Trading Vertical Spreads | 11-6-19 | Ken Rose CMT
Up against those all-time, highs once again it's starting to show a little bit of weakness but overall we have a nice strong bullish trend, in. Herman. You. So. Investors again do I welcome you here to our session, here today on trading vertical spreads so, when when the market, is is. Up of these all-time highs and overall, we're in it we're in a bullish. Situation. Where they where the trend overall is bullish we're experiencing. Perhaps, what could be a little bit of a temporary pullback, if we, want to trade from a high probability standpoint. Then those short vertical spreads are usually, but come first to mind with many investors, plus. We're going to be looking at is we're going to be looking at short vertical spreads and particularly, in a bullish mark would primarily be looking at things from along the lines of a short put, vertical spread so we're trading with the trend before. We get too far along though let's go ahead and run through our disclosures, just reminder, that in. Addition, to teaching this session I also teach other sessions, also post things on twitter if you'd, like to follow me on twitter my twitter handle is at KR. O SC just like the rose at KR, o SC underscore. T da. In. Wave disclosures, here just, a reminder that paper, money trading, this software application is. For educational, purposes only successful. Virtual trading during one time period does not guarantee, successful. Investing, of extra funds during a later time period as market, conditions do, change continuously. Spreads. Straddles, and other multi leg option strategies can entail substantial, transaction, costs including multiple commissions, which may impact any of any return advance, option strategies often involve greater and more complex, risk than single leg option trades investors. Should also consider, contacting a, tax advisor regarding. The tax treatment of, applicable. Spreads, and multi leg options of course you do want to take that into consideration with, regards to the change of commission, structure at, TD Ameritrade, also. Just reminder that in order to demonstrate the function of the platform we need to use actual symbols however TD, Ameritrade does not make recommendations, already determine the suitability of any security or strategy. Friendly for individual traders any, investment, decision you make in your self-directed account, is solely. Your responsibility. Here's. Our here's our Greeks over here a little review of those well well we'll discuss the Greeks as we're putting together our paper trades and here's, a little update on those commissions and, with. Regards to the recent update, in that area, so. Today but, today my goal is, everyone. Will have a good understanding. Let. Me just shift gears here a little bit just a little bit of a heads up so today my goal is well look at the slides we'll go through the slides by doing underline and emphasize it my goal here today is everyone.
Will Have an understanding of why we, would be looking at short put verticals in this particular market and also, some. Of the unique technical, tools that we can build on our screens, to help us make decisions with regards to that particular area. Now. Coming back over here to our slides again. Will also talk about identifying. Potential, entry signals strike prices and expiration, dates for short put verticals, again. Will sort of load up a customized, chart in relationship, to that will, also do the math behind short verticals, will, determine the max can the max loss will calculate the. Potential return on risk along, with. Implying. Position. Sizing with that will, determine potential, exit, criteria that would be under consideration and of course will create in place, put. Short put vertical orders, on the thinkorswim paper-money, platform. So. This is just a little bit of a heads up here so with, regards to with, regards to potential, entry, signals, now. On short put vertical spreads the, nature of that trade is you'd like the underlying security, to move to the upside so, if you're in an uptrend you. Generally, have a stronger. Trade in other words if you, have a stock that's doing this. Because. It has a history, of. Bouncing. And not only bouncing, but going up and creating, higher. Highs. We. Tend to feel a little bit more comfortable, when. There's a pullback and a potential, bath so you can see right here this, is actually a little bit more of a breakout, we, can also do a breakout entry as well where we broken out and we've come down and we've tested that old area every support of a resistance. As support, and then, looked a look to enter in on a bounce of that particular area, so. That would be from, an from an entry signal standpoint. That would be the anticipating. The bounce entry, a bullish. Candlestick pattern, near potential, support level this little bullish candle right here let's, refer, to as a, hammer. You pull down you have a small body long lower shadow that's. A little hammer right there. Also, trading, the bounces, that happens so it could be as we approach and have our bullish candle or we could wait till the bounce actually, occurs.
