Long Calls & Long Call Verticals | Barbara Armstrong | 10-14-19 | Trading a Smaller Account
Okay. Good afternoon and. Welcome to trading a smaller account, my name is Barbara Armstrong. Today, is. Monday. October, 14th. And I. Am delighted to be with you so today, I thought, we'd take a look at the. Difference, between. Trading. A, long-haul, vertical, which is a bullish. Strategy, and trading. Simply, a long call which is in regular. English buying, a call and hello to Patricia and, Sandeep, glad. To have you on board if you're with me live please feel free to, type. A greeting into the chat to both me and to one, another and if you have any questions, as we go along don't. Hesitate, to ask so, we've got lots, of great information to, cover in this half hour we have together and I'd. Like to make it totally worth your while so stay tuned we're getting started. All. Right so as you can see here we've got our little bird. Announcing. That we are all now part, of the, Twitter family, would love to have, you follow me on Twitter. All of, the coaches at TD Ameritrade are, posting, daily so. Not, only you know things that are good food for thought but. Stuff about the markets and the trades that, example. Trades that we are placing in, class, sometimes. As well or commentary, on what's going on with, individual. Stocks, and. With the market in general so hello. To Duke also I didn't. I I took off my big, yellow, thing that says hey don't forget to hit the like button, and subscribe but. If you haven't subscribed, to our channel I encourage, you to do that it's. Both to your advantage and it helps other people find. This, complimentary, education, that we're offering so, helps, you help someone else out as well. And. Then hit the button like button as you know if, you find this information in, this class helpful, and then, follow me on Twitter so that's that covered okay, let's get through our important, information, so we can get right down to business, options. Are not suitable for all investors as, there are special risks inherent to. Options, trading, that may expose investors, to potentially, wrap it in substantial, losses, spread. Straddles, and other multi leg options, strategies. Can entail, more substantial. Transaction, costs, including. Multiple commissions so we have to be aware of that also. We're. Not going to talk futures, today however we. Will be using the thinkorswim platform and. In doing so we're going to talk about actual symbols, we always do however, that is not to be construed as a recommendation on, the part of TD Ameritrade, or, myself we, cannot begin to determine, the suitability of, any security, or strategy, for an individual, trader any investment. Decision you make in your self-directed account, is your responsibility. My friends, and. Know that there have been some changes to Commission costs and other, fees. Although, we need to take that into account when evaluating a trade now. Which is pretty. Exciting, for us here in this trading a smaller account, class in particular there's. Zero Commission applied to online us, exchange listed, stocks ETFs. And, options trades, and just, a. $0.65. Per option, contract, fee applying. To options, trades so. That, will help us out particularly. In our spread type trades, and but. You know past performance, of any security or strategy, doesn't guarantee future results or, success, and, Delta. Gamma Vega and theta also known as the wreak show us how price time and volatility, impact. Our options, trades when we're trading options, know. That all investing, involves risk including, the, risk of loss okay. So what's, the objective of today's class well. If you haven't seen a long call vertical strategy. I actually spent, an entire half-hour. On that strategy, alone. On Friday, in the, getting started with options so you can swing, back and watch the archive on that, and. We're. Going so we're going to look at a, long, haul vertical, and the, advantages, and disadvantages. Of trading, a long call vertical versus, perhaps, just, doing a long call or even perhaps buying, the stock and we're, going to use, synopsis. Snps. As our example and then, time permitting. We'll, look at review, our our current portfolio, okay. So with. Synopsis. If we, look at this stock there's. A couple of things that I, was. Looking for in, trying. To find an example one I wanted. Something where earnings, wasn't just around the corner, and if, we come up and take a look at say this. Watchlist. I'm just going to shrink our calculator, for a sec here's our Nasdaq you. Can see anything. That has a blue. Circle. Beside, it I. Just. Want to make sure that you guys can see this also and it may be a bit small but anything, that has a blue, circle, beside, the.
