outline our example trade of the day and we're going to be buying a put it's also known as a long put when we use trader speak and we say that we're long something it simply means that we bought something to initiate a position so we might say we're long a stock because we bought the stock we might say that we were long an option because we bought the option so now look at the at the next issue that we're confronted with we already know that we're planning a trade here for the 14th of april but when we open that up look at all the choices we have so many different strike prices now about 200 people watching now i know a number of you are veteran options traders and you know exactly what i'm talking about when i use terminology like buying a put a strike price and all the difference or re says what's the difference between an investor and a trader or are they the same now a reef they may be the same person but describing someone as an investor versus a trader or investing versus trading is kind of a it's it's a hint at the time frame of a typical intended position if we're buying and holding for a longer period on average what do you think we are are we more of an investor or more of a trader that's probably a description more of an investor they have kind of a longer term time horizon for their average position a trader is typically in and out a little bit faster it doesn't mean doesn't mean really fast it doesn't have to be overnight it doesn't have to be intraday it doesn't have to be even within a day or two but you know typically if round trip we're getting in and out in days to weeks even in just a few months we might think of ourselves more of more as being traders or we are trading trading in and out fairly quickly does that make sense hope that clarifies that all right but i do want to go to pace that everybody can follow here so what we're specifically doing is we're buying a put option let's make sure that everybody's comfortable with what we're doing um when we are trying to make money from a stock going down we may enter into a contract with another market participant known as a put contract and what this contract allows us to do if we're the buyer of the contract is we're paying another party and in exchange they're promising that they will buy shares of stock from us at a specified price we're striking a deal to maybe sell some shares of stock to another person so notice there's this column here that says strike and right down the center we have all of these different prices 160 180 200 240 280 and so on so these are prices at which we can strike a deal to maybe sell some shares of stock to another person what i'm going to use as our first benchmark look at where the stock is right now about 200 bucks so we could strike a deal enter into a contract where we have the right to sell shares of stock to another trader for two hundred dollars now they're not going to enter into that deal and just promise sure cam and i'll take i'll take your shares off your hands for 200 bucks per share no problem you let me know when no what we need to do we have to pay them a financial incentive to get into that contract with us right now it looks like that's that would cost us about nine dollars you see that 8.95 at the bid price 940 at the ask price right so we could choose to pay another trader about nine bucks and in exchange they're agreeing to buy a hundred shares now this is a standard contract standard contract represents a hundred shares that can be exceptions to this rule but for the most part vast majority of options contracts represent 100 shares so we're paying them nine dollars per share times 100 900 is what we're paying here but if we do that and maybe we just map that out let's we're going to call this our example trade by the 14th of april 200 put for about and let's be a little bit more precise right now we're trading 880 to 940. let's call it nine dollars and ten cents right in the middle there about nine dollars and ten cents or if we multiply that by a hundred it's a nine hundred ten dollar investment so if we really break that down just to make sure that everybody's on the same page we're paying 910 to someone else in exchange we have the right to sell 100 shares of stock at any time to that other mystery trader doesn't matter who they are anytime between now and 14th of april for 200 now how do we make money from that how does the trader make money from that well let's let's clean up this chart a little bit i'm just going to remove a few of our drawings let's remove that trendline let's remove that trend line and let's remove this one i'm going to use these other ones here in just a moment okay but i'm gonna let's draw in a line right at 200 bucks it's about right there carry that out through next the 15th of april there we go come on you can do it there we go all right so what does that mean well if the stock were to collapse in value look what it's been doing down down down down down if the stock were to drop let's say from where it is right now down to 170 bucks we have the right to sell shares for 200 well here's a little secret do we actually own 200 shares of stock nope we don't own 200 shares of stock but what we do own is the right to sell shares for 200 that can be an attractive right to another market participant so if the shares are only worth 170 and we have the right to sell shares for 200 that has 30 dollars of value to the