Comparing Trading Strategies- Risk & Reward | Trading A Smaller Account

all right good morning everyone good morning everyone welcome to trading a smaller account it is friday morning my name is barbara armstrong i am going to be your coach today as we enjoy trading a smaller account i always feel this class is a little bit like speed dating there's so much you want to get in and so little time i've not actually ever speed dated but i did watch the movie hitch so um stay tuned today we are going to continue our comparison of long call verticals short put verticals and long calls and over the last few weeks we have done example trades on apple and microsoft and get ready to flex your fingers because we're going to have a conversation and then we're going to put some new trades in in this venue we're also going to have a look at an iron condor so stay tuned everyone lots of great stuff about to come your way [Music] all right so just before we get into the thick of things i want to say good morning to everyone that is here today to vijay and sandeep who were here like 15 or 20 minutes early getting ready to go um thank you for just being here oops sorry let me put my phone on mute um yeah so good morning to sandeep and denise and el diego and michael and charles and krista and jules and krishna and kevin and john and vijay and aj and david and colonel tm and lee and so many people your names and and michael and tony and giles and rocky and osborne and mia and the rest of the gang thank you all for being here and hello to una also if you are joining us for the very first time please type a greeting into the chat so that we can welcome you this isn't just a webcast it's a community of people that get together on a regular basis to learn and and grow together i also want to give a huge shout out to ken rose who is here helping in the chat and he brings a wealth of experience so please take advantage of that by asking questions if you have any and um you know ken will do his best to get to those and i try and keep an eye on the chat as well so that i can answer questions um also as we go so if you're here live you can use the chat if you're watching this in the archives you'll go to the comment section on youtube you can put questions in there i do check those on a daily basis so you can take advantage of that we can also communicate via twitter and both ken and i post on a daily basis on twitter um if you're not following ken rose and i on twitter you are missing out my friends so at k rose underscore tda at the armstrong underscore tda um you know be there be square okay so let's get through our important information so that we can get out to the platform where the magic happens as i like to say first and foremost no this class is for education and informational purposes only it's not to be construed as a recommendation for any particular strategy um you know or or security also know that we trade a lot of options in this class this is an intermediate level class options not suitable for all investors as there are special risks inherent to options trading which may expose investors to potentially rapid and substantial losses also if you're new to td ameritrade you need to apply for option trading privileges the same goes for futures um you know if you want to trade futures and we do discuss futures on occasion in this class um you know you have to apply for futures trading privileges as well it's subject to review and approval and not all clients will qualify in this class we use lots of symbols and we're going to talk about lots of of different symbols and trades today however once again it's a great way to understand the concepts and to have an understanding of how the platform works not to be construed as a recommendation keep in mind that all investing involves risk including the risk of potential loss and we've seen both gains and losses in this class right my friends okay and then what are we doing this looks vaguely familiar right we're we're going to do a quick look at the market the bell has just rung so i haven't had a chance to even see what's happened yet we're going to look at some of our current positions we had an iron condor trade on that i'd like yeah we're going to do some management on we're going to come continue with our comparison conversation around short put verticals long call verticals and long calls and we're going to put some new trades into the mix so you know that's what's up for today okey dokey um let's come out and have a quick look at the market so we're going to start with the s p 500 so you know what we can see is that um you know overall it's certainly been up trending right um and you know we had a two-day pullback and so you know tuesday and wednesday it pulled back this was a pretty big um red candle so a lot of people started getting their knickers in a bit of a twist wondering if you know this you know might be the end of this long bull run but really it came down to the 30-day moving average and then you know we have a bounce on this today you know yesterday and continuing through today so you know when we look at this has this happened before absolutely you know we can see it's come down cross below the 30-day moving average how long was it there one day next day back up back down back up back down back up so you know one might it you know look at that and say ah it looks like the trend might be continuing is that a guarantee yeah there are no guarantees my friends okay so and here's uh you know the nasdaq tech heavy uh 100 stocks um and you know we look at it it had a bit of a period of consolidation here you know going through february through june then broke out i've got some lines on the chart it appears to be kind of consolidating doesn't it but it's consolidating you know pretty close to its all-time high and today looks like it's moving back up across that 30-day moving average so again some might look at that and say ah the consolidation close to all-time highs is continuing is one way some people