Timing Considerations Using Short Verticals | Swing Trading (Days to Weeks)

good afternoon and welcome this afternoon to swing trading it's days to weeks my name is ben watson i'm joined by james boyd and we're going to be talking about timing considerations for high probability swing trades coming up right after this hey ben watson here again talking swing trading that was my best guy fieri imitation well not my best it was a guy fieri imitation my dog is barking at me because he didn't like it but i'll tell you what we're gonna do we're gonna talk a little bit about the idea behind some of the timing considerations for swing trading and so joining me today in the chat 30 plus year veteran of the financial markets maybe it's 40 plus year veteran james boyd is going to be handling your questions out there in the chat he is there already he's already handling your chat thanks and welcome to all of you they're here for the first time if you're here on a regular basis welcome to you as well my opportunity to fill in for a couple of weeks for john mcnichols so we're going to step into our discussion here really quickly and we are going to talk a little bit about some of the housekeeping items we need to take care of again you can follow me at twitter on twitter at ben watson underscore tda you can follow jamesboyd on twitter if you don't already uh at jboydunderscoretda lots of great content and information going on out there in twitter also remember that anything we talk about here or on twitter or anywhere else simply for illustrative and educational purposes only it is not investment advice it is not a recommendation of any security strategy or account type remember that options aren't suitable for all investors there are special risks inherent to options trading that may expose investors to potentially rapid and substantial losses we're going to be talking about spreads today in this discussion so make sure that you're aware of how that strategy works if you are unfamiliar with the spread trading strategy or a spread trading strategy great educational resources to be able to learn about that but make sure that you understand the strategy before you trade it also remember we're going to be using the paper money platform that paper money is a software-based educational platform it's a great way to learn but it does a couple of things that are a little bit different than what happens in the real world specifically with how the paper money platform handles uh short options remember that anytime anytime anytime you are short an option you could be assigned early prior to expiration regardless of its in the money status paper money doesn't do that so that is a key difference between paper money in the real world be aware that fact also remember that any investing strategy involves risk including and up to potentially the risk of loss no part of this presentation may be copper recorded rebroadcast in any form without the prior written consent of td ameritrade and with james boyd's prior consent we're going to jump into the agenda here and thanks to all of you again for asking those questions uh along the way let's talk a little bit about our agenda today oh i got to point the other direction it's my other left we're going to evaluate market conditions we're just going to talk about what's going on in the market we've been seeing a pretty strong rally short intermediate term in the market we're going to discuss swing trading timing considerations and we'll demonstrate a swing trade short vertical spread paper money example if that's not enough adjectives to describe what it is that we're going to do today so let's go ahead and let's jump on in to the thinkorswim paper money platform as we go about doing that and again just really quickly uh while i'm making that jump to hyperspeed here we're going to go over to the thinkorswim platform and we'll take a look at what's going on in the market but i i want you to start thinking about this i mean i know it's right there in the title it says days to weeks when we talk about swing trading and so there's some timing considerations to the idea of swing trading uh and and so they come about in terms of how long do we expect to be in the trade uh how long do we expect the trade to to really take to get to its maximum gain or to where we might feel comfortable exiting and more importantly when do we get in and when do we get out relative to what the stock is doing and whether that is a function of kind of chronological time or whether that is a function of what's happening from a technical analysis perspec perhaps perspective on the price of the stock that works either way and we'll talk a little bit about those ideas as we as we jump in here so let's take a look at the s p 500 just kind of get a sense of what is going on and again this isn't uh you know when we talk about individual stocks when we talk about the market as a whole remember that those are not recommendations those are simply just illustrative examples to help us to understand what is going on and how these ideas work so we've been talking about over the course of the last few weeks let's take a quick zoomed in approach to the s p 500 we start to see that rally up and then that little bit of a pullback about a week ago this is about where we were last week when we talked about this uh discussion uh in terms of uh some short call vertical spreads or short put vertical spreads and we were looking at the possibility that the market was pulling back a little bit well guess what the market as a whole rallied up through what we thought was going to be a resistance level that resistance level uh here in this case let me bring up my magic marker so that we can kind of draw this in here but you can see where that resistance was right there around that 4500 level we talked about the idea that the market might stop at that point but there is always that risk and there is always that risk that a level of support or a level of resistance doesn't exactly act as a level of support or a level of resistance so we think about why those things occur and i'll tell you what nobody is better at explaining this idea than james boyd if you watch some