marketplace and we could then conceptually sell that contract for which we paid nine dollars and ten cents we might be able to sell that to the marketplace well we should be able to sell that to the marketplace for at least thirty dollars so that's how we could make money if the stock goes down what if it doesn't go down what if the stock stays where it is well in that case you know let's say the stock is still at 202 as we approach this april 15th expiration we have the right to sell shares that are worth 202 for 200 bucks that's no benefit to anyone right and so that contract has diminishing value as time goes by there's less opportunity for us or for the next owner of that contract to make money right so i've been using this as our example however did we have to choose this as our strike price the price of which we're striking a deal to sell shares to another trader nope we had other choices now i want to know we have 220 people watching how many people are still you harbor still just a little bit of concern about the leverage that comes with options because if you think about about the scenario that we just discussed we we were talking through a scenario where a 200 stock dropped to 170. that's a 15 drop in price so if if that were a stock trade it would be either up or down 15 depending on whether one is long or short but for the option trade we saw a thr uh uh we multiplied the value of that investment by more than three times a 300 percent increase in the value of that option or in other words a theoretical 200 percent profit that is a lot of leverage right so that leverage can be great if the stock goes down it can work against the trader though as the stock goes up now we can't lose two or three hundred percent of our investment when we buy an option how much is the most we can lose 100 can't lose more than 100 percent of our investment right lori yeah still worried bob you're concerned about that leverage okay so let's talk about strike selection and how that influences leverage and something that's going to be vital to this discussion is a little feature known as delta so i'm going to come here to my layout and make sure that i've chosen the options greeks here i'm going to choose delta and that's the one that we're going to explore in good detail today okay so let's look at our delta and you'll notice that we have a number for delta ranging from 0 to 1. 1 is the highest they can go zero is the lowest it can go and what this is doing is it's telling us how much leverage basically now there are a couple of different functions of delta some of you're going to say cameron that tells us the likelihood of the of an option expiring in the money at expiration right that's true it also though tells us how much that option will change in value on a one dollar move in the underlying security so if you've ever wondered boy i wonder you know if the stock goes up a dollar how much do i actually make on this option well let's look at that let's look at our 200 delta apart now 200 strike price all right hey nihon says and you're getting right there neon just says and i'm gonna i'm gonna throw this out this is a teaser for we're gonna be discussing i usually mitigate the leverage by buying a lower delta interesting interesting we want to talk about that leverage but let's suppose that we spend the nine dollars and ten cents and then the stock does drop by one dollar tell me did we make or lose money and how much and let's assume it does that immediately so the other influences on the pricing of options which are time and volatility they haven't had much chance to have an impact how much did we make or lose on our two hundred dollar stock on our 200 strike if the stock were to drop one dollar well we look at this delta notice it says minus 45 what that means this has a bias for a downward movement okay if it were to go up this if the stock were to go up one dollar and notice d delta starts with d so does dollar so you might think of this as a one dollar move right it's not it doesn't work exactly that way all the time but that's uh that's a good that's i think that's a good way to think about delta if the stock were to go up one dollar we would lose about 45 of our investment we paid nine dollars or 110 bucks for that investment so now that investment would theoretically be worth about 865 bucks if the stock were to go down which is the bias here that's the minus 45 okay then we would make money that shows us that a put makes money a long put makes money if we go down so what is the degree of leverage let's measure that leverage and i'm gonna i'm gonna refer to it as our delta leverage okay we have a 45 dollar potential gain or loss divided by 910 dollars invested so a one dollar move this is what this translates to 45 divided by 910 a one dollar move is just about a 5 leverage 4.9