Now. The advantage of that is is, the move we can actually see the move visually, under way rather than looking. At the candlestick, which suggests the following move, will be underway and a, common, rule of thumb on that just look for the stock to trade above, the high of the low day this, being the low day right here and trading above the high to low day right there and then, then determining, what time of day to activate, the order some, traders will take it with more aggressive traders may take that trade intraday more, conservative, traders going to wait till the end of the day to, make sure that we have cleared, not only traded above the high the low day but we're looking to close above the high the low day another. Potential, entry is confirming the balance where the stock is trading, closing. Above the closing, above the high the low day near the end of the day so. When we can look for a trade in other we look for more of a confirmation. Of that bounce waiting, for the end of the day maybe, some of the neighborhood of 15 to 30 minutes before the actual close, of the day so these are some example, sample. Entries notice the key thing here is, the stock is pulled down to a support, level right here. Strike. Price is an expiration so, technicians. Often select a strike price below as many levels, of support, as possible while maintaining, acceptable. Premiums, so. You can see right over here, this, is support, right, here we're suggesting hey if we can get a strike prices significantly below, that level of support that's. Okay, but. Of course we'll also like to have a premium, that makes sense with regards, to the trade. Now. In relationship, to that a rule. Of. A1, one thing that some investors will do is, they'll. Look at the Delta and they'll. Look at from the standpoint I'd like to have a tray that has a probability of success of. 60%. Or higher, so. That would suggest from a theoretical standpoint a Delta that somewhere in the neighborhood, of 30. To 40 so that's another thing you can do when, you're looking at how far below the support level is look. At that Delta between 30 and 40, and then map that out and see if you're below support number, and then, how far below that support level that you currently are. Another. Consideration, be, your return on risk you. Can take that into consideration as, well usually, you're selecting, out of the money strike prices when you're doing these short. Put verticals. So. In, calculating, our max key to max loss I'm going to shift gears here a little bit let's go to the thinkorswim platform and. Kind, of catch up to where we are here then we'll come in here and we'll we'll actually put, together a trade will calculate max gain max loss return on risk and position, sizing then, we'll come in here and we'll use this math here as a review. So. To do that we'll, come back over here so I my thinkorswim platform I mention, to you that we're going to bring up some tools here that are especially. Useful. If, you're, looking at doing short. Put verticals, or just short verticals, overall, and, the tools I have here, our Bollinger. Bands I'm just going to, make. This so we can see them a little bit better our Bollinger Bands right here I'm going to increase the width of our bands here, let's. Make them three wide and actually. Don't need to have lower and upper band different colors so. We'll. Put on matching colors, right here so what are these Bollinger, Bands well. We. Can just simply identify, Bollinger, Bands this is our, bands that indicate, potential. Resistance, and support levels, on a chart based on previous price action we can just look at them like that and that's fine I want to get a little bit more technical weed weed we dig into the into, the statistics, tools chest the, Bollinger Bands is simply the normal distribution. Put. On its side moving. Along the moving average line and coing and going out to standard, deviations, on both sides from, a statistical standpoint, again, those tube dose bands to represent. Potential. Resistance. When this price goes out and touches the top part and support, when it comes down and touches the bottom part as, you can see right here on our chart right here just, to make things cleaner I'm going to get rid of one of our moving average lines here because that looks to me like that could be creating some confusion, these Bollinger Bands are set around a 20-period, moving average so, I'm going to take our 50, period moving average off of our chart here.
