Active Trading Strategies | Ken Rose | 12-29-20 |Trading Bollinger Bands with the Probability Cone
hello investors and welcome to our session here on active trading strategies my name is ken rose substituting here today for pat mulleily great to be here great to discuss these this particular area putting together different strategies for more active traders the market today took a nice little gap to the upside but has been fading we'll take a look at the market as well as other factors affecting our strategies here today so let's go ahead and get underway so again you want to welcome everybody here today just a little bit of a heads up you can follow me on twitter my twitter handle is at krosc underscore tda and i post things on twitter related to this area as well as other areas of investing i want to thank barb armstrong for being over there in the chat window also very knowledgeable in this area i encourage all of you to follow barb on twitter as well in way of disclosures here today just a reminder that in order to demonstrate the function out of the platform we need to use actual symbols however td ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility options are not suitable for all investors a special risk inherent options trading may expose investors potentially rapid and substantial losses including the loss of principles we want to keep in mind that spread straddles and other multi-leg option strategies can entail substantial transaction costs including multiple commissions which may impact any potential return we do use a paper money platform in here this software application is for educational purposes only we want to keep in mind that successful virtual training during one time period does not guarantee successful investing of actual funds during a later time period as market conditions do change change continuously here's a little review of the greeks that are frequently used with regards to options trading with regards to our session here today it is assumed that you do have a basic understanding of investing in stocks and also investing in options if you don't have that basic understanding you're more than you're more than welcome to be here i do try to craft the words in a way that will be beneficial to everyone if you still if you do at times feel a little bit lost and you may want to go back and i'll show you a couple of resources that you can look at in correlation with with regards to today's session here in fact let's do that right now let's just come over here and over here i'm on the td ameritrade website and notice up here i have the education tab now again if you're comfortable with options the basic of options you then then you are in good shape with regards to our session today if you're not again i believe you'll get some good benefit out of our session here but you may feel a bit lost lost at times if you do feel that way over here on the td ameritrade website if you come over here and roll over education and then come over here under education center and click on options you've got this options course right here this options course assumes that you don't have any prior experience with options so this is a great place to go to fill the fount to go to build a foundation also in addition to the course you come over here to education and come down here and click on webcast when you click on webcast this will bring up a webcast calendar these these are webcasts like the one we're teaching here today there's a couple of webcasts i just want to call your attention to here and to to identify which webcast we have coming up once this page comes up just come over and click on the webcast calendar right here and we have a getting started with options webcast that's actually on fridays right here i believe it's on friday i think in fact i think i think barb teaches that i don't see here on our calendar that could be because of the holiday january 1st but barb if you want to just chat in to confirm when you when you teach that getting started with options webcast that's a great webcast with regards to a foundation of our discussion here today also be discussing a multi-leg option strategy here today so in relationship to that there's a wednesday webcast on multi-leg option strategies that's taught by mike flett and that's at 9 30 a.m so keep those things in mind again you you don't need to have these with regards to today's session but if you do feel a little bit overwhelmed i just wanted to pull up a couple of those reference points for you well coming back over here then here's our here's our greeks right here with regards to oh let's take a peek at this this is a picture myself i've been here since uh 2004 i specialize in blending with fundamental analysis with technical analysis i i love to learn in this area there's always new things to learn i love to trade i love to teach here as well i'm a contributor on the td ameritrade network i'm a charter market technician i work with thinkscript building indicators triggers and strategies and the like for our agenda here today we'll just do an overview of the market kind of see what's going on chat a little bit about trading neutral strategies you know during the during the holiday season we're a little bit late a little bit late into the holiday season but but you know a lot of times during holiday season the market does sort of rest a little bit after a rather volatile year and trading strategies may come into play one of those strategies would entail using bollinger bands i did when when pat asked me to substitute here for him i went and i looked at some of the previous sessions you had it looks like you had a little you had somewhat of a discussion on bollinger bands last last week or or possibly it was two weeks ago i wanted to kind of carry that discussion forward and look at it in relationship to an additional um to an additional indicator with regards to an additional strategy here as well so we'll we'll do a little bit of review on bollinger bands we'll talk about a custom column that is part of the thinkorswim