of his technical analysis webcasts james does a phenomenal job in talking about the mechanics of the mentality of levels of support and resistance and so you start to see these levels materialize and there are points at which price has changed direction before it's nothing magical it's nothing mystical it's nothing kind of uh you know unusual it is simply an area where buyers have been pushing say for instance a level of resistance buyers have been pushing higher they run out of buying pressure meaning they're not buying at the next higher price sellers take over and say hey i've got an imperative to sell so price starts to come back down and so oftentimes levels of of resistance are those turning points between an upward movement and a downward movement doesn't mean that it's going to last for a long time as a matter of fact this level of resistance that was there lasted exactly one trading day maybe two trading days and then price blew up through that resistance and now that level potentially becomes a level of support and we can see what happened right here is that two days ago or actually yesterday price came down tagged that level of support bounced up off of it and started to move higher that suggests that buyers were willing again now to step in at a higher level and push prices higher so levels of support and resistance work as a function of buying and selling pressure the battle between bulls and bears or buyers and sellers that gives us an idea into kind of the trading psychology that might be happening as swing traders though those levels become all important to us they become critical because those are the points that we use to define the swing right the swing from a low to a high is that is the swing move right that is the one move and and so an exit might very well have been out of something as if that price was pulling back from a level of resistance so we kind of have to keep that in mind but then there's also kind of that time frame element remember we're talking about days to weeks and so this is the type of a trade here let me just kind of clear that annotation you know if we were looking at the s p 500 it has made a swing move it made a swing move and maybe it's now making a new swing move our uh task perhaps might be to identify the next level of resistance overhead that that swing move might move towards so and and as a matter of fact jack points out we're almost back up to those january highs which could again intentionally but or potentially become a level of resistance so there might be another swing move in the offer okay great now how do we play that or how do we use that to our advantage if we know that a swing move is that move from support to resistance or resistance to support this is swing that's a swing move okay as opposed to for those of you might be brand new to this discussion as opposed to a trending move or a trending trade or a trend trade however you want to define that but a trend trade simply says follow the trend until that trend changes so i'll give you an example here if we had been looking at the s p 500 the trend trade would have been that entire position and length of time right there this is trend that's a trend trade versus what we were just looking at with a swing trade so now that we have a fairly clear understanding of that definition a trend trade might incorporate multiple swing trades within the context of the trend so can you can you be both a swing trader and a trend trader the answer that is yes but the way that you bifurcate your approach to that trading and understand trend trading versus swing trading is that you keep your swing trades clearly defined and it's the goals of those swing trades clearly defined and you keep your trend trades clearly defined now can a swing trade ultimately become a trend trade yes as a matter of fact james has even talked about that in one of his webcasts in talking about transitioning from swing trades into trend trades and how do you manage that kind of neutral zone if you will of of making that move from a shorter term trade to a longer term trade okay all right so that being the case let's kind of define what it is that we're looking at here and i have an example i think that will help us to kind of keep in mind or see how we might approach a timing issue with a swing trade so what i'm going to do is i'm going to pop back over here and i'm going to change this to amc and i know you're a lot of you're saying oh this one right but i think this gives us kind of a clear uh example of a swing trade because we've seen the range or the boundaries or the definition of that swing trade occur before right amc is a trade is a a stock that has moved with fairly clear boundaries but it's also had the ability to move beyond those fairly clear support and resistance boundaries now i'm going to reiterate that this is simply an illustrative example okay because it's an illustrative example recognize that you know just because this might be of interest and being talked about out there on twitter and in other forums that is not why we're using this example we're using this example because it is a clear definition of the type of approach that we're looking at this type of swing trade days to weeks that we've been talking about so i'm going to zoom in over here on the right hand side really quickly and we'll just kind of zoom into this time frame right here and what i can see uh looking at this from a technical analysis perspective is that i've got an area of support down here around the 14 mark and i've got an area that has been resistance up here around the 30 dollar mark okay so about a fort about a 15 or 16 dollar swing so we've seen it swing from top to bottom that was one swing move we've seen it swing from bottom now to top that's another swing move okay so if what we've seen happen before is that when it runs up into this resistance up here around 30 it reverses and it swings back down to 14. what we're looking at potentially for a swing trade here is that move right here okay but we also know a couple of other things about this scenario one is it could break up through that resistance and keep going that would be detrimental to our idea of a