Right. Here so this would be consider the center of the band other is that would be the center of that norm distribution, here's two standard deviations, here in hirsute, and standard deviations, here so. If we're looking to doing a short put vertical we. Want to set up that short put vertical. Below. A support, level and, if. We want to use Bollinger Bands to do that would, like to find a stock that has moved down to the lower bands here and possibly bouncing, and moving to the upside this, is the chart for the S&P 500, but notice right here we. Came down here we actually broke out of the lower band, hugged. It right here then we moved up over here, we. Came down here actually, broke out of the lower band, came. Back in touched the lower band right here then, we moved to the upside over, here it doesn't look like we broke out we just kind of rid along that lower band notice. That when we hit that lower band. The. Fact that we hit the band that makes it an aggressive entry, for right at that band that's, why some investors, will look for that bullish. Candle, perhaps, a hammer, candlestick. Perhaps, a bullish, engulfing pattern, down, at the bottom of these of these Bollinger lines but but something to indicate the potential to bounce up rather, than just continuing, to ride that band of the downside. Now. I could go through a lot of stocks and identify, stocks just going through stock after stock after stock and look to see if we're at the bottom of the Bollinger Bands however. We have another nice tool that, gets us to that point very quickly, what. It is it's a customized, column, called, Bollinger, % B. So. If we come over here I've got a little watchlist, right here this. Is a watchlist maybe maybe we'll take a little bit of a, sidetrack. Here, as far as building a watchlist, I believe we've got time here take. A second, here this is a watch this built by using the scan tab and in. The scan tab looking. At things like like putting in a minimum price putting, in a minimum amount of volume and then up here we have scan in just, find the intersection, between two public watch lists one, of them being weekly, options and, the. Other public watch list intersected, with notes I have scanned in weekly and over here I have the intersect. With and, I'm, going to choose intersect, with penny increments. So. I'm finding the intersection, between those two then I can put in a. Minimum. For the stock I put in minimum average volume, there's some other things you can do here to further modify. Your surge when, you run the search I've generally seen I get about 60 or 70 stocks, what's the nature of all these stocks they, all have weekly options available which, is nice from an option traders perspective, because it gives you a versatility. They're all quoted in penny increments, which tends to help out with the slippage it doesn't it doesn't doesn't totally delete the slippage but it tends to help out then. You can take that watch list you can take your results, that save it as a watch this and you come down here, start. Down at the bottom and pull up the first stock down here and tie. It into your, trade page.
Using. These little links here right this, one said it read this. One over here is set it read time. Together and you're in your in your trade page here maybe go out about 20 or 30 days and maybe. He opened it up by about four strikes no need to go a whole lot more than that and just check the slippage between the bid and the ask price ideally, you'd like it to be less than a nickel here on Delta Airlines were basically, at about 3 cents somewhere, in the neighborhood about 2 to 3 cents or they all gonna be 2 to 3 cents they're not because. Depending on what's going on with the stock that slippage can actually widen, and it can also contract. But. Then you can then if you don't have what you want you can go ahead and hit your delete key delete the symbol and then hit your up arrow key and you can work your way up through that watchlist, and you, can do it very fairly quickly let's. Get back to our custom, column that will help, cut. The chase with regards to identifying stocks. In a watchlist that, are down at these potential, support levels here on our Bollinger, Bands we, can see that our TN is not it's it's all the way up here now, if. We pull up SP X this will give us an idea. Cuz. SP actually represented the overall market is this going to be a situation where we're going to be finding a lot of stocks that are down to this lower band it's not why. Isn't because again the markets of these all-time highs however the, market is showing little bit weakness here some, would say it could be due for a pullback we don't know that that will occur but. We're going to cover this strategy, in the event it occurs we'll. Know the tools to use and it helps to have in place how. To run the calculation so we'll be in a good place in the event something along those lines occurs. So. But, where we're at right now we. May not have a lot of candidates, from which to pay per trade but we should have at least one or two that. Typically, will be the case we may have to go outside of our watch this may be look at stocks in the S&P 500 we, could do that as far as looking additional, stocks let's go ahead and stay with our watch list here the key column here again is called, Bollinger. %. B I'm. Gonna keep that in mind Bollinger %, B it's not a very intuitive. Name. For a name for a, study. To put in a column, but, to added just come up here to the top of your columns, right. Click on symbol choose customize, and, then once, you have customized over. Here under available items you can just start typing in Bollinger. And. One, of them is going to be right here this is Bollinger, percent B highlighted, click on that item move, it over here I already have it over here now you, want to make sure that your Bollinger, percent B is set to the same parameters. As your, Bollinger, Bands are here on the chart so that they match up appropriately. So. To do that you just scroll. Over here in your box. There's. Your Bollinger percent B click on the little down arrow caret. Here and, the. Length is 20, that's the same with this our length is 20 we're going out to standard deviations, that's the same as this so. It is the same okay so we show we should get a good measurement what, I'm going to do here well what, does Bollinger percent be tell us it. Gives us from a percentage, standpoint, how, close we are to the top the. Top up here let me just grab a little drawing tool here to represent. This if, we're at the top of the Bollinger Bands. You. Know if we're right here. Or. If the price is right here. Or. If the price is right here, that, Bollinger, that bollinger percent, B value, is going to be very. Close to. 100%. We're. Here as well as over here those those Bollinger, Band bathroom very close to 100% if, we're at the bottom. Like. This. Then. Those values are going to be very close to what, will. Be very close to 0%. Some. Of them if you look right here where you actually came out out.