platform it's called bollinger percent b and how that can be used with bollinger bands and then how we can use both of these in relationship to a strategy and the strategy we'll be looking at today is an iron condor and also another indicator going to be used in relationship to that is going to be the probability cone so we'll be looking at again this way review we'll look at bollinger bands bollinger percent b probability cone as they relate to a neutral trading strategy called an iron condor when we're talking about a neutral trading strategy we're basically talking about a situation where if you have a stock that's kind of moving up like this you're looking for a stock that is showing indications of trading neutral over over a period of time so that you can put together a strategy where you don't want the stock to go too high and you don't want the stock to go too low we'd like to stay in this range right here and as long as it stays in the range or is somewhat neutral then that trade has the potential of working out for you now if we have time i don't know that we will but if if we have a little bit of extra time here today we'll go ahead and look at possibly a couple of breakout trades using a custom column as well so let's go ahead and take a look at bollinger bands here and to do that i'm going to bring up the thinkorswim platform right here and let's bring up the spx this is the s p 500 we'll collapse our right corner right here so right here what we have is we have the bollinger bands and you know sometimes the question comes up what are the bollinger bands well we won't get too far into the details of bollinger bands because you really don't need to get too far into the detailed bollinger bands in order to benefit from them but basically from if you're familiar to all the statistics there's something in statistics called the normal distribution and it looks something like that and and this is just a just this is just a distribution of a lot of different data points okay i'm not going to fill this whole thing in okay but with regards to all these different data points there's a there's a there's an arithmetic there's a there is a mean or an average and the mean basically is in the midpoint of that pr of this of this probability distribution when you get out here this is considered to be way out there on the wings okay so if you're looking at data there's a higher probability of the data being in this in this closer to this middle area this average and there's a lower probability with regards to data being being out on the edges what is a bollinger band a bollinger band is just simply it's this probability distribution set on its side to go along a moving average line right here okay so if we're looking at this point right here our probability distribution would look something like this on its side it'd probably go something like that so that's and that's basically all the bollinger bands are it's just that it's that probability distribution of data sitting sitting on its side rolling along a moving average line so and one of the things to keep in mind with regards to bollinger bands is frequently the top band up here acts as a resistance level the bottom band down here acts as a support level so if we're looking for a neutral strategy we may want to look for a stock that is sitting about the halfway point between the top band and the bottom band if we're looking at something that's sitting at the halfway point there and also we'd be looking for the bands to be to be starting to turn down indicating that we could be crunching notice right here the band started to turn down here on the s p 500 they started to pinch into following that pinching in the underlying security started going sideways so i'd be couple characteristics we're looking for a neutral trading strategy is looking for bollinger bands to start to crimp down they don't have to be completely crimped down but starting to crimp down and then the underlying security it's nice if it's trading midway between the two bands and you can set up your neutral strategy where you have something up here and something down here both of which can create some potential profits right there so that's our bollinger so how do we find stocks that are sitting in the halfway point right here we'll talk about that momentarily that's where bollinger percent b comes into play but we're also going to be using this study right here this is a probability cone and this is this is while well while the information here on bollinger bands is based on past data the probability cone is based on options data it's looking it's looking at options and it's looking at the option greeks and it's looking at at um at that data and from that data it's giving you a probability cone in other words you know in time you know down here we have the date right this is going out further and further in time so the probability account is saying as we go out further and further in time the probability that the stock will will stay within this cone right here is greater than 50 percent that is our that's that's our probability cost we have we have two things indicating neutrality of the price we have option data that we're using and we have price data that we're using and we use both of these together to see if we can get kind of a confluence or an agreement between the option data and the past price movement as far as presenting a neutral strategy now just a little bit of a heads up with regards to these two when you come in here you can set lengths on these you know if you're talking remember our probability distribution what time frame do we use for that probability distribution how far back do we go to get the data that's being used for our for our cone that runs in here well what what's what some traders will do is they'll they'll use the length of time that they're typically in a trade and they'll do that for the bollinger bands as well as your your as well as your probability cone what we'll do today here is we'll play the part of the investor that's typically looking