Watchlist, Symbol means that earnings is coming, soon and so, there are you. Know it's, kind of like trying to find hen's teeth you know they're pretty slim pickings the stocks that don't have, earnings. Coming up as we approach this season so, when. We hone. In on synopsis. If we look at a one-year chart we see that this is a stock that has, almost. Doubled in value it's gone from on December. 24th. Seventy nine dollars and 14 cents up to a high of, 146. Sixty and then. We've seen this kind. Of pull back a little bit and we've seen this kind, of some. Would call this a pennant. Pattern, and, in. The last couple of days it's broken, above this diagonal, resistance, line and then. Today it's it would appear, to be, bouncing. Off this line so some. Technicians. Might. Look at this as a valid. Consideration, for. A bullish. Entry. Now, some might want to wait, and and see if it goes above yesterday's, candle. But. We're. Going to use this as an. Example. Today, so. If we. Were. To look at and I'm just going to draw. A cross here to get, us up close, and personal. On this. Timeframe so if you're not familiar with this, trading, strategy. This long. Call vertical trading, strategy, the idea, is. To. Look. For a stock that is moving, bullish, ly and, you. Are going to buy, a call, at the. Money. And. Then. In order to fund, the, purchase of the call. Or. To help fund the purchase or offset, some of the purchase price we're, going to sell a call above that now this is not drawn to scale. So. The idea, being, here. If we. Were to sell it, closed, at 1:30 885, today so. If we were to by the, 140. If these. Are sold, in $5, increments, then. If, we buy the 140. We, might be selling the 145. And. So. Let's say the net difference. Between, these two is is a $2, price. Difference, so that's what it costs us to get into this and, if. We have a $5. Spread, between the strikes the most we can make is $5, on this. -. The two we paid to get in so, the goal here would be for the stuff to continue, through, both strikes, and that's the most we can make on this trade now. We have another choice. And that's just to buy, the call, or, one. Would call that a long, call, and. There's. No then cap, on how much we can make the amount we can make is unlimited but. We're not there's no offset. To this price and then of course the third thing we could do is we could go out and buy some shares for a hundred and thirty eight dollars and, 85, cents a share. So. You, know those are three. Of our, choices. Three. Of our choices okay. So, and today because, our, account. Size is such you. Know if we wanted to buy, $5,000, worth of shares that. Being our max position size we. Would take 5000. Divided, by 130, 885. And. We could only buy thirty six shares and, that would, tie up. 25%. Of our hypothetical. $20,000. Account so. This is. Where. Sometimes options. Become appealing, because. They. Tie. Up less. Capital. Okay. But. You know there there's, a yin and a yang to everything, with an option. With, the stock you buy the stock you. Know and if the stock goes nowhere for a month you still own the stock if you buy an option and, the option expires in, 40, days at the end forty days that option, has no, value, so, you you. Know it's it's, a more time-sensitive. Trade, and there is something when we're what, we call long and option are buying an option, where. Time, is not our friend so. If we came out thirty, two days here, to. November, and we said okay, if we looked at our at the money strike, which, is the one forty, and then we, looked at buying that and then helping offset. The price of buying it with.
Selling. The 145. Strike, we. Can see a number. Of different pieces of information that. You. Know, many, traders. Might, be looking for one have we got the right stock yep. Are, there options being. Traded on these, sorry. So. Yes, we've got 1200. Contracts, on the. 145. Strike, and we've. Got 300, contracts. Now ad as a rule of thumb. Some. Traders. You, know will have a guideline around, this they want at least ten times or, some twenty times the number of contracts, that they're interested, in trading, already. To be you. Know part of the open interest and either. Way you, know we've got that covered with both of these strikes here, and you. Can see we've got a bit a spread, that's about ten cents, on our at the money strike, and ten cents, on the first strike out of the money as well so. If we tee up this long, call, and. It's. Also known. As a debit spread, so it's a long call vertical you. Can see, November. Fifteenth. Our. Multiplier. Is a hundred, so one, contract. Controls, one, hundred shares, if you will our net. Debit on this is a dollar ninety, six so what's the most we can make on this, trade is five dollars. Minus, the dollar ninety, six so the most we can possibly make on this trade is three. Hundred and four dollars and, what's, the most we could lose, if we do one contract. 196. So. If we come to as you. Can see. If. We. Come, to this. Confirmation. Page, we. Can see our breakeven, is at 1:40, 196. So it has to move up a couple of dollars like enough a dollar. Basically. A dollar. 96. Into the money to. Cover what we're paying to get in so that's our breakeven, our max, profit, is three hundred and four dollars as I said the difference between the strikes minus. Our debit and the most we can lose on this is 196. So. In this class our rule, of thumb, was. That our what we wouldn't take a loss, set. Ourselves up, for a max loss of anything. More than 400. So. On this trade. We could do two, contracts, and so. We're going to tee that up, confirm. And sound and we're. Going to put this in our. Trading. A smaller account. For. The name of the class and. Then. Just so that we can track this by way of comparison. We're. Also going to look at well what if we just did a long call, and. What is the difference, to us as a trader. If. We do just a long call well one is the cost, so. If we wanted, to do just, that long call. And. We're expecting this to make a move over the next week or so we really want to get out of this before time, decay, really. Starts eating away at the value of the trade so we want to be out you, know probably, in, in, about two weeks when, we've got about 20 days left so, we. Come out here we want to buy a single. So. How much are we risking where we're risking, three hundred and sixty dollars now. What some people might do is say you know what if this gets to the point where it's only worth a dollar, eighty or fifty percent I'd, rather take half my money.
