Getting Started with Options | Buying Long Puts | 5-31-2019 | Connie Hill, CMT
Is. That what's wrong start. Over. Alright. Folks we're gonna just review. This here real quickly looks, like yeah we're having a little bit of a technical issue so let's go through our disclosures, real, briefly, here again options. Aren't suitable for all investors is, the special risks inherent option. Trading may. Expose investors, to potentially, wrap it in stan shil losses. Read that brochure characteristics. And risks of standardized, option. In. Order to demonstrate functionality. Platform, we need to use actual ticker symbols but keep in mind TD, Ameritrade doesn't make recommendation, or determine, suitability any. Security, or strategy. All. Investing, involves risk including risk. Of loss we're. Gonna be talking about options. Say because this is an options class you want to be familiar with the Delta Gamma Vega theta although. We're probably not gonna dwell too, much on. Those. Greeks. Now. This this, is a series, of. Classes. That barb has put, together to, help you understand, basic, option strategies, and, if. You, notice, that we're in a market. Where it's a little bit more bearish, the market that's pulling back a little bit and maybe that uptrend, has stopped and you, need a way to. Profit. Or you're wondering what. Is the way I can profit in a bearish market that's, one of the strategies we're going to talk about today so we're, gonna learn the basics of buying, a put why, some traders buy puts how, to place an example, trader - and, then. We'll talk about next steps so that you can, enhance. Your knowledge of, puts. And my walk away or what I want you to get out of today's session is. Simply. Familiarity. With the strategy, I don't expect, you to be an expert, alright. By any means now. What does it mean when you buy a put, buying. A put gives, you, the. Right but not the obligation to, sell. The, underlying stock at the strike price. That's. The contract, price up. Until any time before. The option expires. Now. Why, what's, the goal of buying a put well the, benefit, from the down word. Movement, of the, stock whatever, it is that you're trading. Based, on the stock's price are, trying to take advantage of that, maximum. Potential reward for a long put is limited, by, the amount that, the underlying stock can fall, should. The long put, position expire, worthless the, entire cost of the put option, would. Be lost meaning, you, could risk everything. Every. Single dollar and penny that you put into that option that's gonna that's one of the risks you need to be aware of now. Let's talk about. When. You might decide, to do it in terms of what you're looking at on the chart while. On puts is a very technical. Oriented. Meaning chart, oriented. Determination. And so. There can be ideal, times to do it and not ideal times to do it so we're gonna point out the times that are more ideal, to. Do to buy along, put so right. Here some. Of you might be familiar with what bare flags are and now. It's basically a stock that's been downward, trending and, it, has this major drop. And then, it brows okay. This is kind of its rally phase right through here and then. It breaks, out of that formation right, where this white. Outlined. Arrow is okay. That. Would be the date of entry or, the confirmation, after that you could get in after that as well but. That would be buying. The, one put at the close, below. The low of the high date all. Right another. Opportunity. When you could do it this is an. Example, of that here, where the stock maybe has. Has. A day where it kind, of pulls back from this very short-term, consolidation looks. Like it's going down it, could be another one and then. We have one where the stock overall, just. Break support, you, can see it just was consolidating. Sideways here for a long time what, a broke, support. Especially. If it has some additional volume with it that can, be a very. Good timing, to. Buy a long put, so. That's what some traders will look for there.