at doing iron condors going out somewhere in the neighborhood of about 20 20 to 30 days i didn't mean to put a plus sign there let me make that a kind of botching that up a little bit aren't we some of the neighborhood about 20 to 30 days so for the time span on the length that we'll use for bollinger bands we use 25 days and on the length that we use for our probability cone we'll use 25 days now where do you get these to load them up on the thinkorswim platform when you come up here to studies click on studies click on edit studies and over here if we started typing in bollinger there's our bollinger bands right there here's our bollinger bands over here once you have your bollinger bands over here you can open them up you usually want to set them to two standard deviations you set those up to two standard deviations it means the data that's sitting in here from a statistical standpoint there's a 95 percent probability that the data will stay within those two bands it can go outside of them okay but there's a 95 percent probability will stay within them that's if you're at two standard deviations and that's that is that is what that is typically what is used you can change it if you want to the length of time right here that's where you set this the default i don't believe it's 25 i came in here and i changed this to 25 because we're looking at doing on doing iron condors that typically go out about 25 days so that's where you that's where you have your bollinger bands you highlight it here you choose add selected since we already have it we don't need to we don't need to bring it over here you find the probability cone the same way just going here to edit studies and then you just start typing in probability here it is right here highlight it add selected comes over here and note on our probability cone we can also come in here change the period right here we have the period here to 25 my probability range is 55 meaning that on the probability cone there's a 55 percent in other words a greater than 50 probability that will stay within the cone here or that the data will stay within the cone the probability is a little bit higher here on the on the bollinger bands than it is over here on the probability cone okay so that's how you that's that that's how you set those up now we indicated that we'd like to find stocks we're sort of halfway in between in between the the top side and the bottom side of our bollinger bands the reason for that is if we set up a strategy right here for the spx right now notice where the top of the bands if we set up a neutral strategy it's probably going to look something like this where we're out here we have some options up here and then down here we have some options but we're but we're within the bollinger bands right here would i ideally would like to be just outside of the bollinger bands it would also like to be outside of the probability cone and to do that it's usually it's usually beneficial if we have a stock that's halfway in between here that also indicates the stock has some level is going into a neutral a potential neutral spiral type of i don't know if the spiral is a good name let's just say potential stock that's moving into neutrality and that brings us to our final technical indicator we've got bollinger bands we have the probability come now over here we have a watch list this is the s p looks like i got the s p 100 here okay and i'm okay going with the s p 100 it's just this is just for example purposes okay and right here i have a custom column this is a column that comes with the thinkorswim platform so we're not talking about doing scripts or anything like that you know up up here i got some scripts here this gives you dividends and some different things for individual stocks these are custom but we're primarily using here today are not custom by the way if you'd like some labels like this and some other custom stuff that i've done in thing scripting feel free to contact me over there on twitter and i'd be happy to i'd be happy to get some of these out to you along with a little video on how to how to install them and use them but over here in our watch this the s p 500 i've got some i've got some columns that i brought over here okay right here this is bollinger percent b what that tells us is this tells us where the price the stock is currently in relationship to the bollinger bands if my bollinger percent b value is 100 then i'm right up here hugging this band here if i'm greater than 100 then i'm actually actually outside of the band if my bollinger percent b value is zero that means i'm sitting right down here at the bottom band what if the bollinger band value is 50. the bollinger band is 50 that means we're sitting at right at the midway point between the upper and the bottom band and that's what we're looking for now we're seldom going to hit something that's right at 50. so what you can do is you is you can start by saying okay i'm going to start by looking for stocks that are in the area of 40 to 60 with regards to bollinger percent b i may not be perfectly in the center here okay but i should be within i should be somewhere in the range within the center of those bollinger bands right there okay so here's our s p 100 the other column that i have here is implied volatility and those of you that are familiar with options trading know that the from a statistical standpoint the higher the levels of implied volatility are the greater the potential is for your return the but the drawback to that is also the more volatile the underlying stock tends to be as well so some traders will actually pass on maybe the first 10 of these maybe the first 10 percent we have 100 stocks or maybe pass on the first 10 percent and then start looking below that just to avoid stocks that have been extremely volatile they got some nice premiums on them okay a lot of volatility too we'll play the party investor that doesn't want to doesn't want to that doesn't want to deal with that top 10 percent okay but i've got implied volatility and i've sorted by implied volatility here to bring the highest levels of implied volatility up to the top these are just percentage change these are just as they're not directly related to our strategy we're primarily looking at these two so if we come down then 10 if i come down it looks like tesla not too surprising tesla is very vulnerable i come down one two three four five six seven nine ten okay then i maybe start right here on wfc what am i looking for my bollinger percent b value right here i'd like it to be between 40 and 50. okay we'll come down here and it looks like our first candidate right here is going to be xom so xom is actually at 47.25 that's
