January 10, 2017
Option selling: In tonight's video we're going to go over all of the trades that we made on Friday, August 21st, so yes, there were a lot of trades that we made on Friday. It was a crazy day, probably one of the most volatile days that we've seen the entire year in the market. What that means for traders like us is that we have to take advantage of this opportunity.
You can't be timid and be shy about putting on new trades, and so we try to lead by example by doing that today. We started to ramp up not only the position size but also the aggressiveness of some of the trades that we did, and we've got plenty of room in our portfolio to continue to add trades like this week after week.
By no means is this the end of trades like this. If the market continues to be volatile, drops even further, we'll continue to add trades. This is exactly the type of market that we want to see.
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Here's a look at the S&P and again, huge, three-day drop in the markets going from almost 210 to about 198. That's a massive drop in the S&P, about 6% in three days and again, you can see back the entire year, most of the year markets have been range bound, a little bit higher, a little bit lower, etc.
but these couple days have been volatile. You can see what happens as a result of implied volatility and now everything across the board has shot up. What that means is that we have to do a lot of positions, so try to spread out as many different positions as we can. You'll see that today because we had so many different orders that went through.
Not only a lot of positions but we want to try to be in different markets, and we want to try to be as balanced as humanly possible, so even though the markets are falling, that doesn't necessarily mean that we're going to be in this major bear market. Things can turn around quickly, so we want to try to maintain some balance across the board with our portfolio.
I'll talk about that a little bit later on this weekend with our elite members on the weekly strategy call. We'll look at the overall portfolio and see where we're at and see what we can adjust heading into next week. Again, if you're an elite member, we'll talk about that on the strategy call.
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Let's first go over the first earnings trade that we had yesterday. Even before we cover the earnings trade in HPQ, which was a scratch, we did have an earnings trade in DE, which is John Deere. Obviously, with the rest of the market, Deere opened way lower, so we immediately went and did a calendar to move our 90 strike puts out to September, so we closed out the August position, resold the 90 puts in September, did that for a $70 debit.
Then we also went right back in and sold a very short inverted strangle at 87.5 for September as well in DE, the call which is at 115. Even though we paid $70 in debit on rolling out the put, we were able to take in a net credit overall because we had an 115 credit on the call side.
We're a little bit inverted on this position right now, but even though DE had a huge move lower, and you can see the huge move lower that it had, implied volatility remains high, so we are hoping that this week implied volatility will come down as the market maybe balances out or calms down just a little bit. Our remaining position in DE looks like this.
It's this very wide strangle, so it's trading actually right now just beyond our break even point, so just a little bit of a move higher back in DE, and sometimes these stocks have a tendency to move back very quickly, could cause us to regain most of the money that we lost so far in paper trading this position around earnings.
We'll stick with this strategy. It's served us well in all the other trades that we've pretty much done over the last month, and we'll continue to monitor this one, of course, going ahead. Two closing trades that we had yesterday. The first one is in HPQ. This was an earnings trade.
Unfortunately, finger swim's platform was running incredibly slow, at least on my end. I know a bunch of people, they had some issues in the morning with their platform at loading data and prices and even though HPQ opened right exactly where we wanted it to, and we had a nice big paper profit, we just weren't able to actually get the order executed in time to actually realize that.
By the time the order went in and filled, we had to adjust our price to 156 and took a $4 loss. The other trade that we closed out of yesterday was our XRT trade, our call credit spread. This trade we only entered just two days ago, so we entered it for about a 22, 23 cent debit, something like that and closed it right back out for a 10 cent debit.
It automatically hit our closing order that we had to work for 50% of max profit and so we took a nice $60 profit in about two days on XRT. You'll see later on that we reenter that trade as well. All right, so new trades that we entered this week.
The first couple set here are all straddled, so I just did these in groupings and sets, so it makes it easier for you guys to take a look at. All of these straddles, and I'll go through them here in a second, all of these straddles are on very high implied volatility stocks. We tried to spread things out just a little bit, so we have DIA, which is the DOW, IWM, of course, and then BX which is black rock.
All we did is try to go out as far as we could. In some cases they don't have October options, so in BX's case and DOW's case, DIA, we couldn't go out to October like we could in IWM, so now we're spread out not only among the different contract months, which is also going to help us out in our duration of our portfolio, or the longevity of our trades, but it also spreads us out across these different markets.