might interpret that chart okay how about our friends the dow so this is the dow 30. so these are some pretty darn big stocks and you know this too had this has been consolidating you know for months really since may so you know may june july august so four months it's been consolidating and last week you know it's like oh is this a breakout or a fake out it's like banging on the ceiling and then it broke through went up had an all-time high on the 16th and then pulled back you know fairly dramatically for two days like the s p 500 did and then it appears to be back at this resistance level so is it gonna break back through and will this uptrend continue um you know or did this turn out to be just a slight walk on the wild side and is it going to come back and hunker back down in this range so the jury is still out but you know from a technician's perspective if this breaks out it's gone from 333 to 350 so we have a range of about 17 here and so if we see this you know continue to the upside how far might we expect it to go well a technician might say maybe another 17 to the upside so maybe up to around 367. you know but where is it now kind of hanging out right around this support level 349.58 and you know support is a range but it's hanging out on the line and you know which way is it going to go you know not quite sure but overall you know again close to an all-time high and we are seeing a bullish configuration on the chart today okay so that's that one how about our friends the small caps so when we look at the small caps you know this two has been trading in a range it entered what turned out to be a range you know back here at the beginning of february hit an all-time high march 15th and then has yet to hit that high again but you know has been coming up into the neighborhood of that high you know again and again so you know it came up you know close to it in june and then you know at the beginning of june and then again at the end of june we placed an iron condor trade on this which is for those of you who are new to iron condors an iron condor is a credit spread sandwich and if you're not sure of what a credit spread is not not to worry what i will do is i will put a link up here in the corner um to a getting started with options class let me just find my pen i'm going to make a note my getting started with options class on short put in short put verticals and short call verticals if you want to know more about verticals ken rose teaches a class on wednesdays on on short verticals at three o'clock eastern if you want to know more about long verticals because we're going to talk about those as well john mcnichol teaches a class on thursdays at i believe it's at 11 o'clock eastern on long verticals and diagonals so if you want to get more on that but in the getting started with options and i'll put in a link to that series um there are individual classes so we spend a month on spread trades but um to come back to our iron condor trade what we did is we sold a short call vertical oops come to mama we show and this will be the first trade that we'll look at in trade management a short call vertical at the top and a short put vertical at the bottom below the support level and above the resistance level and what we're seeing and we can hardly see this candle is we have this little teeny tiny candle here today which is moving to the upside so as of this moment it looks like this support level is holding but what do you think and go ahead and type this into the chat guys what do you think the value of this short call vertical is now with it sitting at support we've got 27 days to go before this trade expires but do you think that has much value probably not so you know one of the strategies can be if something comes down to a support when we sold it in the middle we could buy this back take that risk off the table and then when this bounces off support and moves to the upside then we can either lag into another short call vertical back in where we're going to get more premium or we can close this one out and just put a new trade on altogether so does that make sense or have i totally confused everybody okay let me just scroll down here okay yeah we're going to talk so someone has typed a uh that typed a comment into the chat saying you know learning more about how to evaluate a trade on think or swim would be a good thing yeah yeah so you guys are all right mia and vijay and neil and joe yeah it's going to be worth it's it's definitely going to be worth less we have 28 days left so there's still some time value in it but we'll go look at that so we're going to look at the vix and then we'll come back and we'll look at this trade on on the the russell so you know the vix has had a pop it's been trading you know since april 1st so we have i always think we'd be a fool not to have noticed this you know it kind of dropped down below that 20 mark and has been hanging out by and large below the 20 mark for some time now and you know the last couple of days it's popped up above the 20 mark and what is it doing now it's kind of it appears to be returning back to this range it's been hanging out in for the last several months it's not quite there yet but we're seeing it's down four percent already today it's trading at 2075. so what does that tell us is you know if we're selling if we're looking at a selling strategy we might get a little more juice in it um today um than we would have you know when it was trading down here around 15 but it tells us that relatively speaking there's still a fair degree of confidence in the market okay so let's come and look at our iron condor uh trade and we're going to come over to activities and positions and look at that today we're not going to look at these today we do have a couple of long positions we're going to focus in this area down here so here's our iron condor on the russell we're currently up a whopping 10 well why do you think that is well we sold this when it was trading in the middle of the range and so now if we look at you know what did we get paid for the short call vertical piece of it and you know this does the math for the whole thing you know at 4 4 30 we were paid four dollars and 30 cents a credit on a uh ten dollar wide spread so we're risking five dollars and seventy cents or five hundred and seventy dollars to potentially make 430. and so if we look at this and we say okay well how much did we get paid for the short call side so we'd say okay that's 1560 minus 13.50