Of The bottom of the Bollinger Bands let that, little that little number there is going to be a negative number I'm just gonna put in a negative maybe see, that occurring here we would actually have something like. You. Know 104, to 4 all the way outside of the Bollinger Bands if we're outside of the Bollinger Band we're actually above the 100%, tile area so. This is the way that, the Bollinger percent, B works if. You. Look at these numbers like looks. Like we've said is that Boeing looks like Boeing's, at fifty two point four percent if we pull the Boeing chart we would expect that we would expect the ball and the price to be right. Here in the center which, may be good for some. Option. Strategies, but not necessarily. For trading verticals. Because usually when you're trading verticals, you, want to be at a resistance level or, you want to be at a support level because, verticals, whether they're short or long they, are directional. In nature. So. With that then what do we want to do if we want to do short put verticals, we. Want to find some stocks that are down to this lower band at a potential, support level prime. To bounce to the upside so, I'm going to sort by Bollinger, I'm going to bring the lower Bollinger. Band, values, up to the top. Yeah. We actually have PEP it's outside, of the Bands we. Have o XY it's, down towards, the bottom of the band we have we. Have C MCA here, so we have a little group of them down here towards the lower towards, the lower side of the bands right here let's, take a look at Pepsi now if it's, ideally. Would like us to have a stock that's down towards the lower part of the bands but is not in a horrendous. Downtrend. Or, is gap way down below a support, level let's. See we got here with regards to Papp - it, looks like that's PepsiCo, so, what's, happened here well, this. Is our right, over here this is going to be a support level right here on PEP. You. Know that's an area where he came down and found a bass and a bounce and started head to the upside if we, bring a horizontal, line across there. To. Try to match this up with where we closed. It's. Right there so, we're sitting we came down and we hitch this same support, level right here now, what's going on from a candlestick standpoint. Well this is actually a bullish engulfing pattern right, here where, you have a red candlestick. Okay. And then, you and then you gap up a little bit in the day so the complete body that candlestick is within the body of the red candlestick, that's, a bullish engulfing pattern it, does indicate a bounce and a potential, movement to the upside we, don't know that that will occur but it is a bullish candlestick pattern, now, the confirmation. Of this bullish candlestick pattern, is when, we get a close above the high of the low day which is this one right here we're, not there yet so if we're going to enter the trade right now. It. Would be an aggressive trade because we don't have a close above the high this low day right here. How. About the trend of the stock I, would, say this stock is primarily, in a sideways, trend. We'll. Go ahead we'll use this we'll use this for an example trade, but it would be nice if we had a little bit more of an uptrend, pulled. Down to the bottom side of the band and we were bouncing, up okay, but because we're sitting on this support level going up this, this makes it a possibility, just, for fun though let's go down through here let's see if we can find something that perhaps is, in. An uptrend, this, one doesn't. Look like it's in an uptrend does, it oh XY will. Go down here that one doesn't, look like it's in an uptrend right, roll over low or high it does look like it's down here to support level however. Not. Seeing an uptrend they're not, seeing it upturn there one of the reasons we're having difficulty, right here investors because the overall markets, in an uptrend so if you have some stocks or down these lower Bollinger, Bands, it usually is going to take a downtrend, to get them down there when, you have an uptrending, mark in other words something something's going on so we may have to settle for something, that sideways, but would like to avoid, entering in, a, trend because then we're trading, against the overall trend which. From a statistical standpoint usually. Doesn't, doesn't, bode well over, longer periods of, time, eBay. Not so good Nike. Nike looks. A little bit better here we're coming up above the moving average line looks, like we broke down below, it though so when Nike right here the trend is in question. Why. Is it in question well going, up here because we broke down below the moving average line and also. Important, is, this. Little price area right here.