And You, know use it to trade another day so. They might put an exit, in so, if we come down here to where it says single, order and first, trigger sequence. We. Can add an, opposite. Order and say, we want to make this, a stop. Order. And, if. This gets to the point where it's a dollar eighty now is there a guarantee that, we'll get out at a dollar eighty if, it gapped down we might get out at less than that but a stop, market, will be or. Issued. When. And, if. Synopsis. This, call, that, expires, on November fifteenth of one forty call if it got to the point where it was only worth a dollar eighty it would get us out of the trade. But. To. Position. Sighs at, least. Some investors, will position size based, on max loss, so. You, know some. More aggressive traders, might say well I feel I'm only risking a dollar eighty here so I could do two contracts. Others. Being more conservative would, say you. Know I'm I'm, only going to do one contract, because I could lose three dollars, and sixty cents or three hundred and sixty dollars. So. Just. Because we've done two contracts, on the other we're going to change this and we're going to do two contracts. But. Again the, more conservative. Trader. Would, likely position. Size based. On that. 360. Or. They might do that so, this is saying that we could lose, 720. Dollars and that's because. Then. We aren't taking the fact that we put a stop loss into account, when you're, max, loss potential, is calculated, it never does now. What about. Max. Profit potential. Well. We can see here that there isn't a cap on this if. This gap to the upside, and, you. Know we woke up tomorrow and, this was back let's. Just see so let's T this order up and. Then. We can go and do something with vo price. So. We're going to Oh trend. Put, this into our. Trading. A smaller account bucket. Oops. Sometimes. If it goes into the wrong bucket, I have trouble finding it again there. We go. Okay. So we have those teed, up now one of the, things. I thought was really, cool when I first, started.
Using Thinkorswim, was, this Theo Price tab and if. We come out to the charts and we say well, what if in the next two weeks this came up maybe, not all the way to 146. But this previous, high was. Actually, 146. What if it came back up to this like 145. Almost, back to the previous high. And. The, way people measure a Penant, pattern just FYI is. They. Would come here and say okay. When. It breaks out of a pennant, we measure the widest. Piece of the pennant, which was. Thirteen. Dollars and 23, cents. And. Then we'd say we're, going to duplicate, this drawing. Say. Okay we'd expect, this move to be thirteen, dollars and 23 cents which. Would put it right up around 150. Now. How long will it take well. It came down here, in three days so, we aren't necessarily expecting. It to go back up in three days but. That would be our our target, would be around that 151 mark but, to be conservative if we said well what if this just came back up close to this previous high around 145. Or 146. And let's, say it took I don't. Know well, we even the first thing we hit is reset, what. If it took us a week and a half to get there so let's go out to the, 23rd. Of October, or, let's even make it the 24th, and this. Thing went up to it's. At 138, 85, so let's have it go up and this. Is just picking a number six, dollars a share. So. What would that be almost. 1:45. So, you know in the the previous high was 146. And change, well what would our option. Be, worth, well. One if it's, gone through both our strikes the 140, and the 145. And. And. This one would be. 140. It would be close to our max we'd be getting close to our max gain at that. One 45, now. If. We. Had just bought this call and. Where. We want to look here by hitting Theo price there's now this new Theo price tab and this is we're, not taking volatility. Or any other factors, into account but, this is just saying this. Could, be worth, on. The, 24, if it did go up by six dollars you, know a share you know, it could have gone from the, 355. Or 360. That we're paying to get in up to about 650. Which. Is a pretty nice return. And. We. So. I have, a question asking, if we have time to go to the analyze tab and, look at the probabilities. Of the long call versus, the long call vertical and we, are not going to have time to do that today but. Perhaps another, day we can do. That in this class one. Thing, you may want to check out an is if you go to the archives, on the thinkorswim. Page. There's. A walkthrough on how to do that if you're not already familiar with the analyze tab. But. There I know that Connie Hill has recorded, sessions, on the analyze tab because. I wanted to take just a quick minute. Now that we've teed up something, new to. Look at the positions, that we already have, so. If we come to our, monitor. Tab. And. Not. Unallocated. We, come down to our. Trading a smaller account. So. We, have three long, positions, so we can see we have synopsis. In here teed up and, we've. Got this long call position, teed up did. We not get the other order, in also. Let's. Go buy time placed. Time. Placed again yeah, so we have an order in here to do a buy on this also. So. We'll make sure that that comes in and. Then. So. That's the order we put in for today we also have a long, position or we own, to. Use regular, English we own a hundred shares of AT&T. So. We bought AT&T. At $34. When did we buy it we. Can, come down here to view trade August, 7th and it's. Now trading, at 37. Dollars a share. We're. Up about. 10% on that and if we wanted to add a P&L. Line, to, this, we. Can click on this little sprocket, above, this section, and we. Can type in P, I. Think. It's P and L since. We opened and. Add. That and, we. Could have that show up. And. Then. Our percentage. Change. That's. Just the percentage, change on the stock today so we can take, that one off. And. When we hit okay. Where. Did that go piano. On the open, oh. Sorry. I've got that in there twice, I. Wanted. P&L. Percentage. Add. Item. So. We're going to take. Somehow, that showed up twice there, we're. Gonna move that up. And. We're, gonna take that one out. Okay. So, now we can, see that. Honor. AT&T. Were up about ten percent on that which we could tell just by eyeballing it, but I thought it might be handy to have this in here, we.
