Defined Risk Swing Trade with Options | Swing Trading (Days to Weeks)
good afternoon everyone john mcnichol here and welcome to swing trading days to weeks we have had a sell-off today but are we starting to see some things turn around we'll stick around and we'll uh take a look at the market we'll look at some swing setups and do some practice trades all right hey it's great to see those you that are live with us today such as vj jack we got wayne akbar jack dylan mike dg el diego sharon frank krishna larry and everyone else mr james boyd helping out on the chat once again any questions i am unable to get to he's more than happy to help you can follow us both on twitter i'm at aj at j mcnichol underscore tda and as with most the coaches it's their first initial last name jbs is at j b o y d underscore tda if you wish to follow us learn a little more about the markets as well as ourselves would love to see you there let's take care of disclosures folks we'll get right into it contents intended for educational information purposes only non-investment advice or a recommendation of any security strategy or count type options not suitable for all investors spread straddles other multi-leg options strategies often involve greater greater more complex risk than single leg option trades commissions are important factors should be considered when evaluating any trade as well as you're encouraged to practice which you learn here today with tools such as paper money software that application is for educational purposes and successful virtual trading during one time period does not guarantee successful investment of actual funds during a later time period as market conditions change continuously make note as far as the risks of a long call or long put option that position may be entirely at risk as well as which short options with the risk of assignment and should be considered when doing any of those types of trades and in order to demonstrate the function out of the platform we will be using actual symbols keep in mind to ameritrade does not make recommendations or terms suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility while this webcast may discuss technical analysis other approaches include fundamental analysis may serve very different views and a stop loss order will not guarantee an execution at or near an activation price once activated they compete with other income and market orders uh there's a brief background for those of you if you're new to this webcast welcome please let us know in the chat if you are new uh we'd love to give you a nice welcome there this class does focus on active trading relatively short term swing type trades whether bounces or breakouts that may be in a trend and uh certainly uh james has vast experience as well and is more than willing to share that here as well as on his webcast too keep an eye on the schedule as he does teach a great webcast on trend trading uh weeks to months so kind of a good uh webcast uh looks at more of the longer time frame whereas this one's focused on the shorter time frame now is our agenda since uh certainly concern with the markets we'll take a look at the market see where we're at going in this last hour uh we'll do some swing setups may have a couple uh bullish and bearish ones to take a look at and we'll get some practice trades in as well and then follow up on uh some of the previous swing trades that we've done in the class we did have delta break out uh which was a buy stop break and resistance we'll glance at that later and also had one trigger uh on the downside with dick's sporting goods which is one of her other practice examples on conditional orders that were discussed in a previous session let's go ahead and bring up the thinkorswim platform and uh whether this is considered to be a turnaround tuesday or not uh we shall see uh prices uh on the s p we're trading as low as uh looks like around 43 46 uh area there now lugia joined us yesterday at the market open we had uh discussed that potential fibonacci resistance bounce as the market had failed you know to kind of fully reverse that correction from earlier the month so bears bit more in control here at least over the shorter term whereas when we look at averages in this case like the 55 day moving average notice how that's flattened out so from an intermediate trend perspective things are looking a bit more neutral uh i think along the small caps that have been doing that for quite some time the dow more recently and looks like we may be seeing some of that back and forth with the uh with the s p okay uh let's see and like i said as we're seeing you know price action is coming off of some of those lows if we go and switch to an intraday chart some stops and starts as far as the market trying to find a low at least looks like that low may have set in although we still have an hour left at least for the day and kind of a smaller reversal as prices are trying to claw back on some of those losses since the opening uh let's take a look at the nasdaq as a nasdaq hit pretty hard too i think many of the fang stocks like microsoft i believe was off about as much as nine dollars today that was kind of testing those lows and coming off of those lows at the moment as the market's trying to find some of that support and again uh notice that in this