um so we got paid 210 for that two dollars and 10 cents what's it worth now well 242 minus 212. so right now we could exit that side of the position for 30 cents and you know if i get my little calculator out 30 divided by 210 we've got 85 percent of our max gain so you know it's going to make this pro this position look less profitable but you know if we're at support we have 27 days still to go if this bounces and goes up you know in the next week back into the middle of the range we might be able to sell another short call vertical that expires at the same time and in the meantime we can recognize here the difference between the two is a dollar eighty our three hundred and sixty dollars because we've got two contracts are three hundred and sixty dollars worth of profit now i'm not taking transaction costs into account it's 65 cents per leg per contract so we're going to go ahead and exit just the short call side of the trade now on the short put side what did we pay to get were we paid to get in well we were paid about 220 so almost the same and right now that's in a losing position because you know 5240 minus 48.60 that's worth about 380. so we're down on this side but if it's at support are we are we panicking no we're saying you know what we're going to ring the bell and take the profit on the side where we have the gain and then you know it's trading in a range and things stocks that trade in a range will come down to a support level and then sometimes go back up to a resistance level if it breaks out of that below that support level then we may want to consider taking you know closing this out all together but as of this moment um it that does not appear necessary so what we have to do is come into our iron condor because we have an exit and said you know said when it was worth 80 cents we wanted to close it down so we're going to just cancel that entire order because instead we are going to come in to our iron condor and right click and create a closing order to say we don't want to close the whole thing we want to close that 2350 2360 call for 33 cents and take that bit of profit so we have two of those the 2350 to 2360. they want 35 cents okay we'll give them the extra nickel confirm and send um and these numbers are going to be a little skewed but what you want to make sure it says is to close it doesn't say to close something is a miss so we're gonna close out that side and there we go we're out okay so that's that trade now i also quickly went in we did a bunch of trades on microsoft on the 30th and what i will do is once again i'm going to go in and where do i want my hand to go in the top right corner um so in the top right corner i will put a little um link in to that july 30th class that's 7 49. so i will put in a link to the july 30th class so if you missed it you can go back and you can see when we put all these trades in okay so i'll put a link into that um but it we can come back here to the monitor tab and to our account statement and we're going to look at microsoft and we're going to go back well that was the 30th about 20 uh 21 days that was about three weeks ago uh okay did that get all of them just to set up we wanted to go back to july 30th okay so let's go 30 days back we tr yeah i just don't want to clutter this up with you know anything more so this is july 30th so that's got what we wanted so the net of it was we did two short put vertical trades and i want to draw your attention to these notes that i put in here was our comparison trade on the 30th so we did a short put vertical trade now how do you know it's a short put vertical trade well one thing is it's going to say vertical and it's going to be in pink we're opening it here we're opening it and we're being paid a credit so we got a 70 credit when we opened it and then we put in when we place the trade and exit to say when we've got 80 of our max gain we want to close it out so that was kind of trade number one if you will and so we ended up making you know 56 dollars a contract um so our total gain on that was 112. now what did we risk we risked 360 to make 112. and we knew that that was the

risk and we knew that that was the reward with a short put vertical it's defined risk and reward right okay so then the second trade that we did um you know when i don't know exactly the order the these went in but so this was our short put vertical we did a long call vertical and we did one that was five wide so that's here's our long call vertical that's five wide and we paid two dollars to get in now i was trying to move really quickly on this we should have done two contracts because we can risk four hundred dollars in this class and had we done four hundred dollars um you know our gain here was 173 it would have been you know just two times that so our gain would have been 346. but we it and this would make it more apples to apples because here we were risking 360. on the long call vertical we only risked 200 and we actually made more so some might look at that and go well then why would i ever do a short put vertical because a short put vertical doesn't it's it's less directional so you know we did this on microsoft so if microsoft had just gone sideways the short put vertical would have still been successful with a long call vertical it's directional how directional it depends on how wide your strikes are and where you've placed them because we just did a trade on apple where it really didn't have to move much at all to go through both strikes so but that's part of a a future conversation so here was our number two we did this long call vertical for two dollars with the five dollar wide strike and then in class we decided to take our gain of 374. now we could have waited um but we took our gain of 374 a week ahead of expiration and said you know a bird in the hand we have a nice profit on this almost a hundred percent so you know we made a hundred and i i guess actually it was yeah it was 173 on that then we did and we did three contracts at 250 wide so that was number two then we did three contracts at 250 wide and that cost us a dollar twenty each to get in and then we close those out we made the decision to close those out because we had a nice profit you know not quite a hundred percent what's 210 divided by uh 120. you know a 75 percent gain you know we made 270 on that trade and risked 360. so for the