Not only the industrials but also the rustle, kind of the small and mid caps and then also some real estate and equity and stuff like that. All of these trades again, we did very very aggressive. We were selling strikes that were right on the money or very close to the money and taking in nice big credits across the board. In the case of all of these, you'll see here, they all had really high implied volatility.
The DOW obviously had high implied volatility, up around 100. IWM, same thing, implied volatility up around 100. BX had a huge move lower as well and implied volatility with BX up around 100 as well for the day. All of these straddles are on super high implied volatility stocks at the very very edges and extremes. Again, this is why we have to trade these aggressive strategies where we're trying to sell as much premium as humanly possible, be completely naked, if possible on a lot of these trades.
Now, as I've spoken about many times, and there are video tutorials on how to do this. If you are trading an IRA or a ROTH account or a SEP account, something like that where you can't do these straddles, you can still participate. What you want to do in these cases, with these straddles is you want to go out even further beyond the short strikes that we sold.
In the case of IWM, we sold options at 116 both on the call and on the put side, so on the put side, you want to go down below 116, so maybe down to somewhere around 106. On the call side, you want to go up somewhere around 126.
You want to go really far out so that you still get that same type of payoff diagram where you have a lot of credit but you're going on the further edge wings buying the 126 calls, buying the 106 puts and that's going to reduce some of your credit because you're going to use up some of that $755 credit to buy those wings, but it's going to allow you to create a risk defined position and then you're going to be able to trade it in your broker account.
The key is, in all of these positions, if we're doing a straddle or a strangle, you just have to go out further on the wings and buy options to create a risk defined position. When you do that, all of your brokers will allow you to make those trades if you either can't do these because of the account type or your trading level is too low.
It's not that you can't do these. You just have to be a little bit nimble on you do them obviously. Again it's really different for each person so I can't say that one particular strike is better than another, but I always say, look at your risk reward and see if you can go out a little bit further, especially on these straddles and strangles, we want to try to go out as far as we can and make sure that we're taking in a big enough credit to obviously make the trade worth it.
As far as the next grouping of trades, we did a bunch of strangles. A lot of this strangles are set up very very much the same way except for Starbucks which I'll get to here in a second. Basically what we did is we went in and said a lot of these stocks still have really high implied volatility, the Q's, SPY, Apple, all really high implied volatility, but instead of doing just all straddles, we also wanted to throw in some strangles, give ourselves a little bit more room.
In the case of the Q's for example, what we tried to do was just go out to about the one standard deviation level on either end. We went out to about the 95 strikes down below the market in the Q's and up to about the 112 strikes above the market. Now the market's obviously moved, but we tried to place these strikes right at the 15% probability of being in the money on either end.
That's what we were trying to do is trying to be as neutral as humanly possible to the future movement. If you're making this trade new or next week, you want to get into a trade like this, and all you want to do is reset your strikes to about the 15% probability level.
That means you'd come down to around the 110's and then maybe you come down to around the 90's on the put side. Now you're, again, a little bit more neutral and it's the same balanced trade on both sides. You can still make these trades; you just want to reset your strikes and again, shoot for that 15% probability of being in the money on both sides.
That will give you a lot of balance. In our case, with the Q's, just as one example here, we did the 95's and the 112's, so that means that we have 95 is all the way down here. Gives us a lot of room for the market to still fall and make money and then the 112's on the call side means that the market has to go all the way up to 112 from where it is right now for us to lose money between now and expiration.
Now that implied volatility's higher; it gives us this much wider range or profit window to make money because of the higher priced premiums. We can still sell options far out of the money. This is why we have to be aggressive because times like this we can obviously take advantage of a lot of the pricing.
We did virtually the same thing on the SPY and Apple, so those are virtually the same. In Starbucks, we just did it a little bit different. We did a strangle, but it's very tight. It acts more like a straddle right over the market. You can see the reason is that we sold the 52.5 puts and we sold the 55 call, so it's very very tight.
Again, acts more like a straddle right over the market, but in fact, it is truly a strangle. The chart here isn't loading up at this second for Starbucks. The next grouping of trades that we did is a bunch of vertical call spreads. Now the reason that we did a bunch of vertical call spreads is that as we were adding this, I started to keep .