So. Rinona. Sitting. Right on this support level but. In moving down there we broke down below this support level right, here, okay. So, we're kind of we're kind of hanging out here you know looking at Nike here because, we have a little bit more of an uptrend we've been moving sideways, here without breaking below this historical, support level right here let's, go ahead we'll use Nike, as our example here we'll go ahead and look at Nike, so, what do we do then well we, want to identify support. Let's delete our drawing. Here we'll take it off here. Support, we want to be down below support, but, also like to have a tray have a tray that has a 60%. Higher, theoretical. Probability, of success would. Also like to have a reasonable, premium, all these things would come into play time. Is going to give us more premium, and. Higher. Delta is going to give us more premia but we want to go with a lower Dell to have higher probability. We, don't want to go out too far because then we're half then we need to forecast, the price out, to out to a point, where, we may not feel comfortable making that forecast, well. Let's come up here to trade then here we have Nike, let's, go out about 20 to 30 days why, don't we let's. Let's see if we can squeeze something in, here on 23, days and I'm, going to open up so we have more strike prices and we, want to have our Delta here so we'll come over here to Delta, here's. Our Delta's right here so we want two Delta between 30 and 40, our strike. Prices come in 50, cent increments. So. Let's let's look to go. To. Dollars wide. That's. Going to be a few more strike prices we'll go ahead and go with all here so. Here's our Delta then, right here we want to be right here we, want to be $2 white so we're gonna go 8750. 8650. 85, 50 that's, going to be one two three four, strikes, wide, so. To bring this up, Delta. 31 I'm gonna do a right-click here. I'm. Gonna come in here and I'm going to choose cell I'm. Going, to choose deep and wide because we want to we want this to be $2 white so we're gonna have to go for strike price I'm gonna go deep and wide. One. Month, for. Strike. Vertical. So. There we have it there there's our four wide we have a credit, of 46, cents, this is a credit before commissions, that's. At the mid-price here, let's, come over here just a little bit let's let's move it down to 45, in an effort to get filled so, this is where we can start looking at the numbers and we can look at the probabilities.
First. Of all what's our theoretical, probability. Our. Theoretical, probability, is going to be the inverse, of the Delta the Delta here, is 31, I'm just going to note here that means our probability. Our theoretical, probability, of success is 69. Percent. Sameen. We're gonna be right that's, almost. Seven out of ten times it doesn't mean that it's, a theoretical, probability, only but, again a useful, tool to keep in mind so. That probability how long are we gonna be in the trade are gonna be in the trade for 23. Days I want to note that 23. Days. What's. Our return. On risk. Well. Let's grab our calculator, here to get our return on risk we need to calculate our risk what's. The maximum loss on a $2, wide. Vertical. With the 45 cent, credit will, you take the width of the spread, which. Is $200. You subtract, your credit, which. Is 45, again this is before. Transaction. Cost and. That puts our max loss I'm going to note this our max loss, is. 155. Dollars. What. Is our max gain our max gain is this credit and. This. Is a credit before transaction. Cost but that's our max gain is that credit so if we want to get our return, on risk. We'll. Take our Max gain here of 45. We'll divide it by, 155. That. Gives us a return on risk I'm just going to know this down return. On risk equals. 29%. So. Is a, twenty, nine percent. Return. On risks, you know look, looking, at these numbers this is an important, consideration. To. Keep. In mind here and that's. What you want to ask yourself investors, here is is a is, a twenty nine percent return. On risk, over. Twenty three days with. The sixty nine percent probability. Is that is, that acceptable, is that good well, the answer, to that isn't. Going to be in this webcast, it. Isn't going to be in our numbers, it's actually going to be in your trading journal that's. Why it's so important, to keep a trading journal because, when we all went you know when we analyzed things and we look at the technicals, and we look at these numbers and different things we, all tend to fall in different areas, so. If I go by keeping a trading journal you can go back and you can look at individual, stocks you've traded before maybe, you've done several verticals, on an individual stock and, stockings as a group and kind of get a fill now, in this case we're, getting we're, getting a little bit more than a percent, a day with. A sixty nine percent probability. Of success. So, that's where the answer that question would be would be within your trading journal and we, always want to keep that in mind okay so, with that in mind then.