same amount of risk you know as we risked on the short put vertical we made more than twice as much but again um it has this is more directional it had to move you know through both strikes for us to see our max gain now we got out before it was at a max gain i think that last friday it was trading at maybe 289 okay and then the fourth one we did was a plain old long call now which is the most directional of these strategies and we did the long call with a one atr plan which means we looked at how much microsoft moved in an average day and said if it moves up this much sell the call and we'll take the profit so we're going to trade that long call not like a trend trade but like a base hit now how much were we risking well we had put a stop in on that because you know technically we're not supposed to risk 775 dollars in this class our goal is not to risk more than um than 400 but we had put in a one atr exit right so vj you're right in traders speak the higher the net delta the more directional the bias so the long call is the most directional of all because you know if it doesn't go up and that stock starts lollygagging around time value will just eat our lunch but on this one this was the trade we were in for the shortest amount of time these others we were out the august 12th august 13th this one we placed on the 30th we then had a weekend we were out on the fifth and this one our trade number four we got in at 7.75 and we got out at and we had put in a target right we said hey if this goes up you know whatever that atr amount was um we're going to get out so we made 100 and forty dollars on that one now what we didn't do was a trend trade a long call trend trade we can't afford to buy a hundred shares in this class we have a twenty thousand dollar account um you know this is that would cost more than twenty thousand to buy a hundred shares but with a long call you get the benefit of the movement of a hundred shares without having you know to lay so much money on the line and that call you know we bought for 7.75 had we bought a second one and done it as a trend trade as of yesterday's close that call would have been worth 14 and change so instead of being out at 9 15 i think we would have been out at 1475 with a gain of 700 which is almost as much as all these other gains combined but again it's the most directional so you know i i just thought it would be helpful to do this and somebody said in the class last week if you were doing this in your live account would you really put on all these different trades the answer is i guess it's possible that some might but you know many might be looking for one trading strategy that they really want you know to learn and practice and and get strong in and you know they might practice all of these um they wouldn't necessarily put all of them at the same time uh you know live in one account but we're doing this as a means of learning right so we've now teed up a bunch of trades on apple and last week i was hoping i'm always like overly optimistic about how many trades we can place in one class um you know and and so we had hoped to kind of round up microsoft again and just do a wash rinse repeat and then do the same thing with apple so apple so far we bought a call and we got stopped out on that call so we we were doing that same one atr strategy we bought a call we paid 360 for it and it moved down one atr and stopped us out so how much was our loss on that it was a hundred and thirty the other trades are all still percolating so i'll add these to our comparison note um thing but you know we have a vertical in place and and i'll show you these on the chart because i went and put them on the chart this morning now microsoft wouldn't that just frost your petunias like that we got the trades in on apple didn't have time to put the trades in on microsoft and they would have been totally crushing it because look at microsoft today up another one point you know almost two percent up another five dollars a share um but if we come and look at apple and my charts getting pretty convoluted so we're going to go out to a three month so we've seen this consolidating and then it it dropped down much like the s p did in the nasdaq and then found this support level and is moving back above the 30-day moving average today so our short put vertical is at 145 and 143 so as long as apple stays above 145 we have a profitable trade on the short put vertical right so it just has to stay above 145. it could continue going sideways for the next couple of weeks and we'd still be fine okay so that's the short put vertical we have a long call vertical at 145 and 150 so the strikes are you know here and here so and when we place this trade last friday that would have been the 20th it was sitting right here so it was almost at 150 so it didn't have to move much at all so it's halfway through that now the 145 and 150 but if by september 3rd this is trading at 150 or above we'll have a trade with a max gain now the other directional trade was more directional in that it had to come up to 155. and so the chance that was a one um 150 155 and last friday was trading you know within a stone's throw of 150.