Okay.what, Stuffs and a, slash. Out options, could make, good, candidates. These are the things to look for so, first look for those that are in a bearish trait or bearish. To neutral trade if you want that puppy to fall maybe be looking for more of the bearish trade there Bradish, trend you. Want to look for stocks that have higher trading, volumes if they, have higher trading, volumes that will lead you to options. That have higher. Liquidity which, means lots of contracts, being bought and salt it's easy to get in and out of you're, not the only person out there fishing right. You have people. Or, contracts, to interchange, with. When. You also look, for stocks with higher trading, volume and higher open interest you have tighter. Bid-ask. Spreads, and what does that mean it's, the difference between the bid and the ask are not that far away from each other all. Right so maybe it's just pennies. Maybe, it's nickels or dimes as opposed. To big dollar amounts, or big, stamps amounts, well, look at that down. Trending stocks. Timing-wise. Down to any stocks that are below support with high volumes, breaking support with high volumes bouncing. Off resistance, maybe it's run up a little bit and, is, drop hit its head on resistance, and it's dropping down or. Creating. That Bear Flag pattern, that we looked at that that, 30 the. Acronym, for that is a close below the low of the high day so you see that CBL. Ohd. All. Right, let's. Look at some considerations. Strike. Selection you, know there's a whole list of what you could consider in. Terms, of a strike. Price and sometimes it's really hard to know especially, when you're starting out it's hard to not so. Many. Traders, will just start at either the at the money strike price or the, first in the money strike price hopefully, you're getting familiar, with those terms and what they mean I'll point, them out to you. Expiration. Dates the further out the expiration, date the more expensive the option is likely to be however. Out here that, doesn't mean you shouldn't buy an expensive option. The. Idea is you buy plenty of time for the, stock to make the move and have. Some padding, of days on, top of that so. That the stock or rather, the option, has minimal, exposure, to time decay which. Is measured, by that theta one of those Greeks we talked about now. The outlook, is. Should, more so be bearish, and, in, terms of position sizing many, times. Traders. Will position size to the max loss meaning every, single dollar of that premium. They. Will position size to it because theoretically it's, possible, that. You could lose that, entire. Amount. All. Right now. Quickly. Benefits. And risks and then we're gonna go look at, an. Example here your. Maximum, gain now it's not unlimited like, a long haul is unlimited but. It is limited, to the amount the price of the stock could fall which is zero. Right stock could drop to zero, is. It likely to well. If it's, $100, stock it's not likely to immediately. But, that could be a nice profit, as, its, dropping okay. Means. It benefiting, from the downward movement of a stock a smaller, investment, it, is, a smaller investment is required. Compared. To shorting, the actual stock shorting. The stock is a bearish strategy as well we don't talk about it a lot because it has the. Potential. Of. Having, unlimited. Risk, alright, with, a long put you do have limited, risk and, again that's why many people might position, size to it I, have. To one, thing I learnt in here is that sometimes, a one call or a long put brings. Out. I'm. Gonna say the Green Monster in, you okay because you're thinking oh it, could drop this far I could make this much money and sometimes.
Especially, As you're new you can get wrapped up in that so that's, just Connie's, word warning and. Again. The potential max loss could be the total in the trade, so, let's go look at an example here I'm going to bring up my finger swim platform. And. You. Probably have noticed the markets a little bit down today you, probably have noticed that, its. Peak was up here at the first part of May and May. It's been more of a bearish month for, the market overall we're, looking at the S&P right here now, we are going to look at an example here, and. I'm, gonna bring up the chart first of all. And. We, are going to look at Goldman Sachs. Now. I want. To say that the market has gapped down the, stock today, yap, down and, it's. Kind, of rallying. Off its lows so, to speak the. Days not over, things. Could still change, but. In terms of looking, for say, a setup here, you. Can see Goldman Sachs was down lower here, in December. Like. Most stocks were and. Then. There. Was a support, line drawn in kind. Of a support for this area about 180 yeah. What is that 186. Almost and. Today. It, gapped down below, that support, now. It's a little hard to tell if we have some excess volume at this point in the day that's what these little lines are down here on my chart to, let me see. When. It breaks support. With a lot of volume that's when sometimes your your, ears perk up and say hey this could be a potential, candidate, now, could it be a candidate, to be on your watchlist definitely. And then you can watch it for the. Precise. Entry you're looking for now. Because you and I don't have all day to hang out together and watch, this stock we're gonna kind of walk through the steps here now I want to do some drawing. On. This, one and, what. I want you to notice is that the 30 day moving average. Started. To drop my. Blue line is a 10 day exponential, moving average, it's, been headed down for quite a long time and, then. In terms of kind of this pattern, that we're looking for let. Me change colors here so. We have. Kind of a big drop, that. Would represent a, flagpole, those, of you that are familiar with price patterns, and then. The stock, does. Some consolidating. It tries to run up here a little bit all. Right and within these boundaries, its consolidating. And then. When, it pops out that. Could be a day that. Folks might consider entering, into the trade. So. That's one the other is if it runs, up to resistance, and rolls, over and railways, again that kind of would be. I'm. Gonna point to here, that, kind of is representative. Of what it did this day it tried to rally it didn't get very high maybe. Broke some short-term support there but, today, this. Is the short term or the longer term support, that it's breaking, there now. Could, the did this candle. Today, still end up to be a bullish, bullish. Candle, by the end of a it, could right. We're seeing like I said we're seeing the markets bounce off their lows and, the stock as well as a bouncing, off of its lows, now. One. Thing that's helpful to have in mind is how far. Of, a, target, or how big of a target, doesn't look like the. Stock house where, is it gonna go to next how far could a drop now. I'm going to back up here a little bit and let's. Take a look at this we. Have and we're going to use our drawing tools from the thinkorswim platform. We. Have some lows down here, in December, right this is where the. Market. Had. And, you can see those on many many stocks where it came down to a point, where, maybe, there were only a couple of, days that formed that long term support, for, the stock. Let's. Go ahead and just kind of zoom in here, so we've, got this one level clear down there and. You think well is there anywhere, else that, might, act as the next support level down this one's down quite a ways at 154.