Let's. Go ahead then and look. At our position, size what. Was our max loss our max loss was. A hundred, and fifty five dollars let's. Play the part of the investor, that on this particular trade, is okay, risking, well. We. Don't know yet do we because we want it we want to see what this looks like on the chart how. Could we set our position, size without first looking to see what this looks like on the chart we. Want to be below supports, we want to see hey is that eighty seven fifty below support if, so how, far, below support is it. So. Let's come back over to our chart here and. Let's. I'm going to duplicate, our line right here. Let. Me go back over here to this. Trade. We're looking at and we're at eighty seven fifty, so come. Back over here I'm gonna duplicate, this line. I'm. Gonna move it move it down here a little bit it's not going to be down this far I just want to get it down here so that I can grab, it easily out of the property, and we. Want to look where we're at in relationship, to. $87.50. Are we below that support, level that's. Key, and. Let's show that over to the right-hand side. Okay. So that's that's where we at are we comfortable, with. The trade so we have a little bit of room down below that support level now, we, can bring up another tool. Help, us to gauge this the more that we can do to be systematic, rather. Than taking a hunch. The. Better we that the better investors, the better the investor, performance, generally, generally, is and to, be more systematic we, can add another study. Down here there's implied volatility, if worthy of note to see that as a stock goes down implied, volatility, goes up that also helps with regards to those premiums. We. Can add another study that's called the average true range B. Come over here and add average, true range. We, can look at that we can we could calculate the distance, between support. And. Our. Short strike price, we. Calculate, the distance and then we can see what, percentage that is of the average true range. Let's. Go ahead and run that number let's. Look. At this, yeah. And we'll put this one on the left hand side just to kind of go through the numbers what, were we looking at let's or every two ranges a dollar 55. What's. The distance will the support. Levels at $89. And 18. Cents, I'm. Going to subtract from that eighty. Seven, dollars and. Fifty. Cents, that, gives me a dollar 68 I'm going to divide that dollar 68, by, the average true range of a dollar 55, what, does that average true range represent. It represents an average, between the highs and the lows on a day-by-day, basis. Going back about 14, periods and it does take into consideration, gaps that's, what our Average True Range is coming out some, investors, may want to be more, than a hundred percent of that some investors may want to be okay with 50 percent of that let's see where we're at we got a dollar sixty eight and again we'll divide that by. One. Dollar and, fifty, five cents that, puts us at about a hundred and eight percent, so. Is that a good number again would would want to go back to our trading journal book these would be excellent, numbers to put into a trading journal to follow up on later so let's. Play the part of the investor that is okay with this they're, okay with a distance between the, support, level and where. A short strike is at they're okay with that being a hundred and eight percent of the average true range it's just, reckoning. With regards to volatility. Of the underlying security. So, with that our risk then again was a hundred and fifty five dollars for each contract, we'll, play the part of the investor that's okay risking, a thousand. Dollars which would be one, percent of a one hundred thousand dollar account. So. If, we're okay risking a thousand, dollars here we'll take a thousand, dollars we'll divide that by our risk. Per vertical, which. Is 155. Dollars now would suggest we can get six of these, so.