awfully close to 50. so what are we looking for on xom well we're going to be looking for bollinger bands you know we're going to be looking for bollinger bands we'd like them to be starting to crimp here they don't have to be totally crimped but starting to cramp we're looking for xom to be sitting right in between those two bands right there that's what we'd be looking for let's pull up xom then and see what it looks like here it is right here and looks it looks to be it looks to be pretty much what we expected right first of all notice that the bollinger bands are starting to crimp down which isn't unusual when a stock when a stock starts trading halfway between the two notice how they're crimping down they're getting tighter so the space between the bands here is tighter than what it was right here so that's that's going to be a positive with regards to this strategy those were kind of going sideways right here and here's our probability cone over here so let's put together an iron condor and for those of you that aren't familiar with options an iron condor is an option strategy that entails that entails selling some options up here we're going to be we're going to be selling call options and down here we're going to be selling put options and we're looking to sell these options and we're just looking for those options to expire worthless we want to have the probability of that occurring in our favor so let's pull up then a trade a trade grid for xom we'll come over here to xom we want to note that we have a corporate announcement over here and that corporate announcement is going to be on february 2nd and would like to avoid being in a neutral strategy over a corporate announcement it could be an earnings announcement look you know that's that's that's what they are for the most point i like to avoid being in a neutral strategy over a corporate announcement unless you have fine-tuned the neutral strategy for that corporate announcement you can actually do that with an iron condor but that's not part of today's discussion we're going to be looking to be out of this trade before february 2nd so we'll pull up our trade grid here then we'll bring up trade and remember we don't want to be here february 5th so what do we have we have some choices here we have the 22nd of january expiration we have the 29th of january for expiration let's go with a little bit of a shorter time frame here we'll go with the 22nd of january that takes us out 24 days remember that we fine-tuned our bollinger bands and our probability cone to 25 days and we don't have to necessarily have that be the governing control issue okay because we're looking at typically being between between 25 and 30 but we'll go ahead and we'll set this up looking at that 24 day expiration so i'm going to open up then our option chain here and we'll leave it on all strikes the same just for those you may not be familiar with options we want to talk about this column right here this is a called a delta column and notice we have a delta column for both calls and both puts the delta is giving us a a a probability that the option that the price of the underlying security will will move beyond the strike price of the option and we don't want that to happen so the delta is telling us the probability that it will happen the inverse of the delta is telling us the probability that it won't happen we're going to have two separate to we're going to have two separate option trades here without getting into too much detail each one of those trades is going to involve two separate transaction costs because we're going to do a short put vertical which involves two transaction costs or two contracts we're going to do a short call vertical which involves two transaction costs or two option contracts okay but you know a lot of times we'll call those we'll call those strategies we'll look at them as a single strategy okay so if we want our probability of success to be greater than 50 percent we want our probability of getting into trouble to be less than 50 percent so right here on our delta what are we looking for we're looking for something that is less than 25 okay because we're going to have two of them if we have 25 over here and we have 25 over on the other side that's you combine those together that's going to be a 50 percent probability of getting into trouble which means a 50 percent probability of success we want to probably suggest to be greater than 50 so we're going to come below the 25 and we're going to come here to set up the put side of the short put side of our iron condor and let's do that now so we'll come down here delta 21 is less than 25 these these options come in 50 cent increments we're going to want to go a dollar wide in other words a dollar difference between the two separate contracts we're going to be using here and do right-click here and what do we want to do we're going to do a cell this is a sale and we're going to use the think or swim deeper wide function this just gets us so that we're a dollar wide rather than 50 cents wide we're gonna go wanna go one month two strike prices to get to a dollar wide then we'll come down here to our iron condor so here's our iron condor we know the put strike prices is where we want them but not the calls because we can only we can only do the puts or the calls one at a time so we need to fine-tune our calls right here so come down over here and we want to note i'm just going to make a note our delta on the put side was 21. what's our delta on the call side going to be here we want to get down to a delta that is less than 25 so we'll come down here and find this here's a delta 22 here so on the call side we'll do a a 4450 45.50 on the call side so we're going to