So. We. Could say well where, was the previous support, level previous. Support, kind of looks like it was in this area. So. I'm gonna draw a line in here. That's. Gonna be about. About. 173. And a half, can, you see here how, the. Stock kind of is. I'm. Gonna say dancing, around this level is sticking. Around this level. Kind, of what. We would call, consolidating. And so you're gonna see a lot of congestion in that area and that's, an indicator to you as well but it could be a support, area so. Looks like the stock right now is at 180 423. This. Is same possibly. It could drop, in the neighborhood, of about ten to eleven dollars okay. So if. The support next support level were really, really close, somebody. Might, say I don't know that it's worth doing it right. But. If it has a target, that it could drop to, then. It's. A little bit more appealing. All. Right let's walk through the process so we see the technical, setup we, see that it's a break of support, and, maybe. At the end of the day it's not but, right now while. We're together in class it is so we've got to take advantage of it so, let's go over here to our trade tab. Now. And. In. Terms, of. Different. Option, contracts, on the option chain Goldman. Sachs has quite a few because they have their monthlies which. Run black here are the June's that expire in 21 days. Here. Down here are the July monthly. Contracts, and usually the monthlies, have, more, liquidity. In them they have more open interest in them than. Sometimes. Then the shorter term contracts, so, let's take a look here for example I. Open. Up the June 14, and. I, open, up, July. And. I want you to just kind of follow my mouse down the open interest contracts, we. Can see 12. 670. 324, 126. So. There are some activity. In there but. If we jump down to say these July contracts. Then. We're seeing. 1:26, 75, 190. 1715. 2286. Same. Thing on the put side here, and, we're seeing lots of, open interest and we. Would be in, this case looking more so at the put side of things. Alright. And, so which ones do we go for it there's. No magic. Answer that says yes absolutely, this but. The expectation. Is by, sometime, that you think it might take the stock to hit your target so. In this case. You. Know it could take a few days sometimes. People, will measure the average move, on the last drop. Sometimes. People, will use price. Patterns, to set a price target. To. Help try to identify that, if, we did that in. Or. The, other things sometimes, people will use is the difference, between support. Levels because. Many times those, support, levels will break out into chunks, that, it's, like every seven dollars or every four dollars, okay. On, a higher price stock usually that difference. Is a little bit bigger, and. So we have. All. We said maybe from what's one. 185. Which we're gonna call 186. Down to this next level so. That expected, target is about 11, bucks now. Things do move down much more quickly than, when. They're going up you might have noticed that you're like man when things pull back it's, like there's. An old adage that says. Stocks. Jump. Out windows when they're headed down but. When they're going up they climb up stairs so it's a slower process on, on, a stock going up versus dropping. So. How. Soon could this take place well. Something. A lot of traders will do is they will err, on the side, of buying more time so to, help avoid that theta decay and to give the option, plenty, of time to make it to its target so. As we look at these weeklies that we have here, probably, all of those are a little bit too short in time. Now. We have the June monthlies which is 21 days, many. Times what some traders will do is, they will figure, out how much time they want and then add an, additional. Twenty to forty days you. Know what we could just kind of say in, the middle of that maybe thirty days for our example, today so. The June with 21 days to expiration probably, doesn't give enough time for that move, to. Go, all the way down to that target so. Perhaps, looking, at these July 19, s is going to be a better way to go. Now. You can see we have the, first in the money option. Is the 185, you can tell by this yellow, shading, on the, option chain. Currently. If the stock at 184 44, that technically. Is the closest. Strike price as well so it. Technically. Is our at the money option, as well as has a little bit of intrinsic value and a slight PE in. The money if, somebody wanted a little bit more conservative, approach they, might go a little bit more on the money they might go to these 190s, all. Right now. For. Our purposes today let's. Examine, this, first in the money option, it's, going for. 750. By, 770. If we're gonna buy it we were paying this higher number of the asking price, it. Has. 626. Contracts, out there of open interest so is there, a balance, of contracts, out there that there other. Traders, to trade with, yeah absolutely. And. Today. It looks like it's picked up an additional.