Let's Come back over here to our trade and we'll, increase, our number here we'll take two, three, four five. Six. Okay. So right now we're ready to enter the trade before, we do though I just want to come back over to our slides and just make sure that we've touched, upon these points, so, what, have we talked about in a relationship, in relationship, to this trade we've. Talked about max gain is our net credit, and our example our net credit was 45 cents, we, talked about max, loss is the. Difference between the strike prices. Minus. The net credit, the, difference between the strike prices was 200. The, net credit was 45, making. Our max loss at 155. We, talked about our return on risk which was our. $45. Divided, by our max loss of $155. That, gave us a return on risk of about 29% and. We talked about position, sizing and we were saying that our trader was okay with risk. Of. A thousand, bucks we. Divided that by 155. And that, put us into, about. Six contracts. Okay. So let's with that then we're we're, okay to go ahead and enter this as a paper trade now, I have this down at 45, we, hope to get filled we may have to come off a little bit further, we'll, do a confirm, and send here I'm going to click on confirm, and. We'll, send this into a little paper trading account here again. You'd, want to review your transaction. Cost here's our transaction, cost right here okay. And. We're gonna go ahead and click on send. There. It goes and we, were filled now. What, would be some exit, considerations. On this, trade. Well. We. Know that we we know that we know that we're getting a 45, cent credit. What. Would happen if this stock all of a sudden took took a rather dramatic move. Okay. What. If it took a dramatic move maybe, some good news came out and it, just over two or three days it went up like this. Remember. Our trade is set to last for. 23. Days what. If we're up here at five days and as. A result of that move. This. Spread that was worth. Forty-five. Cents when we entered it the value, of that spread has dropped down to. Five. Cents. Would. It make sense think would it make sense to get out of that trade well, if we're sitting at five cents I'm just going to grab the calculator here. I'm going to take five. Five. And divided, by 45, at. That point we would be at. 89%. Of. Our. Max gain, with. It would it make sense to, to, exit this trade at eighty eighty nine percent of our max gain only. Being in the trade for five days and avoiding. The. Additional, what, would it be the additional eighteen days of risk there. Would be a fair number of investors, that would say that that would make sense. So. What, some investors, will do is they'll actually set a percentage, you know maybe the percentage, is 89 maybe the percentage, is 90 maybe the percentage, is 80 maybe it's 75 percent when, so many vessels do is they'll send a percentage, to, get out of the trade at that particular percentage, if the opportunity, presents itself. And. You can actually put in it put in an automatic order, to, do that for you on. The other hand if the trade goes against, you and. Starts to move down so, that that spread that was worth 45 cents. It's. Starting to go up and is starting to approach what's the maximum that can approach the, maximum value that spread could approach would be, would. Would be 200, maybe, it's going and you get down here and you're a year, to buck 50 you. Say you know what I position, size around that maximum loss but because. Of the trend in what's going on can I go ahead and buy. This spread, back for two for a dollar fifty I can I could buy back for a dollar fifty I still, get to keep my credit of forty five so that would me leave me with a net loss of, a hundred and five dollars, per spread so. These would be some of the some of the considerations, to Kate to keep in mind now, on here we have ours we have where's our spread that was entered right come. Over here monitor. And. Let's. See maybe we can do it this way here's our monitor, let's see where's, our spread here's our field order right. So there's our spread what. If we wanted to set an exit to take us out any time we could get out at 89% of our max gain again this is outside of transaction, cost put. In a secondary, order just right-click on this choose create. Opposite, order, make.