sell here we're going to sell the 4450 44.50 and we're going to buy the 45.50 and that's what that's we're looking at right here okay and i'm looking at our credit here a credit of 25 cents that's not a to be honest with you that's that's not a super great credit okay that is not a super great credit well we'll go ahead and we'll go through we'll we'll go through this example i may fine-tune it a little bit maybe bring these strike prices in a little bit tighter in order to in order to get a greater credit here okay because when you think about the transaction cost there's one two three four different transaction costs entering and four different transaction costs exiting that can have a serious impact if we're able to capture this this this 25 credit um i'm thinking this kind of um maybe we maybe we want to go well let's let's we'll we'll go ahead and stay with this period but but we may make an adjustment and bring these in just a little bit we'll see what it looks like on our graph when we're done with this so i'm going to come over here then here's our trade that's set up i want to analyze this on the analyze page this just helps us to see visually where our breakeven points are and what our probabilities are so i'm going to do a right click here and we'll choose analyze trade and here's our iron condor on xom this is this is the nature of what a what an iron condor is this is our level of profitability right here okay and this is our level of loss so we're risking more than we stand to gain now right up here this is our reward and right here this is our risk so why why would we risk more than we stand to gain well because the stock doesn't need to go anywhere in order for us to be profitable we it we have a we we have a probability of success on this that is that is greater than 50 percent let's see what it looks like on the chart i'm just a little bit concerned about that little credit right there of 25. i open up the guy right there yes in 2526 but let's see what it looks like so first of all i want to identify our breakeven points on our graph here this is right here notice that this is a zero right here so where these lines cross right here that's a break even when it crosses right here that's a break even so this is our breakeven zone on our graph right here and then we're coming over here right and then over here this is where our max loss occurs over here the reason we're doing the reason we do two options here one is to get the credit the other one is to is to manage our risk okay and this is the impact of that second option i'm going to set these these lines here to that breakeven point so come over here and we're going to set slices and i'm going to come over here to break even 1 23 that's our expiration saturday i believe so there we are ok here's our breakeven points right here what's our probability of success on the trade well it's it's it's over 50 percent that's what we expected it's about 53 percent now is there a possibility we could do better than 53 percent on these trades there is there's there is a very real possibility in fact our technical analysis and everything is geared towards accomplishing that if you look at it if we're if we're successful 53 percent of the time and we're making this much and we're unsuccessful 47 43 47 percent of time and we're losing this much it's not going to work out okay so we either want to get a so so so we so one of the things we'd like to be able to obtain here is is a larger credit to improve that relationship we also like like our probabilities to be in place as well let's just see what this looks like on a chart though in relationship to our probability cone and our bollinger bands to do that i'm going to come back over here where we have our price slices and i'm going to choose set slices to charts i'm going to come right here and choose charts right here okay there's our set slices charts notice that we are if we're looking at things on the put side we're well below our bollinger bands right here on the call side we're sitting right on our bollinger bands so the call side looks good the put side we could actually move our put side up just a touch and still be below that bollinger band because because we want to be just outside the bollinger bands notice on our probability cone here we're outside of our probability cone coming all the way over here but how does that relate to the expiration date well we want to check that out so we notice we can possibly move our put side up a little bit and increase our credit here just a touch and then we'll also look to see how we're doing the probability company let's first of all adjust our put size that may that may give us a more attractive credit if we do that i'm going to come back over to the analyze tab then and on our put side we're going to move this up to from 37.50 let's go up to 38.50 and then on our protection we'll move that to 37.50 and that gives us a nicer credit it improves the relationship here we're still we're still risking more than we have to have to reward but that but that that does improve the relationship here somewhat okay so if we if we're getting here let's just take a look at our reward risk where we're at right now if we're able to get 32 cents what's our reward to risk going to be on this trade looking at it as a if we if we if we take a look at the numbers well on a on an iron condor max loss is the distance between the strike prices minus the credit so our distance is one dollar minus a credit of 31 dollars so our max loss is going to be what that's kind of bouncing between 30 and 31 so our max loss is going to be 69 bucks right so let's take 31 divided by 69. looking at a 44 percent return over about 20 22 days right well actually it's 24.