and so this is our most directional trade that is still sitting sitting out here okay are there any questions on any of that so if we come back let me get rid of my drawing tools here so if we come back and we look at this and we say okay here's our well sorry we're going to come down iron condors so oh here's our we had a long call vertical on adobe and that expires today um we bought the 605 and sold the 610 it's a five dollar wide strike and you know we've pretty much got our max gain on that you know like it can't go any higher than five dollars i don't know why that is showing but you know it's through both strikes but we're going to go ahead and close that out to take our profit on that and if we come up to the charts and we look at adobe you know our strikes it's it's comfortably through both strikes but because this is paper money i just want to be sure that we get the credit for this in our account so we are going to go ahead and close that out by selling it so we bought it to open so the most we could make on this is five dollars yeah we're willing to give them their their two bucks in fact we'll make this 4.95 just to make sure we get filled so that was another successful trade and then we have our long call vertical on apple and you know this shows kind of weird because we put them both on the same day so we sold um you know we sold this 155 call got sold twice and then we bought the 150 and we bought the 145 and so it shows we're underwater a little bit on this but you know we're by and large we're not in bad shape and where's our short put verticals there we go and then we have the short put vertical and again we know where those strikes are if i close this now 145 and 143 it's still trading above that it's trading at 147 and it shows we're just slightly underwater to the tune of about 20 but if we think that that support level will hold then we're just going to let these trades percolate oh did i call adobe a short put vertical my bad apologies on that yep uh we bought the 605 we sold the 610. so yeah that was a long call vertical and we we do have our our max gain on that so we could come back out and look at adobe and say hey adobe is continuing to move to the upside this is a 600 stock so you know in in our class could we afford to buy some shares yeah you know maybe six shares five shares we couldn't buy very many but you know could we come and look at a short put vertical and say you know if this is continuing to move to the upside it's in the tech sector which is strong you know so could we come out and look at say that 620 it's trading at 647. or even maybe 625 i'd rather do 620.

i like to get as far away as i possibly can and so if we come and we look at this and we say okay at 6 20 what's our delta our delta is 26 which means we've got a 74 chance that this will expire worthless we've got about a 60 cent spread we'd like that to be tighter but it's still within that 10 range so we say okay that's acceptable is there enough juice for it to be worth the squeeze well on a five dollar wide spread if we're being paid a dollar five it means we're risking four to make one so we've got a 25 percent return on risk for a trade that we would be in you know for about 28 days so if that meets our parameters we could come out to confirm and send we're risking 395 the most we can make is 105. if we say hey when we've got 80 of our max gain we'd like to exit the trade we're going to create an opposite order say hey when this is worth about 20 cents let's buy it back and take our risk off the table so good till cancel confirm and send we're going to do one because in doing one we're risking four hundred dollars now would we like to do a long call vertical as well well we could so and you know what might our strikes be well we might say okay today it's at 6 47 could we even just do the 645 and the 650 if there's a five dollar wide strike so if we came out here and we said okay we've got a 645 what's that option cost if we just wanted to buy it 17 to 1800 again there's a 70 cent spread we've got hundreds of contracts on the books 20 traded today a 54 chance i you know this is kind of like this is a fluid number if adobe really goes up tomorrow that number will be higher if it really tanks that number could go down but if we look at that and say you know 645 to 650 how much does this move in an average day well let's see what our debit would be by vertical so i'm paying 250 basically to make 250. so i'm paying 255 to make 245. so it's a about a one to one ratio and so if we look at that if we come back to the chart and we say well the average true range on this baby is 10 bucks in an average day up or down and compared to the day before it moves about ten dollars in a day so is it crazy to think that it might go up in the next 20 some days by ten dollars well by less than actually by two bucks and i'm risking 250. so you know i could look at that and say okay uh yeah i think that that looks like a reasonable expectation so we're risking how much we're risking 245 dollars yeah so confirm and send how much can we make 247 how much could we lose 253 can we do two contracts no because that would be more risk than we're allowing ourselves we're only allowing ourselves four hundred dollars in risk but if we put that as a long call vertical we'll put that in our long call vertical group now could we do a one atr trade on this we could but you know a stop is no guarantee and if this stop gapped up or down well especially if it gapped down and we did a long call we're putting too much at risk those options are very expensive and so in this case we're better to this is where these