case 55 day moving average that exponential moving average they're starting to flatten out where you know we may see a battle here over the shorter to intermediate term as far as with some of that market direction uh break below support could see some more downward momentum this is the uh kind of a longer term channel uh of the nasdaq uh that i've drawn i think over the well this one's just since the summer time uh but the uh kind of the more secular longer term trend you can see how well the nasdaq is a bit extended there but see where some of that potential support may come in so looks like an attempt at some support testing last week's lows if there was some more downward momentum uh as a lot of things in the news consumer sentiment uh was a bit more negative of a surprise uh we have congress uh trying to pass some things and everything from continued funding to infrastructure both near term and longer out there is a chance of a government shutdown i'm not sure it's a high chance but uh if there's no funding by uh thursday night uh there could be a shutdown going into the weekend so a few risks there and uh you know looking at the nasdaq uh you know as far as with you know some of the uh potential support uh below that there uh maybe somewhere down around those lows for july if there's a failure or to launch here looking at the russell which small caps had been an outperformer from the previous week they backed off relatively strongly as well but notice they are staying above kind of their mid-range there uh on in this case the 55-day average and some of the drivers to that uh as you look at different sectors energy actually still to the upside and over the last five days as far as market action energy financials materials uh russell very much weighted in those areas not to mention industrials which squeezed out again and discretionary you know helping the russell with some of its relative performance uh since i'm looking at this uh i'll put a shout out if you are going to join me tomorrow for breakouts and reversals i am going to spend some time on sector analysis and rotation along with relative strength now there have been requests to that since on education day i did talk about the subject uh with uh instruments uh that uh uh unfortunately uh cannot be recorded uh but we'll go ahead and focus on some of the uh sectors and stocks that may comprise of those sectors looking for a relative street strength in that rotation all right and then let's see with the dow djx you know dow struggling as well again we can kind of see that consistency with those intermediate moving averages uh three of the indices below russell just kind of hanging tight there and again still potentially coming off the lows whether this will be a higher low and we'll see if there's any shift in momentum going into this week uh looking at the volatility vix vix uh i'd commented on this uh yesterday as well which seemed to have been a a little bit of a concern well we've been talking for some time how volatility has been creeping up which may point towards some risks also higher premiums on options but with the big drop in volatility we didn't necessarily see an equal rise in the market the market move was a bit subdued as i showed you on the other chart finding some resistance did have a subsequent pop in volatility today with the drop but notice volatility dropping off significantly again uh off of uh kind of that higher range so kind of mix here as we go into the rest of the week again at least an attempt at support we'll see where we go from that so let's go ahead and talk about some of our uh swing setups and we may be able to apply here and let's see had a couple examples so we can take a look one that kind of stood out uh general electric which a lot of people haven't really talked about uh much from their heyday but from a technical standpoint some stronger relative strength we've seen a surge and rising price rise in relative strength technically with this breakout general electric is actually outperforming the s p for the last three months we're seeing a break in resistance and if we go ahead and take a look at you know bigger picture here traders may go ahead and you know measure that range between support and resistance and project out a similar target this is a common theme for a breakout and reversal class uh tomorrow which is going to be at i believe noon eastern time and measure the distance between that support and resistance quick way of doing that you can take a drawing tool just grab a simple square and then go ahead and draw it over uh part of that range from that support to that resistance some traders may uh you know be a little conservative you know as far as that range we can right click on that we'll activate that drawing and push it over projecting that potential target and notice there's a bit of a confluence with previous highs that may act as a target another way as well is uh looking at the midpoint in that range i can actually use a fibonacci tool as a bit of a ruler here looking at that 50 percent mark which it believes right there traders may go ahead and measure about halfway to that target as kind of more of a profit management tool okay so a few ideas there now uh the prices actually moved uh a little bit quicker than i anticipated i was actually hoping and