a 44 return over 24 days with a probability success of greater than 50 percent are we okay with that well some traders would be okay with that some wouldn't be okay with it let's see what it looks like again let's notice notice over here by adjusting our put prices notice notice that our breakeven point has has moved out i don't hasn't moved there it's actually somewhere in here that it's moved out let's just let's set those at breakeven now we'll come over here set slices to break even now we should be a little bit lower when we pull this up when we look at the graph we'd still like to be outside the bollinger bands we'll see what we're looking at when we take a peek come back over here and we'll say set slices to charts right here now we're still just outside of that okay we're still just outside of that so now we're okay on our call side we're okay on our put side we can still lose money on the trade we know this trade can can we you know there's there's still risk involved there's nothing guaranteed here or anything like that but we like the direction of bollinger bands we like where we're sitting at bollinger bands act as resistance here support here how about our probability count on the probability cone we want to come back over here to the analyze tab and just check so the 22nd of january is where these options expire so we want to find that on our chart here i'm going to grab a drawing tool down here i'm just going to grab this drawing tool it's just to draw a square i want to find the 22nd of january here right there's the 22nd of january and we can see on the call side we're outside of the probability cone on the put side we're just a little bit inside the probability column okay but we're going to play the part of the investor that wants to stay with those puts where they're at just because of transaction costs and everything else it doesn't make a lot of sense to take a credit that is less than 30 cents okay in relationship to this so with that then it looks like it looks like we'd be ready to go with our trade then we would on a very important part of this would be to put the trade in our trading journal make a note of where we were at in relationship to the bollinger bands make a note of where we're at in relationship to the probability count look at our probabilities of success as as we look over here on the analyze tab the probability of success now has actually gone down below 50 percent here but we're going to play the part of the investor that's okay with that because of where we're looking at on the bollinger bands on the probability column but would still want to note this right here i just want to make sure that we have our dates right on there because we want to go from today's date to the expiration so here's today's date when you're looking at these probabilities you want to go your date here and then your date up here till expiration so i actually need to move this down to january 25th or january 22nd right there okay so we put it down there you know what that actually brought us back up here to 53 so when we put in the correct dates for expiration we're still running at a probability that is greater than 50 right there again on the analyze tab when you look at your probabilities up top a couple things you want to do probability in the money here then down here you want to put your date today and up here you want to put your expiration date then you look at your probability of being in this zone right here so probability of breaking even right here is about 53 and really the distance between breaking even and getting your max gain here is very small i'd say your probability success is probably going to be 52 50 50 probably in the neighborhood of 51 or 52 somewhere in that area okay we can we can't move these over kind of look at it visually here and here actually that takes us down to about 48.49 this this is looking at our max gain right here okay on that so but the the main thing i wanted to note here investors is to keep a trading journal and note in here because you may be asking okay kim but wait a minute is 53 good here is 48 49 is it good here as far as looking at your max gain you know what are we looking for with regards to our numbers well the the answer to that is actually not here the answer to that is in our trading journal okay look at your trading journal look at it over time you may surprise yourself you may you may out perform the percentages here by a significant amount or you may disappoint yourself and you may underperform the percentages here by significant amount that's why that's why trading journal is extremely important it helps you know you know what percentages are going to be appropriate for your own individual style of trading so we have our iron condor set up here i'm going to do a right click right here and choose create duplicate order what we were saying our max loss line is about 69 i'm going to lock that in at 30 cents we'll put it in we may not get filled immediately notice that that 31 is the mid right here the natural is 20 because the transaction cost the nature of this trade we we would not consider the natural right there at 20. we're we'll play the part of the investor that would be okay if we're able to capture this 31 as things vacillate during the day that's a possibility but we may not get filled we don't get filled that's fine we're risking here about 69 on each one of these let's say we're playing a part of the investor that's okay on this trade risking a thousand dollars so if we've got a thousand dollars we want to risk in each one of these is 69 of risk we can do 14 contracts so we'll move this up to 14 contracts like so and we'll send it away here and i'll just go ahead and put this in a margin account here just again these are just paper trades we'll send it in we didn't get filled yet but that's okay well actually we we did get filled again this is a paper trading account so we're not sure exactly how that could play out in live trading camp well let's let's come down here now that we've gone through it sort of step by step let's look for a second candidate just to