is that a pretty good amount of leverage it might not sound like a lot but let's compare it to stock ownership okay what's a one dollar move up or down on a two hundred dollar stock that's half a percent okay so we've just taken a half percent move and turn it into a five percent move that is 10 times stock leverage is that a lot of leverage did the hairs on anybody's neck just go up thinking oh wait a wow so whatever the stock does this strike is positioned to make or lose 10 times that much for some traders they they might cause them to drool oh that's fantastic because i am convinced that this that the stock is going to go lower from here and this is going to have a multiplying impact on my profits all right well others might see this as risk as well and it is it's risk because if stock goes the wrong direction if we are stock owner oh and we went the wrong direction we might have lost a half a percent on a one dollar move as an option owner on this strike price we might lose 10 times that much yeah lori that's the power of options well the nice thing is this is a very customizable number so where might we go if we wanted to let's say we wanted to dial down that leverage let's say the trader thinks well you know i think i might be right about the direction here and i love it when the markets are cooperative make me look smart yeah this stock has been selling off since we started talking so it heard that i was going to talk about this and decided to cooperate yeah no but if we want to dial down that leverage i think this makes sense what we're going to do is spend a little bit more money right generally speaking the more expensive options carry less leverage the the um less expensive options carry more leverage okay so let's just let's let's look at an example here what if we were to go like the let's go to maybe the 220 put so i'm going to take this equation and i'm going to add one little detail here we're going to call this an at the money long put okay matter of fact i'm going to get rid of this forward slash and now we're going to do another example trade so we're going to call this first one example trade a and example trade b is going to be in fact i'm just going to borrow this again it's going to make my life easier there we go example trade b we're going to buy let's say an in the money long put what in the money means is we're buying at a stock price that's higher than the current price and you're going to see that those are going to be the more expensive options what that's allowing us to do is to sell the stock at a higher price and it's currently worth we have to pay a larger incentive to someone to get us into the to get into that sort of a contract with us but that additional expense is going to dial down the leverage of the trade so let's look at this let's say we were to buy the 14th of april not the 200 put but let's say we buy the 220. so this is giving us the right to sell shares for 220 per share obviously if we're going to require someone else to pay us a higher price for our shares they're going to require a larger incentive to do that so it's going to cost us more money so right now that's trading between 10 and 22 22 25 let's call it 2165 splitting the difference there so is this a larger investment it certainly is it's more than double the investment about 2165 dollars okay so what's our delta leverage here well here you might look and say oh look at that this is awesome so on our 200 option if the stock went up one dollar went down one dollar let's look at the optimistic side if the stock went down a dollar oh we could make 45 dollars with our 220 put if the stock goes down down a dollar how much can we make we can make 77 wow we could make more money it seems like we've dialed up that leverage nope because if we look at this we're not going to make quite twice as much but we spent more than twice as much to get that leverage does that make sense so let's see what the actual leverage is so in this case it's going to be more like 77 this is these are going to change as we're talking don't be too distracted by that because the markets are open 77 divided by our investment of 21.65 and let's see how that works out i can see richard says it's three percent i think you're you're just about exactly right there richard 77 divided by 2165 is three point let's call it 3.6 percent so what we just did is we reduced that leverage from 4.9 percent gained or lost to 3.6 gained or lost it doesn't sound like much but actually we've reduced our leverage by nearly a third it actually is just about exactly a third isn't it uh no it's actually closer to a quarter in any case it's a significant reduction in that leverage and for some traders they're setting themselves up to be on less of a bumpy ride by spending a little bit more money on those options now obviously it requires a larger investment uh so it might require that it might it might also force one to buy fewer contracts think about what may happen here let's say we had roughly two thousand dollars to spend on a new trade well we might wind up at one strike we might buy two contracts with heavier leverage or just one contract with less leverage so actually with this one if we're spending our two thousand bucks ish on the 220 option we're only getting about one-third of the potential productivity and one-third of the potential risk or not not risk but leverage of the original trade as a matter of fact on either one could we lose the full 2000 bucks yep we could just be aware that that the much stronger leverage is here for better or worse the let's say the the more conservative leverage is here well now what if we want to dial up that leverage let's go to example trade c well if we want to dial up leverage we'd actually go for a less expensive contract and out of the money contract let's say that we went 20 out of the money ooh significantly cheaper right so 20 out of money that's the 180 put oops not 190. and that looks like that's trading for between 350 and 375 we'll call it 365.