i can still do this um an example of a buy stop which we had utilized with delta in the previous session where we can put in order that if the price trades above that resistance or breaks out we can go ahead and trigger an order and so way of doing that is and we can also utilize potentially an option if one wanted to not utilize the stock we did a do a stock trade on delta with the buy stop let's say we can do an example of an option by going to the trade tab even though it's a shorter term trade we can go a little further out in duration if we're looking to you know possibly simulate a stock and also mitigate some of the time decay that may be associated with that so as an example you know i have ge trading at 106 dollars uh i can go out 80 days and select a strike that may be a little more into money around a 60 or 70 delta and pay about in this case about 1080. spreads relatively smaller now keep in mind just like when one buys a stock that amount can be at risk it could be the same thing with an option as well okay and yes a question people had asked there was a reverse split uh on uh ge i think a lot of you remembered the stock being priced a lot less and uh there was a split date in early august it was a one for eight split if you kind of squint you should be able to see that so they basically converted uh eight shares uh to one okay uh let's go back to that trade tab and what i can do is i'm going to right click on this we'll do a a buy custom with stop and we'll do another conditional order where we can basically buy and or sell the stock tied to the underlying stock price now the consideration for this is making sure one is trading liquid stocks liquid options you know we're looking at ge trading over 8 million shares we also saw the spreads on those options being relatively smaller wayne asks a valid question could you do a vertical uh absolutely in fact we do have some examples of verticals so one may consider that as well uh i'm trying to mix it up a little bit because those of you that do follow me i do a lot of verticals as well so mixing up between individual options stocks as well as spread trades so if we go ahead and take a look with that in mind uh so we got that order now i made these both market gtc's so we can go into the condition and tie the entry based off of an underlying stock price so i'm going to go ahead and click on the gear for on the buy order and this is where we can go ahead and plug in information tied to the individual stock now let me go back to the chart i just want to make sure we get the right price level uh i was looking at that resistance uh at around 106.46 106.47 let's say i'll set it 20 cents above there which we're getting pretty close to that so i'm going to click on that gear and then we just go ahead and click right where it says symbol the stock appears we can click method select mark which is essentially the last mid price or close to the last price and we can say greater than or equal to and i think i said 106.67 which we should be hitting
and so the idea is if the price hits this level at or above it's going to buy the option at the market i'm going to click save there and as far as the sell order we can put up to two con to three conditions if we wish tied to when to sell this option so for instance may have a price target in mind like that previous high one may also if the stock fails or drops below a certain area think of it almost kind of like a stop loss although it's not guaranteed to fill at a particular price once triggered it'll compete with other income and market orders as these option trades are going to be market orders and can and possibly need to account for slippage if i want to put uh let's say a stop three percent below that breakout point we can figure that out or i should say a exit price that's below that since we're technically not doing a stop order we can take that 106.47 times 0.97 that'll come out to be in 103.27 so i'll go ahead and i'll uh right click on one of these lines do a duplicate we'll just go ahead and we'll mark that so we have that information handy you can always right click on align to and edit the properties and plug in a specific price you can also color code them if you're utilizing it as a you know an exit against you or an exit for you you know like red or green i think that's already kind of green there there we go all right so we have that information so we can actually plug these conditions as well into the cell order so if i go ahead and adjust this down here on the bottom is where our open order order is we can click on that arrow to bring it back up now you'll notice uh a gear will not appear unless there's actually a condition so notice the buy order has a condition the cell order does not but if we put our cursor there it will appear and we can click on that to go ahead and put in that information and as an example we could put up to uh put up to three conditions we only need two for this example we can say if a general electric mark now right now it says less than or equal to so i guess we can put in basically what would be the exit to the downside i believe we had marked 103.27 so we can plug that in hit enter so that price sticks and we can click on the second row and say mark greater than or equal to and then plug in what that appropriate target is 115.
