How to Trade SPVs (not SUVs!) | Barbara Armstrong | 11-25-19 | Trading A Smaller Account
The, trading, strategies. That we've discussed in this class over time we've looked at buying, and holding stock, positions, we've, also looked, at buy, right covered calls and today. We're going to look at a trading, strategy called. A short, put vertical or a credit. Spread so stay, tuned stick around lots. Of great information to cover. All. Right my name is Barbara Armstrong, I am a coach with TD Ameritrade, delighted, to be with you today in, this trading a smaller account, class, as you. Can see we are all now part of the Twitter community this. Is my invitation, to you to join me there at V. Armstrong, underscore, TD a let's. Get through our important, information, so that we can get right down to business on what our objective, is for today and what we're going to do to help us accomplish that, hello, tool and thank you so much for being here from, new jersey, north, jersey. Hope, that life is treating you well out there feel free to type in greeting into the chat, you, know acknowledge, each other this is a really great community that we have here, and i love that you guys want to participate in it if you have any questions, as we go along don't. Hesitate to ask okay here's, our important, information, options, are not suitable for all investors as, there are special risks inherent options, trading that may expose investors, to potentially, rapid and substantial, losses, and we are looking at option strategies, today. Know. That trades, involving minimal, potential, benefit, can be more significantly. Impacted, by transaction, costs, and there is a, $0.65. Per option, contract, fee that. Will still apply on option, trades in order, to demonstrate the functionality of the platform, we need to use actual symbols, we will look at several today, however, TD Ameritrade, does not make recommendations. Nor, can we begin to determine, the suitability of, any security, or strategy, for, an individual, trader so any investment, decision you make in your self-directed account, is your.
Responsibility. My friends, know, that all investing, involves risk including the risk of loss and that Delta Gamma Vega and theta known. As the Greeks impact, how price time and volatility. Impacts. Of the. Value of our options. Okay. So. Having, got. Through all of that let's come over to, the. Thinkorswim, platform, this. Is the paper-money platform and, really. What we're going to look at today is a short put vertical. Strategy, if you're, not sure of what a short vertical, is I'm going to take of two. Or three minutes and go over it for is there anyone, here, that is brand new to this class for the first time today so. Let. Me just review. Our, assumptions, in this class this trading a smaller account. Our. It. For. The purposes of short put verticals. Our. Max. Loss. That we're willing to take on any one trade is. $400. So we're assuming that we have an account size of approximately. $20,000. $400. Represents, 2% now. If you had a you. Know two million, dollar account you, might not be willing to risk 2%, you might be willing to risk half of 1% so. But when we have a smaller, account, side size. Sometimes. We'll. Take a slightly. Bigger, percentage, risk, in order. To be able to take. More different. Types of trades, so. We're, going to review what a short put vertical is we're. Going to look at at some, of the setup strategies. That, some, investors might consider, we're, going to place a couple of example, trades and then over the next couple of weeks we'll, look at how to manage those, okay. So. I have, Facebook, up, here, and actually let's, start with Apple because Apple. Well. Not to say they're the apple, of my eye let's. Get rid of that. Yeah. We. Won't show our alerts. Okay. So. We, see that Apple has been up trending, over the last nine months and, it. Hit a new high. You. Know for the year last week. And. Then. We had this four day pullback and today it's bouncing. To the upside, so, some, would look at this, as what, they call a bull, flag pattern, where. We saw an uptrend. Pulls. Back then. Looks like it's starting to move again to the upside so. What, some investors, might do and and for, those with, a smaller. Portfolio. Who, are saying well I see, that apples, up trending, but this thing is. 266. Dollars, a share. You. Know buying, this shares might be cost-prohibitive is, there another way I could benefit, from an, uptrending, stock in this kind of price point and, so, one of the strategies that some, investors might choose, is to say okay. It. Recently, bounced, off support, here around this 260. Mark. So. How. About I sell, a put here around 260.