okay so instead of being 2100 it's only 365 bucks and if we look at the delta if the stock were to go up or down we might make or lose 21 that doesn't sound like much but we didn't spend much let's see how much leverage we have a 21 return or loss on a 365 dollar investment is 5.8 again substantially more uh leverage than we were seeing on the on the um out of the money contract also because it's so much less expensive a trader who's really looking to dial things up could they let's say they had two thousand dollars to spend they might be able to buy six contracts here pardon me yep so um i just really want to drive home in this lesson in this discussion how that delta can influence the trading decision and it really comes down to the amount of leverage now a lot of you are asking questions about like well what about volume and and um and open interest and all those all those sorts of things are those still considerations certainly they can be right are we still going to look to see that the bid ask spread the measures of liquidity are still there for each of those strikes yep yep but another take-home message that i wanted to have here is what about our stop placement what if well let's let's look at stop placement here and i'll say as a general rule of thumb what a trader might consider is that when buying the less expensive options those are going to be more leveraged we've already we already know that we've demonstrated that mathematically so if we're using very tight stops on those out of the money less expensive contracts what is what does that expose us to on a more regular basis than maybe the the in the money contracts that greater volatility may wind up stopping us out more frequently guess what we might need to do with our stops we may need to loosen our stops on those out of the money contracts and for some traders they may just be willing to risk the entire uh option value so example if they come into this and they say well my risk tolerance is four hundred dollars and this out of the money contracts is gonna cost me 365 bucks believe it or not they may actually buy that put and use no stop recognizing they're taking a risk they might lose the 365 bucks entirely however if the stock makes the intended move could they make that back and more could they double triple that investment that's certainly a possibility thanks to this heavier leverage okay yeah anthony that risk much greater risk of getting stopped out pardon me when using tight stops on out of the money contracts than on in the money contracts it could still happen on either one but if we're you but one of the let's let's call it the luxuries of going in the money is that lower leverage can allow us to use tighter stops so for some what that might mean is well maybe they might have let's say a 30 stop on an in the money contract a 50 stop on an at the money contract and no stops on out of the money contracts to accommodate for the additional leverage that's just inherent to the way those contracts are structured all right so what i thought we would do today let's look at uh let's let's say we buy the um let's buy the at the money okay the 910 contract how much is that trading for right now it looks like it's gonna be a little bit pricier than that looks looking and guess what that just means the stock is going in the correct direction the co the options are becoming more expensive because the stock is moving down that's good well if we were to buy this for let's say 950 960 and we put a stop in place risking half of that investment we're right close to our 400 risk tolerance now i'm the intruder here on on barb's webcast so i don't mind i'm going to bend her rules a little bit and and extend a little bit beyond that 400 risk tolerance okay oh yeah bobby thank you for calling me out on that yep yep yep we want to make sure if you see me make a mistake like this where i forget to you know um correct something if i get a wrong number here please do just like bobby just did let me know it doesn't embarrass me at all because people make mistakes all the time right but it's important that i get the correct information on screen so that everybody can see i think you all followed along with the math you probably just glazed right over that but still someone who's hitting the pause button and maybe you know watching this on the archive later they want to see exactly how we came up with these numbers so if you spot anything else here i think the rest looks good but thanks bobby for letting me know that there was that typo there perfect all right so we're going to buy the at the money contract looks like about 9.50 right now and let's put in a stop half of that now you understand why we're we're using the stop logic that we are how do we do that well we can just click on the ask price i'm going to show you there are a couple of different ways we could place this trade i want to show you a different way than maybe you've typically seen there we go so we're going to buy just for today's example just one contract if we were to buy more than that it would expose us to more risk than we can tolerate in this in this smaller portfolio buying one contract to the 200 puts uh looks like our naturals up at nine six let's let's back that off to 960. okay leaving that as a limit order though there's always a risk the order might not fill half of this is going to be a 480 dollar risk though pretty close to our risk tolerance barb can can forgive me later for going a little bit high on that but i'm going to watch this this is just a cool little technique maybe some of you haven't seen this before i'm going to change our order type from a single order just the buy order to a first triggers sequential order that means once our first order is filled it triggers a second or a sequential order to go into effect and then i'm just going to right click on this on the original order and create an opposite order so this is the order to get us out in order to get us in in order to get us out this one though we're looking at a stop stop the bleeding i want out of this trade and specifically i want out if it falls by half its value or in other words if it falls down to four dollars and eighty cents in total value and then finally i'm going to make this a good till cancelled order there we go and our order is now prepared awesome so i'm going to click confirm and send buying that one contract the 200 put for april selling if the stock happens to fall or the option happens to decay any combination of influences that brings the value of that option down to four dollars and 80 cents we're cutting it off now what's the most we could make well the stock went to zero we might make 19 000 so i'm not planning on that maximum loss despite our stop because the stop is not a guarantee of a sale at a specific price the most we could lose is the investment here there is a transaction fee but let's send this order off there we go agaribus says can you do a stop with a condition order you could yup i'm not going to demonstrate how to do that today but it is a possibility you can experiment with that in your paper money account but now we've just leveraged ourselves if this stock goes down i wanted to come back here and figure out how much might we be able to make well where do we think the stock might go from here i drew these lines in for a specific purpose when you draw a line on your charts using the trendline tool you can actually use that as a measuring device notice as i point at those lines i can now see where the line started and where the line ended it looks like this one went from 217 217 down to about 189 that's roughly a 30 swing down this one went from 214 to 184 that's a 30 swing down this one went from 223 to 203 that's a 20 swing this one was 234 down to 210 i'm gonna round that off let's say 235.210 25.