for our example point one zero dollars and 10 cents hit enter then we can click save there and then notice that those two conditions are put in there now when i hit confirm and send we can also position size this one of the attractions as far as with options it is still a defined risk although that can be significant in this case one contract we have over a thousand dollars that's the premium times 100. some traders may position size that to a maximum loss to look at a worst case scenario however we did put in a trigger that if the price does drop below 103 that's about a little more than three percent or three dollars below where it is right now uh we're theoretically not risking this entire amount although it could be a few hundred dollars uh maybe more so some traders may position size this uh closer to uh their exit but keep in mind there could always be some slippage on that i'm gonna do this two times for our example so we'll go and adjust that there is a little chain link here that sometimes appears you can click but make sure the buy and the cell are the same go back to confirm and send and double check the math so the idea is if it goes above and looks like i made a mistake already uh it says 108.67 i believe it was supposed to be 106. 67
so that's why we try to measure twice and cut once and uh i thought he did that well the last time and uh uh in the case of uh dick's sporting goods i had a wrong number in there fortunately someone had commented on one of the videos and it went back in their day to fix that so we had got that there let's try this again mark adder above 106.67 being a trigger and if that fills basically we have two selling conditions one being a desired outcome and the one if it goes against us so basically bracketing that order let's go ahead and hit send on here see what happens i went ahead and hit send now notice the price it did not trigger the order why because notice the price did back off a little bit off of that 106 67 20 cents above that resistance now if the price does trade above there before the close and since i have a good till cancel if it does that tomorrow uh it will go ahead and trigger that order now keep in mind this is a market order for the option some traders may look to re-evaluate and cancel the order possibly put it in for the next day there could be gap risk whether to the upper to the downside in this case if the price had gapped to the upside we can be paying more for the option than one considers although if we want we could put a limit order on that option as well which is what i did do with with one of our trades from last week but i'll leave that as a market order so we can see what the impact is if there is a gap risk and it doesn't trigger today now let's go ahead and take a look see if we have any questions there i know mr james boyd is doing an outstanding job over there do appreciate everyone's participation and if you enjoy what you're listening to today and viewing consider clicking like on the video it's a great way to show me that you're enjoying the content it also gives others the opportunity of seeing it as well as the more likes other people on youtube may be able to see that and uh as we look at some of the questions i think uh some of you made some other suggestions in there you know we talked about long verticals long diagonals you know any type of long or bullish position can be an option there so i'm not saying that one trades better than the other uh those that know me i do long verticals and diagonals primarily on thursday but i've integrated them into this session along with the breakout session but i try and mix it up doing different instruments and sharon thanks for the feedback there as well and i think we have uh james taking everything quite well thanks james all right let's go ahead and see if we can do an example of a a bearish one and this is assuming that it hasn't made a bounce let's see we'll look at uh d k n g uh draftkings was looking if they were actually potentially breaking uh some support which they did maybe seeing a little bit of a hammer in action so some swing traders may be looking to see if a bear flag forms a little bit of a counter move counter retracement to the upside and see if there's a bearish bounce that's kind of similar to you know on the uh well the spx although probably a little more of a ryzen wedge but similar characteristics to a bear flag looking for that to be breaking down another one we're looking at uh five this is another kind of similar to a a ryzen wedge or kind of a larger flag you can see the price action making a sharp move down and then we have kind of a retracement up kind of form in a a rectangle basically a bigger flag and we can see the kablod price closing or trading below the low of the high day we're also breaking that diagonal support maybe we can utilize this as an example since mentioned about verticals on the example of a vertical spread now there's a couple of options you know one may look at selling a call spread and receive a credit one's looking at being more directional it would be a debit but have a potential greater return on risk if the price does move down let's say we were able to piece together on this we'll come over here to the option table uh we'll look at a expiration somewhere in the 20 to 50 days out so if we look at closer in see what we got here now one of the things on weekly options liquidity can be a little bit of an issue you may see some wider spreads trying to keep the spreads within 10 percent of the ask price now technically this kind of falls into that 50 cents 58 cents would be uh 10 percent and if we go out a little bit uh further you know one may be able to see the spreads being a little bit tighter on the standard contracts 17 days a little under that 20 days but notice the spreads are a bit tighter here there's always a trade-off as far as with time there let's say if i did do the 17 days i haven't done many this close-up but we'll do this as an example we'll go ahead and we'll go to the put side and if we're looking for a little greater probability we may go looking to buy the option that's a little more in the money and target a strike uh that may be close to the current price where we're selling some time premium or for a little more directional you know may be able to go slightly out of the money so in this example uh you know if i was looking at the 192 and a half and maybe look at the 195 or the 185 what i can do is i can click buy for the 192 and a half define risk we pay for the option but by selling where we believe the stock may be going to and i'll hold the control key and hit sell we can weather sell 450 we're about 560. a little more time there at the money um and actually let's uh let's go ahead and start off with this 187.50 i'm going to click sell on that one and so what we have is a five dollar wide a 285 debit so we reduce the cost of the trade and the attraction with this strategy is that defined risk 285 is going to be the risk on the trade so we can position size that accordingly the maximum profit is going to be 215.