73. So there's some activity, here in the volume column which, can be helpful to note if. You're entering, a period of time where maybe there's not a lot of open interest but you see a lot of volume come on in a in a certain day like, if the options were first new or something like that but. We're seeing that yeah there's definitely liquidity. Now. There a difference, between the bid-ask spread, is 20 cents, and we, talked about well is it is that tight, or is that you. Know that typically if that's if it's a tighter spread. And. You're looking for a tighter spread, that that's more ideal. I'm going to do something here I'm going to take 20 cents. And. Divide, that by. 765. To get a percent, and. We're, gonna see what the percent, the market maker is asking, to, match you up with another, contract. And as, we do that calculation it's, about two percent two. Percent is a pretty low decent. Number let's, go ahead and make this trade we. Are going to simply. Do a right click or. Take. That back a regular, left click on the, ask price it's going to populate an order here we're just going to do one contract, goldman-sachs. Expiring. We're. Gonna do the one eighty five strike price gives the the, buyer of the long put the, opportunity, to put that stock to somebody, else at one, eighty five. Price. Of, seven sixty five for that contract, would, put it as a late limit, order good for today only, now. If we're close here on the price, the actual, asking, price it's, more likely to get filled more quickly than. If you are gonna back off the price and look for a bargain now. I'm going to back off the price and nickel, now, that gets us to the midpoint, look. Through your confirmation, dialog, box kind, of tells you in English what you've done outlines. The. Transaction. Fees for you here as well and. Then I'm gonna go ahead and his sound and voila, it, filled us at 760, so. It did it even a little, bit I think that's what we asked for actually, all, right. Let. Me mention some other things to you here I'm. Gonna come over here to the education, tab. And. I hope you guys are taking advantage of. In-person. Events. Kind. Of been harping on this, at. Least in my classes, and the, reason kind of harping on this is because it. Is such a great opportunity, for you to. Go to these in-person events around, your city now, if you're a little bit newer workshop. To your in-person event you could look for is. Called. Investing. Fundamentals, workshop. The. Next, one we're gonna have is July. In Houston, and then a couple of weeks later we're gonna have another one in Indianapolis so kind, of splitting the country that way, again. You don't have to pay to walk in the door you, do have to pay to get yourself there so, maybe there's some more fun you might want to go I mean. You. Didn't like to say the market drive event that could be entirely appropriate for something that's in a beginning to intermediate, category. The. San Francisco, might be a nice time of year to visit San Francisco, in June, all, right so, please take advantage of those, opportunities. Now. As. We summarize, things here I'm going to push out a survey, to you, and. We're, soliciting. Feedback in, all our sessions, trying, to engage, if, we're, giving you what you need and what you want and so. I'm, going to ask you to fill that survey I'll click on it now while it's active and then. If you haven't seen one before it's, just five short questions. Fill in the dots with your mouse pink, pink pink and, it, shouldn't take you more than about 30 seconds. All. Right now. Well. What do we talk about today we learned the basics of buying a put we. Talked about why raters, might want to buy puts to benefit, in a downtrending market right we. Saw an example on the fingers one platform, now. Next, steps for you I would. Say is go, find three, stocks, that have a bearish trend in. Your paper money account and go place. Orders. On those making sure yours give yourself enough. Time looking. For a target we didn't plug in the target but looking you, know where could it possibly go, to or, might its next stop being all. Right, three. Paper, trades and, that's, all I'm going to ask of you is to do three. Paper. Trades in your paper account.
All. Right now, coming. Up naps and this will be in about a half hour Mike fair warned in the splash he. Will be talking about long-term investing. As far as portfolio, management, so. That'll, be in about a half hour he'll be in our next class that comes up here. Barb, should be back next week she. You. Know after a nice little vacation you. Might give, her a hard time if you come to her class regularly you're maybe, not a hard time but you could see how the cruise was I appreciate. You being here today we appreciate you. Taking the time to spend with us in, our, webcast, that we have that are designed. For you and to help you alright, so, check, out my fair borns class we'll see you here next week if you're really focusing options strategies, right, this, is the right place to be have, a good morning you guys buh-bye. You.
2019-06-07 13:40