It A limit order make, it a debit, limit order and set, it at five cents. Right. Down here we'll come down here to five cents. Five. Cents and we could have this said. Good till cancelled, that, good till cancel will probably, mean it will last it will last the life of the spread because usually as good till cancels, are good for some of the neighborhood of about, of about two to four months we, only have 23 days on this so that's probably going to last us if we. Wanted to also say. You. Know I also want an exit if the spread gains in value I'd rather rather to avoid that max loss we. Could take this order and we could change this to O Co one cancels other come. In here and choose duplicate. So. I have these two orders but I'm going to change this one to a stop, order. And. I'm going to set that stop at a. Dollar. 50. And. So this is set to automatically, take us out when, the value of that spread reaches a dollar 50 now we, may not actually get out at a dollar 50 we may get out at a lower price you, know stop orders don't guarantee us, we're will be getting out a limit. Order some. Things may happen but a limit order is is, almost a guarantee, that yeah this isn't going to trigger unless we can actually buy this back at five cents there could be a technological, glitch, or something like that that could occur to, to have an impact on that so. We'll go ahead and send this one in as well good. Till cancel, limit. At five stop, at a dollar fifty, click. On this and we'll send this in as well. So. We've got an exit, based on a profitable, level and we also have an exit based on an unprofitable level. Now of course investors. We can also rather. Than put those automatic, orders in there we could set alerts, so. That we just it gives us an alert to come in. Investors, if that if that value comes down to five cents, and it's not a rapid, move it, comes down to five cents and maybe we have two or three days left in the trade we may look at it technically, and say you know what I'll, go ahead and stay in the trade to pick up that extra five cents just want to keep in mind when you do that you're. Risking. You're. Risking that 40 that 40 cents you're risking the 40 dollars in order to make that additional five dollars and from, a statistical standpoint. That doesn't, look too attractive for, many investors. With. That said then let's go ahead and come. In here so we talked about exit. Criteria some. Of them some of the considerations, in relationship, to that and trendin like you, know given, a choice I like to look at it on actual charts rather than slides which we've done in here. Considerations. For short put verticals, let's go ahead and pop through these here discuss them a little bit. Out. Of the money. Out. Of the many short verticals carry more risk than potential, gain that's, true, so, why do investors, do it it's that high probability. In our case it, was that trade that had a 69%, probability. Of success, so. White investors do it again, that the high probability nature but yeah we, were talking about risk and what a dollar, 55, to make 45. Assignment. Risk from the moment the trade is open regardless of the price so, those options can be assigned, that, can that, can cause some difficulty, with regards to your spread although. Frequently it depends, a little bit on where. The spread is that assignment, can both hurt you and help you depending, on what the nature of your spread is when, that possibly, occurs, I always, keep in mind that the max loss is possible, regardless. Of the probability, at the beginning of the trade that max loss is real most Mac losses, do occur regardless, of what your probabilities, are and also, keep in mind this transaction.
Fees Can significantly, send. Can significantly reduce, profits. And increase. Losses. Alright, everybody so just a little bit of a heads up this session is considered to be an intermediate. Session, it, is thought that you do have a good understanding of, you. Know stocks and a good understanding of options, if maybe you felt a little bit lost during our discussion, here today I would also suggest you, you, look at attending our getting started with options, webcast, that's on Friday at 11:00 a.m. Eastern, Time with, our very own Barbara Armstrong is she and she does a great job in that session following. This session here today we have coming up active, trading, directional. Options, I understand. That James. Is out, of town today but we have a fantastic, individual. That's going to be coming in and filling, in for James so definitely want to want. To stick around for that so, what we talked about we talked about identifying, potential, entry and exit prices, dates. And the like we discuss max loss max gain return. On risk some, of the things to take into consideration when, looking at exit we placed we created, a trade and we placed a trade, I like to encourage all of you to do is basically, do what we just did here today you, know build your charts, use, those Bollinger, Bands use that Bollinger percent beat you, could go through a list of stocks you have you go through the S&P 500 just go through the same steps and look at potential, candidates, and doing that go ahead and trade it you know you you, basically learn how to ride the bike by getting on the bike and riding it so I like to encourage all of. You to do that, just, a reminder then once again in order to demonstrate the function I the platform we need use actual symbols have a TD Ameritrade does not make my recommendations, or determine the suitability of any security, or strategy, for, any individual traders any investment, decision you make in yourself to account, is solely. Your responsibility. Everybody. I hope. You have a fantastic, day, best of success and your invest in going forward and if you'd like to follow me on Twitter I'd love to see you there as well it's kr OSE underscore. TDA, and again just like to encourage you to get out there and try what we've done here today that's a great way to solidify, what you've learned here today so. Bye everybody we'll see you in thanks again. You.
2019-11-13 12:25