When, I sell a put what does that mean, it, means I'm agreeing, to buy the stock, at any time between now and expiration, but. If I only, have a. $20,000. Account size I couldn't, afford to, buy a hundred shares of, Apple that would be more than my entire account, size that. Would be twenty six thousand, six hundred and thirty seven so. To protect, myself in the event that the stock doesn't continue to go up as I might, be, expecting, or one might be expecting, I'm going, to buy o, sell. A put, sorry. Let. Me put that sell a put I'm going. To also buy, a put and, when I buy a put what does that do well, when I buy a put it gives me the right to sell the stock at that strike. At any, time between now and expiration. So. If I've sold a put and I bought, a put it's going to limit how much I can make because part. Of the gains that I have realized by selling, the put I'm going to reinvest, to be able to define my risk so. If I have say the difference between this bid-ask spread. Is, two, dollars and 50 cents and. Let's. Say I get paid 50, cents. That's. My net gain, then. The most I can lose on this trade is, $2. The. Difference between the two strikes, and. The. Credit I got paid to get in, and. How much can I make well the most I can make is right up front is whatever I get paid to get in and, the. Multiplier, is typically, a hundred, you want to check on that so fifty dollars a contract, so, you're risking, two hundred to make fifty, and something. Between a twenty. And a, thirty or thirty five percent return, is a range, that some investors, are looking for now you, know there are different ranges now if this is a new strategy for, you then. What I encourage you to do is go to the. Getting started with options, class that, is recorded, on Fridays, at eleven o'clock Eastern. And you. Can go back into the archives and look for the one entitled, short put verticals, because, that's what this strategy. Is called okay. So that's, the setup for it any questions, if there are any questions please type them into the chat because if you have a question, chances. Are you're not alone, so. If we come to the trade tab and, we, say okay, we. Saw that get this balance off the 260. It's currently trading at 266. What. Is our Delta so, our Delta is 32. What does that mean what, it means is that. Currently. The. Expectation. Is that there's a 32%, chance. That. This, stock could end up at or below 260. Dollars a share on. December. 20th 25, days from now now. What, does that mean on the flip side it means you've got a 68%. Chance that it'll be above that and. So, if we said okay we think a 68%. Odd is not, bad now is that Delta, number set in stone no if, the, stock continues to go up that Delta, will get smaller which means our probability. Of having a profitable. Trade will, get larger, and if. On the reverse. Tomorrow's. Apple. Were to drop like a rock that, Delta would go up which would mean our probability. Of a successful trade would go down but. That's where it is today, and. So this gives us an estimate so if we said okay we're interested, in selling, a vertical so. We have a two, dollar and 50 cent. Dare. France between, the strikes and a, 61, cent credit so. If we look at that and we said okay, well. What's the difference the 61. Minus, the 250. Gives us a dollar 89, so. If I took 60. Sorry. 61. Let me do that again 61. Divided. By my dollar 89. That. Would be a potential. Return. Of. 32%. For. A trade we would be in for 25, days now what some investors, will do to make this an apples-to-apples comparison. Is they.
Will Say well, if I'm in the trade for 25, days I'm. Looking. For. At, least a 25%, return, and that's not to suggest that they think they're going to earn at least 1% a, day but, that overall. So, that if they were comparing, say the, December, 20th, strike, with. Maybe. The. January. 3rd. Strike, which is 39, days it's. A way of trying to equalize. Expiration. Dates and timeframes if, you're in it for a longer period of time then some investors, would like to see a higher. Return on the risk they're taking so. How, much are we risking here, 189. Dollars a share so. If our maths risk, was. To. $400. So. Francisco, is saying I don't understand. In the, trade for 25, days a 25%. Return so. Some. People when it comes to return on risk so. That's a good question and I want to spend a minute on this because I want to be sure that everybody, understands. What I'm talking about so, ror. Stands, for return, on risk and so. In our example here this. Particular example. This. Is a potential, 32. Percent. Return. On our risk for. A. Trade, that we are. Going. To be in for 25, days. So, depending. On volatility, when volatility, is really, low some investors, who like to trade this strategy might, say well, I would consider, given, how low volatility, is, overall. A 20%. Return on my wrist to be acceptable, others. Would say I don't care what the, volatility. Is I want. At least a 25%, return. On risk other. People, might say you know what. I. Want. 30 and. And. And they don't care how long they're in the trade that's what they want, other. People, might say well if I'm going to be in this trade for 25, days I wanted. To see at least a, 25%, return. Versus. If I was only going to be in this trade for 18, days maybe. If I was offered a 20%. Return, then. I would consider that acceptable, because I'm in it for a week last time, but. If we went out and let's say we. Changed, our timeframe, of. Fransisco, and said, well what if we went out to January. The January, monthlies. Well. Is saying this isn't traded, and you know why probably because it's at least a five dollar spread. So. If it, would accept a five dollar spread so it's saying a dollar 35, credit, so, if I take, five. Dollars. -. My dollar 35. That. Gives me 365. Right, so. If I say okay, a dollar. 35. Divided. By 365. Gives. Me a 36, percent return, so. I'm only getting. A. 4%. Higher return. And, yet. I'm going. To be in the trade, more. Than twice as long so. My money is at risk, for twice the length of time for, only. A, 4%. Overall. Higher return, because I've had to take five. You, know, five. Dollars, worth of risk - my dollar 35. So they might say what I would prefer, to do is to do a trade that expires, December. 