that is if it's trading at or below 187.50 at expiration so question if it's doing this in the next 10 days and the price doesn't go down are we going to make money on this trade so we can make money if the price stays where it's at we can make money on the trade if the price goes down and our breakeven's actually about 30 some cents uh above the price so uh we got a pretty close break even now if i position size this uh to a maximum losses i'm willing to risk about a thousand dollars on the trade we can probably do this about three times so i'm going to go ahead and change this to three confirm and send and actually as we look at it the break even since we're selling a lot of time and volatility is up meaning we got some juicy time compared to where it was yesterday 189 65 is to break even so if the stock basically even if it goes up two dollars here uh this this trade would still technically make money minus commissions uh but we would like to see the price being at or below 187 and a half for that maximum gain i'm going to go ahead and we'll send this through actually before i do that let's go ahead to the charts now this stock has had some volatile moves i mean 1 89 is basically above i think the high of the day a little bit higher than that so we're basically expecting that the price would continue trading lower so let me go ahead and we'll do a confirm and send and there's the maximum gain risk or maximum loss risk in 840 maximum profit 660. i believe that's over about an 80 percent return on risk let's go and send this through now notice that didn't fill right away sometimes requires a little bit of patience there although with this webcast we don't necessarily have the patience of time but as we look at the working orders i can right click on that cancel and replace order and make note of the spread the spread is a little bit wider so one may have to explore coming in a little more closer that natural price your results may vary in an attempt to get that filled and notice we were able to get that filled there all right let's see what we got going on here folks so we went and took a look at look at the market there we've done some swing setups we've done both a bullish swing setup and a bearish swing setup we're able to get to two practice trades in one utilizing a buy stop for a long call option the other one for a long vertical this case on the put side a defined risk bearish spread if we go back to the platform and just double check on a couple of things in the case of ge you know we may or may not get that fill as uh looks like there may be a little bit fading of the market in this last half hour let's go ahead and look at the five minute chart you know basically kind of fading back to the last little run up there we'll see if that low sits in the day or if there's any kind of panic buying or selling going into the clothes there you'll have to watch that on your own to see where that goes but let's go ahead and go back to the platform and and look at some existing positions you know we had done conditional orders on uh delta and on dick's sporting goods uh from last week i believe is when we had uh initiated these trades delta actually triggered earlier in the week as price went ahead and broke out this is where the benefit of a buy stop can come in particularly on a horizontal resistance is that when price goes ahead and breaks that resistance one can capture that trade and capture that momentum we had originally if i go to the trade tab or actually go to the monitor tab account statement type in dal i actually have a long call vertical in there as well from another class which is a bullish trade but let's say uh we had done this uh on the 21st so that was last week when we had entered that and it was filled two days later at the market open as delta went ahead and uh basically traded above the 42 level we basically did a buy stop if it broke above 42 to enter that trade we had put in a limit order at 42.20 so we would put a cap on the most we're willing to pay for it fortunately it was able to get filled at 42.06