swing trade now the other idea is this we don't know for sure that the price of the stock is in fact going to reverse at this resistance and start to move to the downside so i'm glad that we've got james on board in this discussion today in the chat and i'll tell you exactly the reason why let me bring this over to full screen really quickly here um james talks a lot about and and not that james is the only one that talks about this but we we as coaches tend to to discuss this uh on a fairly regular basis the idea of using confirmation for an entry into either a trend trade or into a swing trade and so what we might be looking for in a scenario like this is some kind of confirming move james talks a lot about as do other coaches this idea of you've probably heard the couple of acronyms close above the high of the low day if we're going from a downtrend to an uptrend or close below the low of the high day if we're looking for a swing move from bullish to bearish so if that were the case and we were looking for that type of move and i'll tell you what i'm going to do right up here in the top right up about here i'm going to put a link for the recorded session the recorded archive of this session i'm going to put a link right there to a webcast that james teaches in talking about those types of confirmation moves cohold and kablowed right the close above the high the low day close below the low of the high day types of moves so that you can extend your learning and your understanding but as we start to see this kind of move uh and and kind of start to see this play itself out when we're when we're looking for a move from top to bottom or bottom to top um we're looking from some sort of confirmation and as we approach it from that perspective you know that kind of gives us an uh a defined entry into the swing trade however however there is something to keep in mind here from a timing perspective and and what we need to kind of keep in mind from a timing perspective is this that if we're going to wait for that idea of a close below the low of the high day in order to enter a trade in a situation like this if the move is from 30 down to 14 and the low on our high day which happens to be today is down here right around 26 well now we've already given up four points of our potential move to the downside which on the one hand is okay because you can say great i've got confirmation that the price of the stock might move and and that's okay because if we're going to take the directional move and look we were going to buy a put option or we were going to buy a bear put spread that relies on that directional price movement to make the trade successful then you want that confirmation but you have to balance that confirmation with the fact that we're getting in a little bit late we're getting in as it comes down off of that resistance level so what if we were to say all right fine i'm willing to take the risk of a move against the direction that i thought the trade was going to go for the sake of entering the trade and capturing the circumstance that exists so what if i were to play the swing trade with say for instance a short vertical spread that defines my risk but also allows me to enter because it allows for some flexibility in the price movement against the direction that i expect the price of the stock to go so if i were to look at using a say for instance short call vertical in this case what if i could sell a short call vertical somewhere up here so that it's uh maybe a little bit profitable if the price of the stock goes up a little a little bit profitable if the price of the stock goes sideways profitable if the price of the stock goes down a little bit a little profitable if the price of the stock goes down a lot the only time that it doesn't necessarily work for us is if price just really goes to the moon and rockets higher that one doesn't necessarily work for us in this case so we're going to look at selling a short call here on amc above where it's turning or where it seems to be turning and again not a guarantee that it's turning simply seeing those elements of this from a technical analysis perspective so the swing move that we're looking for here is this move from resistance down to support at 14. and if we're going to trade this using a short call vertical that we're going to sell up here s c v short call vertical then i'm not really all that concerned that it goes all the way down to that 14 strike i'm not really concerned that it goes all the way down to the 20 strike kind of that halfway point i'm not really concerned that it gets past that 25 strike all i want this to do is not go above my short strike through expiration does that make sense so i'm giving myself myself lots of possibilities here in this short call vertical using it on a swing trade opportunity okay that being the case let's put this to some numbers and let's see how this works out for us now a couple of things that have been happening i'm going to go over here to the chart really quick and i'm going to go to the excuse me studies and i'm going to put on here i mp implied volatility and we can probably make an assumption that implied volatility is going to be relatively high it's about as high as it has been over the course of the last year there's an expectation that the price is going to move that's what implied volatility is it is an implied expectation of movement of the stock price okay so we know that the price of the stock is likely to move not a guarantee of how much how far when or which direction it's going to go okay that being the case let's now look at this from the perspective of how that short call vertical can work in our favor and timing on this short call vertical okay so if we look at this and say okay it took one two three four five six seven eight nine ten days for the price to move to the upside from support to resistance it may take about ten days for this price to move back down so let's go to our trade tab here and let's kind of think about what our possibilities are i'm going to go out a little bit further than that 10 day time frame to see what that maybe looks like from a premium perspective now what i want you to also note