20th. And if I can close that out early, then, I'll look to do a second, trade and hopefully. I can get a similar, rate of return does that make sense, okay. Excellent. Well thank you so much for that question because I can guarantee you that the people that are watching this in the archives which is the majority of the people that's. When they get to see it they wouldn't get to ask that question, okay. So the. One other thing and we're going to spend you, know most of our time on this first trade and then we'll try and get a couple of others in so let's go back to December. So. This is 25 days the other thing that's appealing, to some investors, about being in that 20. To. 25 day window. Is that time. Decay, starts accelerating, as, you, approach expiration. And so, what we're doing here, so, wrap your head around this guy's what. We're doing, here is we're selling, something, which. We want to expire worthless. Now. Are we going to wait till it expires worthless thank, you for asking that no. Not necessarily. What. We may do is, come in and say you know what when I've got the majority oh. Sorry. We didn't we, were gonna do a, to, 60 to 50 we were gonna do a. To. 50 strike so. What, they'll do is they'll say when I've got the majority, of my. Profit. So. Maybe, when they've I've, got 80% just as as an example I'm. Going to just, put an order in to the system rate when I start, out to close it down and so. We can come up here so, what I've done just so you see I, came. Down to this advanced. Order. You. See that and, it. Says single, order and I clicked on that and change that to first trigger sequence. And. Then. Once that's changed, to first trigger, sequence, I can come up here right click anywhere on this line create an opposite, order. 2 times 6 is 12 so. 20%. Of 61, is approximately, 12 cents, so, when this is worth 12 cents I'm going to put an order in the system to say it's a limit order when, you can buy this back for 12 cents shut, it down.
Now. If in the next week, let's. Say it goes up and it's like, it's now worth 15, cents and it, looks like apples, gonna start pulling back you may say hey close, enough and you can go in and change that order it's not like it's set in stone. So. Just. Because you've teed this up doesn't mean you have to leave it there so we're gonna scroll down put this in our trading, a smaller, account. Bucket. Or, or group. And. So what's our max profit on this trade, 122, dollars, what's. Our max, loss. Potential, is. 378. And. What. Are we doing we're selling two verticals, on Apple the, 260. We're selling, we're buying the 257. 50 to define our risk at, a, limit price of 61, cents and we would like to shut, it down when. It's worth 12, so. We're going to tea that one up for tomorrow, okay. Let's come and look at another one would you guys like to do another example. Type. Into the chat if you're saying, yay. Thought. We'd focus on stocks that start with the letter A to begin, with so here, is AMD, so, we saw AMD. Kind of consolidating. And going sideways and then come the beginning, of October, who really started to move to the upside and then, we saw this three. Day pullback, and. Today. It's bouncing. And we saw it move, or. Close, above. The high of the low day or. It looks pretty, close. It at least moved, above the high of the low day today, so. If we look at this and say well. If it looks like this uptrend is going to be continuing. Could we perhaps sell, something, you. Know under here, and. Then. Buy. Something, underneath that to define our risk. Okay. And thank, you and Len. So, let's come out to the trade tab and again, if we're looking at this December. 20th twenty, five days, do. We have volume we've, got tons of open interest yep. On. This one. So. If we come out and we look at the. 38. Strike. So. If we come out and we look at this 38, strike, and, we. See ok Delta, again 0.3 remember. What Delta means not. Set in stone but as of this moment in time, you've got approximately. A. 69. Percent chance that this will expire worthless. Is there. Enough premium, and you might look at this and go I don't know it's like to. Buy, this. Put to buy or sell this put looking at only 87, cents, so. We. Would again, right-click anywhere on this line we want to sell a vertical and, it. Will give us the smallest possible. Spread. But. Let's say we're willing to do a $2. Spread that would give us a 47. Cent credit and, again. 47. So. If we take a look at, 47. Divided, by the difference between the strike two dollars minus our 47, cents so, divided, by, 153. It's. A 30%. Return on our risk, and so. If an investor, found that acceptable. And. Again if you want to see this example, a second time we're going to come down to where it says. Advanced. Order, single, order we're. Going to click on that and. We're. Going to change it to first trigger sequence. If we. Can risk up to $400, on one trade, then. We could do two contracts, that would be about $300. Worth of risk, we'd, right click create. An opposite, order when, this baby is worth about nine. Cents, or you might want to make it ten. Take. Our risk off the table confirm. And send our Maps profit. $94. Max. Lost, three hundred and six remember. Like I said at the beginning when, we were looking at our important, information, there, is a 65. Cent transaction. Fee for. Per, contract. So. We have two verticals, but. You've. Got you're selling, too and you're buying too so, that's four contracts. So. That's why that charge would be two dollars and sixty cents. Trading. A smaller account. Bob's. Your uncle. The. Limit price means, that we don't we. Want to get that price. We. Want to get paid at least that amount or better, now. If the market is closed that'll, tee up and it'll fill tomorrow, so you might want to check the prices if you're following. Along and placing these trades in your paper money account.