now as we go ahead and look at that example and talk about profit management we had an example of an inverse head and shoulders notice there's that rectangle similar to what i measured for ge and went ahead and set that target so we have a conditional order target in that 46 level but notice price did make half of that move and we got a bit of a shooting star so think about profit management well what i did and if you go back and look at the archive on trailing stops went ahead and basically shifted the stop to a trailing stop based off of the parabolic sar and so now the trail and stop that if the price goes below that parabolic sar which can happen as early as tomorrow morning if the price doesn't fade into that uh we would be closing out the trade for at least a moderate um i guess a little bit of a moderate profit there actually that's the delta spread which is doing even better uh here is the individual stock right here with 100 shares okay if one's doing a spread they may be targeting a certain profit amount in these long spreads i've been targeting about 50 percent uh of the gain so i had a credit i think this was about 80 some cents if i right click to look to close the spread you know can sell for a buck 37. that's a little bit uh close about 50 percent of the return on risk so some traders may look to scale out of that trade look to see if we get a bounce on that a little patient uh we got about 17 days left so uh you know maybe able to go ahead and see if we get a little more of a lift on it uh maybe based off of if we get stopped out of the stock trade all right if we go back on the monitor tab uh one spread that has been doing uh much better too and notice that these were tied to kind of on the travel side and those that follow me and we would look at things such as relative strength and we started noticing some of these reversal patterns forming and they went ahead and have delivered pretty decently if i look at expedia expe you know there's the reversal breakout you know is pulling back a little bit now i don't have a trailing stop on this one uh but i have reached more than 50 percent of that maximum gain on the spread so if i want to i can right click on this and look to close it out this is a seven and a half dollar wide and it's worth 642. so that means there's only about another buck 10 left question is is one willing to risk the majority of the gains to squeeze out that extra 15 20 percent some traders may say no and if you like this type of strategy make sure you join me on thursdays at uh 11am eastern time as we place these types of trades as well as continue to manage them as well a little bit of a wider spread here may not be able to get that fill let me have to explore that a little bit more looks like it did so i think we're all right your results may vary and i saw a little note there as far as on scripts there although i don't spend each session always searching for instruments but a lot of people ask about well hey how do you find some of these different setups uh i have highlighted some of the productivity scripts in the past and will continue doing so such as moving average crossovers for breakouts and utilizing scripts to look for those bounces and i know james shares quite a few of those as well uh if you do follow me on twitter and you looked on my pin tweet the pin tweet is where you can go ahead and see my schedule you can also see a breakdown of some of the scripts i would suggest this webcast if you're looking for examples of trade setups based off of breakouts such as moving averages as well as potentially bounces may be helpful and if you click on the document there's is the breakdown on how one can add those column scripts for crossovers for bounces and the topic i'll talk a little more tomorrow on relative strength we'll highlight some of these tomorrow in our discussion and then likewise for implied volatility which is tied to the spreads i talk about on thursday that's listed there as well so hopefully that's worth the cost of admission folks and at least earns that like there um and keep in mind we accomplished a lot here today we went ahead and interpreted what we saw with the market we went ahead and did some trade setups based off of trend support and resistance uh looking for both a bullish as well as a bearish example and utilize the strength of the thinkorswim platform by utilizing tools such as buy stops utilizing conditional orders and also potentially generating trailing stops if you are new to this session would encourage you to go ahead and look at the playlist for swing training days to weeks as we cover all these topics in depth like to thank james for helping out on the chat and like to thank all of you for joining us as we spent some time going over swing setups today and getting those practice trades in and managing existing positions go ahead and practice on your paper money account translate that knowledge into wisdom and learn on your own as well as we attempt to learn together each and every week on this class remember folks in order to demonstrate the function out of the platform we had to look at actual symbols keep in mind td ameritrade does not make recommendations or terms suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility so thanks for joining us here folks have a great afternoon we'll talk to you again real soon bye now you