Keep glancing back at your portfolio, and you realize that at some point you're starting to get a little bit too bullish. Meaning that as the market was continuing to move a little bit lower towards the end of the day, we wanted to give ourselves just specifically some bearish trades so that if the market did go lower, that we could profit from a handful or a big set of trades that we could then roll lower and continue to profit as the market rolled lower while we still had all these neutral straddles and strangled working.
We went in and did a bunch of vertical call credit spreads in XLE, PFE, DOW, and IBB. They're all the same. They were set up almost the same, about the 70% chance of success level for each of these. That means that we were trading options at about the 30% probability of being in the money. ITM, that's where we had our short strikes set on all of these.
We did these a little bit more aggressive because of gain, we wanted to get some down side exposure in case the market did continue to move lower. We know for sure that this grouping of trades is going to create very quick profits, very much like they did with XRT just the other day. In particular, let's just look at one like IBB. Is that the one that we traded?
Yeah, IBB and you can see here with IBB's chart that the stock is still moving down. It's not as high implied volatility as some of the other ones. It's got about 87% probability or an 87% IV rank, but we still want to get that down side exposure. We want to be a little bit aggressive and bearish on some of these trades.
Again just giving ourselves a little bit more balance in our overall portfolio, giving us a sure bet that if the market continues lower that this handful or grouping of trades will make some money. All right, and then the last set of trades that we did the other day was in some iron butterflies. These are straddles with protection.
The reason that we did these, and this is kind of what I was talking about earlier, is that the reason that we did these is that they are higher priced security. Unlike some of the other ones who are down below $100 and it's very easy for us to do the straddle and cover the margin.
In these cases, with BA which is Boeing and MON, these are higher priced securities, $100 plus stocks, so it's going to be harder to do the straddle or strangle. It's going to take up a lot of margins, especially when implied volatility is as high as it is. This is a classic example of what you can do either a straddle or an iron butterfly, and this is how you can do both of them.
In the case of BA, we sold at the money options at 35 on both sides. You can see we sold the 35 calls and the 35 puts, then we went out and bought the 160 calls and the 110 puts on either side. That reduced our credit just a little bit, but you can notice, we're still able to take in a massive credit of almost $1,000 on just this one trade.
Again, these stocks have high implied volatility, so BA, implied volatility up around the 100th percentile, but we want to do something risk defined because the stock price is over $100. It makes the margin so much higher. Again, when you look at the actual profit loss diagram, you can see you still have that very very wide straddle type look.
It looks very much like a straddle except where you get to the point that you have bought protection on either side, the 110 puts and up here around the 160 call. You can see everything's neutral and balanced and acts and is going to behave very much like a regular straddle, but it is risk defined, and it's a good trade to make in your broker's account if you can handle the margin for that type of position.
Again, the same thing with MON, we sold the 100 calls, and 100 puts on either side then went out $25 on either end and bought the 125 calls, bought the 75 puts for a nice big credit of $745. All in all, it was a very busy day of trading. I would say take your time going through all these.
Look at all these strike prices and credits that we got. Make sure that you understand them. If you have any questions at all, please, please let me know. As far as exit strategies on these, again, what we're trying to do on all these, just like we have in our When to Exit guide for members is, we're trying to exit all of these at predefined levels.
Straddles are going to be exited basically at a 25% of max profit, so we're going to have working orders already in place for those to exit at 25% of max profit. Strangles are going to be at 50% of max profit, the same thing with those credit spreads and the iron butterflies because they act more like the straddles, are going to be at 25% max profit as well.
These are going to be at 25%, and the vertical spreads are going to be at your 50% of max profit. You can place automatic working orders right now to close, let's say XLE, at 15 cents, so 50% of the credit that you receive which is $30. You want to place a working order to buy it back at 15. Same thing with a lot of these.
You can just go right through here and just times them by .5 or .25 and just make sure that you understand exactly what you're trying to get out of these. Put these working orders in now because the markets are going to be crazy next week, no doubt and some of these are going to be really quick profit trades.
All right, so as always, I hope you guys enjoy this video. If you have any questions at all, please let me know. Ask questions right below in the comments section so that everyone has an opportunity to check it out and until next time, happy trading.
Saturday, December 26, 2020