Okay. So we've placed two, trades, we, could go and maybe do one more yep, then and this one we I think we actually did one, on Facebook. If. We, come and we look at the monitor, tab. Well. Or our trade tab we did one last week and it, looks like that one's doing fairly well because. Now, the Delta on that is 20. And. So if we come to our monitor, tab and, we, come down and look at, these. Positions, our Facebook, we're currently up by you. Know a whopping. $26. On this but, given that we did two contracts, at $50. That's. 25%. Of, our max gain. So. If, we. Looked, at Facebook, again you, know this has bounced, continued. Up past this, potential. Resistance. Area. That was established back in May it pulled. Back and seems to be bouncing, or, moving, to the upside and, broke, out above. Resistance. So. This is one that we could potentially look, that. One might look at so what I encourage you to do is, practice. These, strategies. Go. Out and look for examples. So you. Could look at Microsoft, does that one have potential, you know. You. Decide how. About micron, could. That one have potential, now. This one you're, you're looking at you. Know a potential head and shoulders, here, but today it's bouncing. But it came back to kind of a similar, a, similar, low and, we. Have earnings coming up December 18th, so. This is an interesting, one because one. Of the rules or guidelines that. Some investors, have is. They will not trade this over earnings so, why might an investor, not want to trade a short put vertical over earnings because. Stocks can do what over earnings I know, there's a bit of a lag but type it into the chat they can gap. Have. We ever seen a gap on micron. Over, earnings, well. Here was an earnings gap, to the upside so, if you have a short put vertical that, would be a good thing but what about the last earnings, gap. Down, all, of a sudden overnight, max. Loss. So. If you're trying to stack. The deck in your favor, one. Of the things that you don't want to introduce is, unnecessary. Volatility. Because, volatility. Makes the prices go up so even if you're saying oh I'll, close it out before, earnings, as you. Approach earnings, volatility. Goes up because the uncertainty, of what the stock is going to do goes up and, so. You might say oh well you. Know what, it. May, be a set up but because of this if, you can't be out before the 18th, on some, investors, might just not take, that trade, we, looked at Facebook, and there's one other. Yeah. Someone, typed into the chat they've been caught and and, I've. Seen that happen and you know when you go back and do a post-mortem. Some of these trades, what. Sometimes, you'll realize, is the mistake, was made when you entered, the trade, and didn't. Follow all the rules and and, you. Know it's up to each individual, trader, to decide what their rules or guidelines are. But, it's kind of like baking, a cake you don't look at it and go you know what I'm gonna add like eight or nine of these ten ingredients and. Like. What's with the baking soda and baking powder anyway, like it's half a teaspoon, and out of a whole bowl full of ingredients, and then you wonder why the cake doesn't turn out so. With respect to, trading if, you have a recipe, card or a set of guidelines that, you use there's either a valid, rule there and you follow it or.
You You know there isn't and you don't. And. You. Know so anyway, I'm gonna get off my pedestal on that one, but. You know just go through the stocks listed on the Dow or go through the stocks listed on the, Nasdaq, because. Those tend to be heavily traded or there's a watch, list of stocks they, that, have penny, increments. Between the, bid-ask spread. And. Then place some example, trades and then, if you're this is a new strategy for you I've told you you can go back watch, the archived in the getting started with options. You. Can watch last week's archive, so we did three trades, on. The class last week so. You'll, see lots of examples, okay, so, guys it's hard to believe but our time together it, comes it goes oh so very quickly please. Remember that all investing, involves risk including, the, risk of loss also. Please remember we looked at several, different stocks, today in order to demonstrate the, concept, of what a short vertical is all about and in. Order to show the functionality, of the platform, and how to tee those up on the thinkorswim platform but. That's not to be construed as a recommendation, on the part of TD Ameritrade, or myself we, don't know what's best for your account so any investment, decision you make in your live account is on you my friends. With. That please. If you haven't subscribed, to our channel, feel free to hit, that subscribe button. You'll, be notified when new stuff is coming up and you know we're always posting, new material, also, if you found this webcast helpful, hit. The like button, and let, others know that you found this to be helpful, and. Then don't forget to join me if you haven't done so already in. The wonderful world of, Twitter, you can see my tag line below. So guys that's a wrap for today stay, well, drive safe enjoy, the holiday season, Happy, Thanksgiving if. I don't. Get to see, you in a web cast tomorrow and I, will see you in a web cast coming up soon take care everyone, bye for now.