since we were just about talking since we were just talking about implied volatility if we look over here on the right hand side we can see that that implied volatility number seems to be relatively elevated right 300 implied volatility in the front month on down into the 200 percent implied volatility in the two months out right but if we come over here we look at current implied volatility percentile that's not the highest that this implied volatility has ever been it's at the 36th percentile which means that relative to where it's been it's actually pretty low but we can use this in our favor right we can use this for our to our favor so let's think about this 16 days out to go until expiration okay and if we come over here to the left-hand side for that particular stride or that particular series we can see that the expected move based on that level of implied volatility is about 12 points 13 points roughly in 16 days which if we were to go back to the chart and kind of look at what that means we might expect that in the next 16 days we could see a move up or down by about 12 points well down by 12 points is going to put us somewhere down in that range okay again one of the reasons why we're looking at this and using a short call vertical because it doesn't have to get all the way to the 14 level to get us to that profitability in the short call vertical trade right what if it goes up 12 points so that's 30 42 so that's about right here okay and that's right up at another level of resistance well okay that's fine if it goes up 12 points if we use a short call vertical that has defined our risk in the trade and limited the amount that we could potentially lose in the trade but it's also defined what we can potentially make in the trade as well so now if that's the expected move 12 points up 12 points down from where it is now that's about where our levels are okay so let's go back to the trade tab that's in 16 days we know that it could probably move 12 points okay so let's see what a short call vertical would look like 12 points out or excuse me 16 days out for this uh for this stock for amc okay and if i look at delta look at this i mean this is this is how that implied volatility kind of impacts these strikes 16 days out to go till expiration the strike that is right here at the 35 strike that's five points away from where the price of the stock is right now five points away on a 30 dollar stock is still the 49 cent delta that means that there is a big expected move well yeah 12 points over 16 days so we know that implied volatility is relatively elevated we know those premiums are elevated over here we know that those premiums are elevated on the put side as well so what if we were to sell the 35 strike and buy the 36 strike one point wide vertical spread let's just see what it looks like we sell the 35 and we buy the 36 getting about a 17 cent credit about a 17 cent credit on this trade against a one dollar wide spread which means if we go back to kind of the calculation here we think about this we're risking 83 to make 17. okay risking 83 to make 17. so if we go over

our calculator and we say all right 17 divided by 83 that's about 20 of our risk that we're making right about 20 of our risk return on risk okay i'm fine with that i'm okay with that because that's 16 days to go until expiration so if we were to fire that trade off now that makes sense right from a short call vertical perspective i'm five points away from where the price of the stock is the price of the stock could continue to rise five points over the next 16 days and as long as we got to expiration and the price of the stock wasn't above 35 great if it goes up i'm risking 83 83 cents okay i know and sandeep i know that the 35 strike is not fi not 12 points away it's five points away but i'm defining my risk right so i don't care if the price of the stock goes down now in this case 12 points 14 points seven points it doesn't matter it just has to be below 35 at expiration in order for me to claim my 20 return on risk does that make sense so this becomes a very flexible trade for a swing trade i'm not dependent upon the price of the stock making any particular magnitude of move other than it doesn't move above my short strike okay great that's 16 days out fine let's fire that order off and see how that works boom we'll fire that order off now though with implied volatility doing what it's doing and look implied volatility is at the 300 percent level roughly three days to go until expiration and remember we were collecting 17 to 20 cents of premium i just had a thought because look the move here expected move for three days is six dollars and seventy cents almost seven dollars right a little bit better than half of what that movie is for 16 days so i just said hmm self what would happen if we could get jeff just about the same amount of premium for a much shorter duration swing trade and then have the opportunity perhaps to do it again so i'm going to go back over here to our desktop capture and there we go we just sold it for 20 cents okay i'm just going to go back over here and let's go open up this three days to go until expiration series and let's scroll down here on the call side same strike 35 guess what i did this before guys just so that i could see if this would work selling that one for a buck 92 and buying the 36 strike look at that do you see what i'm seeing do you see what i'm seeing right here i'm getting roughly the same premium the same return on risk the same expectation the same definition five points away where's my short strike and an expectation of movement to the downside for three days that i was getting for 16 so my obligation only has to be three days long instead of 16 days long okay fine guess what i'm gonna do that and so from that perspective here's what we're doing we're selling the 35 strike we're buying the 36 strike calls okay it defines my risk because it is a short call vertical my risk is 84 cents or 83 cents versus my maximum profit of 16 cents it doesn't seem like a lot not a home run but swing trades never are swing trades are not home runs right swing trades are base hits small base hits this is a little blooping