this one 238 down to 208 30 and this one 256 down to 219 ish okay that one's about 37 38 dollars but what we're getting here is a feel for the rhythm of the stock is this a guarantee that it's going to go down an equivalent amount not necessarily but it kind it kind of paints a picture this stock looks like starting from where let's assume that today's high is the start of the next down move so that was about 205 where might a trader anticipate the stock is somewhat likely to go maybe down to 180 maybe down you know we've seen a lot of 30s a lot of 20 well a lot of 25s 120 one that was more than that when it was in the 38 range a 25 point downswing if we've if we've leveraged this how much could we make there could it be more than the four dollars and 80 cents that we have risked certainly could be and we could come back here and try to calculate that we come back here come to our layout click on that go to theo price this allows us to calculate theoretical future prices of options and we have a little calculator right here so i could come here and say you know what i think the stock might fall 25 and i think it might do it in the next let's say couple of weeks so let's push this out a couple of weeks and i could just look at my theo price column now and the uh let's see what was oh that's that's what i missed let's hit the reset button there we go let's push this out the correct couple of weeks we are now on the 11th of march let's go out here stock price adjustment 25 dollars and now we look at the two hundred dollar contract we bought for nine dollars and ten cents could be worth about twenty five dollars if we get that twenty five point down swing that would be a fifteen dollar potential profit on a 4.80 potential risk obviously again stop order not a guarantee that that's what we're going to lose that's a nifty little tool if you haven't used that uh that theo price tool all right but we've actually accomplished everything that i set out to do today everybody i hope you enjoyed this discussion i'm going to set this back here and i just want to do a quick recap of what we reviewed today when we launched i wanted to take a look and see what's happening with the markets i wanted to establish a sort of a technical framework for dave for today's discussion then we had our discussion about buying options we bought a put option and we talked through how do we choose a strike using leverage as sort of an indication and then how does that influence the the plan for managing the risk on that trade how can it influence the stop placement and finally we tied it all up with actually placing a trade an example trade got it all done everybody i think i hope you enjoyed that i really enjoyed the opportunity to come in and talk with you about managing a smaller portfolio um because i just think it's it's a topic with wide potential application even big portfolios may slice off a little a little piece and that's their small trading account that they want to learn how to how to manage so trading a smaller account great topic everybody i'm going to look for you next week in my regularly scheduled sessions monday through thursday i have something new on a range of topics just go to go to the calendar and find me there also if you would do this for me click this subscribe button here subscribe to the trader talks channel it just sort of cuts through all that youtube clutter and noise and allows you to follow your favorite instructors your favorite webcast series much more efficiently thanks ken for helping out in chats you're always fantastic i really appreciate that everybody as i set you loose remember that uh risks are real right we used a real example in today's discussion it's not a recommendation or endorsement of those securities or those strategies i'll look for you um in a future webcast you can also follow me on twitter at cma underscore tda as my twitter handle that's where you can have the more personal interaction with me if you like but hey whenever i see you again until that moment arrives i want to wish you the very best of luck happy trading bye you

2022-03-13 16:03

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