kind of solidify things and we'll go ahead and wrap up our discussion here for today so coming on down here then we again we're avoiding that top 10 percent we're looking for something in the neighborhood of 40 somewhere in the neighborhood of 42 somewhere in the neighborhood of 40 to 60 right now intc right here we've got these corporate announcements coming up so we're going to pass on that one facebook right here though is in the 56 percentile let's see what it looks like get rid of that and pull up our chart here so here's facebook you see face facebook has crimped down a fair amount of volatility let's take these guys off here i think this is part of a earlier discussion on facebook so let's remove those for our discussion so here we have our bollinger bands they've already crimped and we're already moving sideways here we do have a corporate announcement coming out here so we want to avoid on this one we want to avoid what are we looking at here 127 okay so we want to avoid 127. and let me get rid of this line right here clear our drawing set completely so we'll come up here to the trade page and we want to avoid 127. there's so this this one expires on january 29th so that's if we did this one would be in it on 127 so we're not able to do this one but we'll do this one right here again going to the one that expires on january 22nd open up our option chain we want to find a delta that's less than 25 since we're doing two different do two different option pairs here we add up the deltas of the short strike prices those are the ones that we're selling to get our probability of running into difficulty so here's 24. let's come down
here to 21 on facebook these strike prices are two and a half dollars wide so we don't need to do deep and wide we can just go with two and a half dollar wide strike prices i'm going to do a right click here on the delta of 21. we'll choose cell and we'll come over here and choose cell iron condor we know our puts are where we want them right but we know that our calls are not where we want them so we want to find our calls by the delta for the calls here's our delta right here so recalls we're going to want to do 297 300 on the calls so we're going to change this 260 to 297 297.50 it looks like 290 yep 297.50 and 300 on our calls 297.50 and 300 right there okay now we're two and a half dollars why we're looking at an 82 cent credit this looks this looks a little bit more palatable when you're taking into consideration transaction costs because now we're now we have transaction cost again for transaction costs going in possibly four transaction costs coming out you know it is possible these could expire worthless so it would avoid the four transaction costs coming out but it's usually because of some other uh in because of some other integra intricacies with regards to iron condors we're usually getting out of these earlier rather than just staying in them because of reward risk relationships as the trade goes on but there's still you know 84 dollars minus potentially eight transaction costs that's going to be a little bit more powerful for some investors than 31 dollars minus -8 transaction costs so what does this look like then on the analyze tab well let's come over here we'll analyze it here is our relationship here also notice here this looks a little bit better there's our reward relationship right here and here's our risk relationship looks a little bit better not not a whole lot better but a little bit better okay and there's our breakeven points right here and right here and this is facebook yep that is facebook okay so i've already i do i i've already got this set up here we already have it set to our breakeven point so let's see what our breakeven points look like on the chart okay so come over here and we'll choose set slices to charts this is nicely outside those bollinger bands isn't it now this this could be part of the part of the relationship of implied volatility on the trade but we are also the bollinger bands have really you know they've kind of been crunching down here running sideways here's the price of stock right here actually i think a lot of investors would like to be outside of them because look we came from the bottom to the midway point in one day of trading basically so we could come back and i think the trade traders are saying okay we're nicely outside of them that's actually a good place to be because of still some of the history the volatility of facebook but still running sideways here how are we doing with regards to our probability count again we want to find january 22nd so let me find that right there and you can see that we're sitting right on the outside the probability cone as well okay so that looks that looks okay so far let's come back over here to the analyze tab once more let's check our dates here's today's date down here up here we want to put in our expiration date which is january 22nd and that gives us a probability here of 53.64
put that in our trading journal we bring these guys in over here to get our probability of max gain rather than just breaking even it looks like on that we're sitting at at about 51.31 so those would be two numbers that would want to put in our trading journal along with where we add in relationship to probability cone where we add in relationship to the bollinger bands we'll come back over here to the analyze tab then so this tray let me take this padlock off here it looks like it's dropped down here to 80. we'll go ahead and lock it in here at 81. how much risk do we have on this trade it's the distance between the strike prices minus the credits we have two dollars and 50 cents between the strike prices minus 81. so our max loss on this by the way folks these are theoretical maximum losses we could incur losses greater than the theoretical maximum loss that's a possibility because when we're looking to get out of this trade we may not be able to get out of it at price points we expect to this would be our max loss what's our return on this well our max gain is a credit so we take 81 which is our max gain divided by our max loss of 169.