grounder between the first baseman and the shortstop so that you can get to base right okay so if i can do that in three days what i would normally we were looking at 16 days and then i could turn around and i could do it again and i could do it again perhaps if the circumstances still allowed for it would that be a better timing idea than looking at longer so what i want you to think about is i know we talk about and when we build into you the mechanics of vertical spreads we talk about selling 20 to 50 days worth of time but i also want you to consider shorter term time frames if you have the opportunity to do that based on the trade definition the way that we've put this together right so that you have that possibility of being obligated of being obligated for a shorter period of time and receiving the same amount of premium doesn't that make sense okay and so arf asks the question well how does volatility impact such a short-term trade well here's how volatility is going to impact this trade three days from now the value of this option the value of our short strike is either going to be zero or it's going to be in the money and it'll be assigned right now we are close to expiration there is the possibility that that could be that that short strike could be assigned early especially if the price of the stock starts to rise but look we're selling for the 35 strike we're selling the 35 strike that's right here three days to go until expiration so somebody the the option buyer that chooses to exercise their right which means that we would be assigned the obligation three days early is going to be sacrificing that time premium can it happen yes could you be assigned early yes if you're assigned early guess what you have risk definition in the 36 strike that's what defines the risk in this trade so you're now short the 35 you're long the 36 and if somebody assigns you the the obligation to sell the stock at 35 you have the opportunity to buy it at 36 okay great or buy it on the market at whatever it's pr it's priced at if it hasn't gone up above that short strike great turn around and do that and now work your way out of the trade by satisfying that op that obligation if at expiration three days from now or 16 days from now the price of the stock is below 35 and you've not been assigned early both of those options expire worthless you get to keep the premium as a now then realized profit and walk away from the trade right so using short verticals can be an effective way to manage swing trades especially if you have higher implied volatility that allows you to shorten the time frame and receive the same amount of premium and so this higher implied volatility that we're seeing here is allowing us to do that okay so a couple of different ways that we can approach a short call vertical swing trade guys this is where it helps to have an understanding of what implied volatility means how implied volatility works and and option greeks and option greeks if you don't understand option greeks and how those option greeks impact your premium good opportunity for you to get back in touch with some of our webcasts that talk about option greeks or some of our virtual workshops that talk about it as well because look at this short strike 64 cents a day of theta of time decay a penny of volatility decay is all so even if implied volatility went down time decay is working as your best friend in this case so consider short-term swing trades based on what the options allow you to do as opposed perhaps even to longer-term swing trades remember a swing trade is going to give you a definition of the length of the typical trade by the simple nature that you're trading from support to resistance anyway but continue to explore that relationship in looking at your available scenarios with short vertical spreads used to trade those swing trades guys we've we've done some interesting stuff here this has been a lot of fun i know you've had some great questions uh for james boyd out there my hope is that as we've talked a little bit about this this has sparked some ideas i'm going to be talking a little bit more about this tomorrow midday in my probability based options strategies webcast if you want to join me which is at one o'clock eastern time uh you can join me for that and uh we'll continue that discussion but again my thanks to james boyd uh for helping out with this here's what we've done today in this discussion we evaluated our current market conditions we looked at the fact that the market was breaking up above a resistance level we discussed swing trading timing considerations and we demonstrated a couple of different short vertical spread paper money examples in this case short call verticals taking advantage of that increased implied volatility allowing us to shorten up our time frame and receive the same amount of premium and the same amount of return on risk guys thanks very much for being here and participating in this discussion i very much appreciate that let me pop back over here really quickly and just simply say this anything we talked about simply for illustrative and educational purposes only again remember be aware of those circumstances that exist when you're talking about trading spreads options aren't suitable for all investors there's special risks inherent options trading that may expose investors to potentially wrap it in substantial losses keep in mind the fact that paper money treats short ver short options differently in terms of early assignment just be aware that fact also remember that past performance of any security or strategy does not guarantee future results or success guys thanks very much for being here and again once again thank you to james boyd for jumping in on the chat today and answering your great questions we'll see you again hey remember though really quickly one more thing right down here at the bottom it's actually over on this side right down here at the bottom there's that little subscribe button click on subscribe so you don't miss any of this great content we'll see you back here again next week take care everybody bye-bye you

2022-04-01 16:53

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