debit spreads and credit spreads allow us to trade at you know a stock in a way that manages our risk that doesn't you know risk you know really hurting our account in a big way now if we we could also look at the 645 655 but you know so this idea and we may not be able to do that and say well 645 to 650 what if we made it 655 well now we're risking 500 um so we're risking five to make five basically um and that's just a little more than we're willing to risk right now um and so if you following your rules in your account you say well i'm going to grow the account and you know on a quarterly basis if my account is now larger then i'd have permission i'd give myself permission to risk that extra hundred dollars okay okay so we are not going to place that and that's the reason why so guys i can't believe it we're almost out of time you know once again our 45 minutes it goes so darn fast doesn't it um i'm just going to scroll and and have a quick look at the questions um someone's saying you know i need to start a journal options can be harder to follow and remember than stocks and and i think and i actually in my notes if you come up i talked about establishing a routine and you know looking at the major indices like we do looking at the market forecast line checking our positions looking at your watch list and somewhere in here i had something that talked about you know if you want it to pay you like a business you need to treat it like a business you know so journaling because i can guarantee you at starbucks they have a routine and they track how much money do they make from their hot beverages how much do they make from their cold beverages how much do they make from their you know sandwiches and stuff that they sell or their food items and they understand how much everything contributes to the bottom line and if something's not working then they change it and so if you're treating your your trading like a business um using a journal and you have access to a journal if you come to um and let me show you am i still oh i gotta log in again what a pain in the patootie um and you can access this actually from the thinkorswim platform as well just go to the education tab so if you go to the education tab and come to webcasts and you can come to the archives or you can go to what's up next you can see this is this class is happening right now there's a little line here that says trading journal if you click on that that's a live link and it will take you to this blank trading journal um so you do have access to a trading journal and joe is saying yes time flies when you're having fun yes i think this is a fun class um yeah adobe that was a long call vertical because we sold the lower strike or sorry bought the lower strike sold the higher strike and when you're buying to get in that means it's long using trader speak um we've got a survey today and i know that ken has reposted it so here's the deal if you will click on that link four quick questions if there's more that you would like to see topics that i haven't covered let me know that in the comment section if there's something you absolutely love like if you love this comparison thing let me know that if you'd like me to do more kind of comparison kind of stuff so happy to do i'm here for you so but the only way i know what you want is if you communicate that so that survey is the way to do it i promise if you'll fill it out i'll read each and every comment um so there you go um it's helpful to go back and review prior trades and you know i know that and it's a delicate balance because if somebody's joining for the first time you're kind of going like oh snap this is stuff they already did and i didn't get to participate in that but we can learn from others i've been listening to stuff by dabo sweeney the coach of clemson's football team remarkable man and he said you know like we all make our own mistakes and we learn from those it's just part of life um but when we can learn from others there's a power in that and so you know i do think it's important that we manage those trades um and joe you're right we did an apple trade we did get to talk about that um and with the long call we can put in a stop loss but stops are never a guarantee okay so did we do what we said we were going to do we looked at the market we looked at our current positions not all of them but the ones that we wanted to actively manage this week we did that comparison conversation on microsoft and apple talking about short put verticals long call verticals and long calls and then we ended up placing two trades both of them on adobe one a short put vertical and the other a long call vertical so next week i'm going to be in maui with my daughter having some fun in the sun and mike fairborne will be filling in but we'll certainly be looking at these trades the following week i thank you so much for joining me um love having you all on board a huge thank you to ken rose for always doing an amazing job keep in mind everything we did today was for educational and informational purposes only none of it to be construed as a recommendation options aren't suitable to all investors there are special risks inherent to options trading that that we need to be aware of and keep in mind that all investing involves risk including the potential risk of loss so my friends if you enjoyed this smash that like button subscribe to this channel follow ken and i on twitter and fill out the subway and that's a wrap for today have an awesome weekend guys and i will look forward to seeing you in a webcast coming up soon take care everyone bye for now

2021-08-27 18:39

Other news