looking at a 47 return over 22 days actually that was 24 days a 47 return over 24 days with a probability of success of breaking even a 53 percent max gain of about 51 percent those would all be important numbers to put in your trading journal how many do we want to do let's say we're the investor again that wants to wants to risk a thousand bucks maybe we're feeling a little bit better about this one uh because of the um because of how far away we are from the bollinger bands let's say we're gonna play the party a little bit more aggressive investor that's okay going two thousand dollars on this one we got two thousand dollars divided by our theoretical max loss of 169 that puts us in at 11 contracts here so we'll come down here and we'll change this to 11. here we are 11 and we'll move this over to the trade page from the analyze tab i'm going to do right click and we'll choose create duplicate order here we are on facebook and i'm going to leave it here the mid drop down to 79 let's go ahead i'll adjust that to 80. we'll go in and we'll see if we can get a fill here on 80. so do a confirm margin account we'll send it it's off and we were filled again this is a paper trading account sometimes we're filled more frequently on paper trading account but we're also sometimes filled less frequently on paper trading accounts well folks we're pretty much done here for today let's go ahead and wrap things up here so what did we talk about here today well we did an overview the market kind of saw what the market was doing uh going up and down you know what i don't know that we actually got the overview of the market uh did we take a look at that just yeah you know what yeah initially when we brought up the bollinger bands we were looking at the s p 500 that was our review of the market we were noticing the s p 500 was at the very top of the bollinger bands with regards to the gap to the upside it's not a super detailed overview of the market but we did take a look take a look at it we talked about trading neutral strategies we talked about using bollinger bands how to set those up in relationship to an iron condor strategy we talked about using bollinger percent b the custom column identifying those stocks are in the 40 to 60 percentile range we talked about using the probability column the bollinger bands uses past price data the probability code uses option data we're looking for trades where we want both of those to be give us a confluence of potential strength with regards to trade we didn't have time to look at breakouts um that's but that but that's okay i you know we we can look you can look at some other sessions with regards to breakout trades like if you'd like to join me for my short verticals class that i do on wednesdays we we we always take a look at breakouts in there as part of that short verticals class as part of it an entry there all right everybody so that's our summary hey again i want to thank barb armstrong for being over there in the chat window and encourage all of you to to follow barb on on twitter i'm sure she'll be more than happy to send her twittle handle over there also you can follow me on twitter at krosc underscore tda and in wave disclosures here today just a reminder that in order to demonstrate the functionality of the platform we do need to use actual symbols however td ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders hey thanks everybody for joining us here today for our active trading session it's been great have this opportunity for substitute for pat i do believe that pat will be back next time hope you all have a a wonderful and prosperous new year a great afternoon and evening and a wonderful weekend and just a reminder let's be careful out there you know with the vaccines they just just over the horizon there this would be like the worst time possible i can think of to get sick so let's be careful let's be safe and get on the other side of covet as happy and healthy investors bye everybody happy new year and we'll catch later thanks you