Also Have a position in, a, utility. Company called. Terraform. Power and we can see there. Were only up about 1% on that one and with. AT&T. We. Can see that this stock has been nicely up trending, but, has had a bit of a pullback it's come back and then bounced, off our, 30. Day moving average, and it's kind of hovering, around that line, with. Terp. We. Can see the same thing it came, up had a nice bump to the upside and it's come back to kind of retest, this support, level that, it was hanging, around, and. That support level looks like it's still holding. Terp. Does, pay a dividend, of almost 5% and that was one, of the, reasons. That had. Us add this. To our portfolio, it's also a utility, stocking, the utilities. Have been leading whether. We look at the last six months or the last year. A lot of people are looking for dividend. Type income, and AT&T. Also. Provides, a dividend, yield of just, over five percent five, point four which. Is you, know pretty strong, so. We have those two positions. In our account, we also have, Weight Watchers which. We did something called a buy write on which was we. Bought the stock and at the same time we sold a covered call with. The intention. Of selling. It in the middle of the road kind of like our covered, call so to speak with, the intention, of it, being run over and us, being called, out on this so. We bought this back here, I think on this day and it. Moved up came, back to the 30 day moving average, and it's just rolling, along now this expires. On Friday. And. Our. Call. Here. Let me just make this uh. Flatline. So. There's thirty seven, ish. There. We go so. We sold this thirty seven call and, if, Weight Watchers does. Not close, above thirty, seven dollars on Friday, what, happens, well. What happens, is we, get to keep the two dollars, and fifteen cents a share that. We were paid for this call which. Is now worth about forty, two cents, and will, expire, in four days so. Come. Monday. You know and we entered, this trade willing. To, be called out so come Monday. You. Know if. This. Is not above, thirty, seven dollars and, it it it closed, today at. 3581. Then. We will own our hundred, shares will have made our two dollars and fifteen cents and we, can decide, what to do from that point we. Could just continue to own the stock we, could sell another covered, call or we could just liquidate. The position, and we you, know have made money on this. Position. Or you. Know we have an unrealized. Gain, is it large no at this. Point its fifty dollars and fifty cents. Okay. I have, a question in the chat saying. Can. You show me where to find the dividend, again, absolutely. Good question, Regan so. You. Can come here to the trade tab and typically. What happens is, you just see this first line which gives us the last price trade in the net change if you, click that little down arrow. Of, course Weight Watchers doesn't. Pay a dividend, but if we go back to AT&T. We. Can see here's our dividend, yield, here's. Our price earnings, ratio that was another thing that we looked at and and some, investors, consider. A p/e, ratio, of under $20. To. Indicate, a stock that might. Be a good value and, then. Here's the actual, amount of the dividend 51, cents and the, last ex-dividend. Date was October 9th, and. It pays a dividend, quarterly, so that's where you can find that information, okay. Well guys our time, it has come it has gone, so, we need to wrap these half hours go so very quickly so. Just to wrap this up, know, that all investing, involves risk including, the risk of loss we, place two example. Trades today, and the, idea was just to compare and contrast and, we'll look at how we might want to manage, those two. Trades differently, going forward, and watching. Twitter and all post. Things as we go along in fact I'll post this trade in Twitter. Tomorrow, and suggest that everyone follow along, and. Know also that to demonstrate the functionality of, the platform, we you know we are using actual symbols, like, synopsis, and reviewing positions, in our example, portfolio, like.
AT&T. And. Terp. And, Weight Watchers and, looking, at how to manage these as well however we're not making recommendations. Nor can we begin to determine, the suitability of, any security, or, strategy. For an individual, traders so that, is on you my friends, thank, you to Patricia and, Regan and Ann and Duke, de panne, Patricia for typing into the chat great, to have everybody. Haitians, so glad to have you on board and with. That guys that's. A wrap for today thank, you so much for joining me I will look forward to seeing you in a webcast coming up soon take care everyone have, an awesome day bye, for now.