Market Posture | Cameron May | 8-29-19 | Selecting an Options Strategy
Good. Morning. And welcome everyone my name is Cameron May it's 9:30 Eastern Standard Time on a Thursday morning that means it's time to get back into our ongoing series, of discussions, called it's called selecting, an option strategy, and, over the last five weeks we've been work on our way through the market conditions, that, might lead an investor to choose one strategy over another we started off with the basic long call long put covered call we moved into call diagonals. And as I promised, last week today, we're gonna be talking about doing. A bear, call, spread so. What. Might be the market conditions for that let's. Dig into it before we can do that though let, me say hello to all your returning veterans Jerry good morning Sarita, Arturo, Dennis, Mike and Pierre. Paul. Great. To have you on board thanks, for coming back week after week and thanks for your contributions. Every week I think it helps everybody with their own personal learning curves and, if, you happen to be watching today's webcast live, for the very first time I want, to welcome you as well and finally, for those that are watching on youtube after the fact on the archives, enjoy, the presentation, but, you're also invited to join us live if you'd like 9:30. Eastern, on Thursday, mornings is when you can pop in and join us and. Final. Invitation if you're not yet following, me on Twitter, just, make a note right now after, the session is over at, CMA. Underscore, TBA as my handle, I try, to tweet something every, day of the week you'll learn a little bit more about me and I'll try to try to provide you some more market insights, okay. So let's go to it first. Of all let me let me just take a quick moment I'm just gonna pause for a second I want to read a chat here to myself because. There's a question being posed. Okay. Gerry actually so, Gerry's asking a great question it's an interesting segue to today's discussion he says hi Cameron can you briefly review which options strategies work best in a high implied volatility, environment, compared, to which work, in a low implied volatility, environment yes I can that's gonna be part of today's discussion thanks, for asking Gerry all, right so, quick. Reminders, important information, options are not suitable for all investors spread. Straddles and other multi league option strategies can entail substantial, transaction, costs. Any. Investment, decision you make in your self-directed account is solely your responsibility. Past performance, of any security or scapular strategy does not guarantee future results for, success all investing involves risks including risk of loss here's a quick overview of your Greeks we.
Are Going to be using real examples, in today's discussion please, don't take that as a recommendation or, endorsement, of any particular security or strategy, all, right so let's go to the platform, and I. Just wanted to do to talk through our quick three, agenda, items and then. We'll hit on what I want you to walk away with, after, our discussion today all right so. Our agenda first, going to talk about what market conditions might be optimal, for a bear. Call spread then. We're going to talk about the pros and cons of bear call spreads and wrap it up with an example trade, so. By the end of that discussion by. Accomplishing those two three agenda items I just, want you to walk away with a firmer understanding of, when you, might select, a bear call spread. Okay. Mmm. Arturo see how that is a good question isn't it no doubt. And. Dennis is saying can we talk about screening, Dennis. I can't promise that we'll. See, possibility. Okay. However. I did, actually talk about when, did I last talk about screening for strategies maybe I'll put that into a future session, because I think that that's something where. We might we. Might dedicate, the entire discussion, to it okay. All. Right but let's talk about market. Conditions now we're. Going to be going on the assumption that we have a small we have at least a basic understanding what, a bear call spread is, it's a bearish vertical spread I'll still try to go to pace that everybody can follow so, even if you're new you should be able to follow along with the discussion, however, if. You feel like you need to brush up on some of these more basic options, strategies, I would suggest that you check out barb, Armstrong's, class Friday. Mornings, it's 11:00 o'clock Eastern, Standard Time it's called getting started with. Options, okay. But. A bear call spread is, a, bearish. Strategy, that's, used but, that's constructed, using calls that's why we call it a bear, call, and then the spread we'll explain in a moment. So. But, within that title, is a hint regarding. What, kind of market. Conditions a trader might be looking for so, bear call spread what, might what might our market, bias be, let's.
Go To the charts I'm. Gonna have a look at the S&P 500 I'm on a six-month daily, charge you might use a different timeframe but. I just wanted to get a quick look at what's going on today strong. Open to today I saw that the futures were set to open up about 1% and, it looks like we're up about 1.1. Nine, percent, today so. You might feel like Oh Cameron I feel sorry for you this is kind of an awkward time to be talking about a bearish strategy, well, maybe or maybe not because market conditions can turn on a dime right and in, any event we're, just talking about an education. Learning about a. Theoretical. Time some time in the future if we're contemplating, doing Bayer call spreads when might those be done so. That I think we can still accomplish today and I think we might still even be able to make a case. For, maybe. Some hidden bearishness, in the markets I, have. A look at where we are right now we've gapped up, overnight. We. Have been pressing higher, but. You notice over the course of the last voice several, weeks, may be pushing into a month now. The. S&P has not been able to rally much, higher than it is at. This. Moment so. Not really much more than that's, not even 1% higher it's. Like a half a percent higher so, do. You think that maybe sets. At least a technical. Stage for an argument for, a bearish strategy, but. What if we think that the markets do go higher at least a little bit well. A bear call spread actually, might, be employed, even, under those conditions because, it contains within it a little, bit of tolerance, for being, wrong or for for the for the direction of this stock. Or an index, to go, against that move. But. The bottom line is for market. Conditions. Probably. The optimal scenario since. It is a bearish, strategy, at heart even if it has a little bit of wiggle. Room in, it depending on how it's structured I should say. Probably. Looking for bearish, market conditions, now, another. Case that might be made is if we were to connect these highs on the S&P 500 and bring, them down this direction you'll, notice we, have not only a. Until area of potential resistance but. Also a diagonally, descending, potential. Area of resistance and. You look at that maybe I'm just making a really compelling case because, we've, even started to fade a few points. Since, we started talking I don't know maybe this will wind up being an, even better example. By. The end of the discussion who knows okay. But those are the market, conditions, and what, we would probably want to have, happen here is for that to carry over to an individual. Stock if we're trading individual, stock options. So. Bearish, market conditions, in a bearish outlook for. A stock and now, obviously technical, analysis doesn't have to be the full extent, of the reasoning. Of a, bearish, outlook it. Might also be we're. Bearish because we think the stock is just not a very good stock maybe. You have convictions, regarding the management or performance, sort or future. Or anticipated. Performance maybe the industry is rotating, out a favor all of those things are more of a fundamental, view of a stock and they, might play a role in the setup of a, bear, call. Spread. Just. Whatever. The. Reasoning, the, bottom line logic is the bearish strategy. Okay. So Jerry's saying would you use SPX, for a bear call spread could, you is SPX. A tradable. Security, actually yes you could trade SPX, options, I won't I won't say I'm going to today Jerry but, that is something that a trader has as a. Potential. All, right we're actually gonna be using an individual stock though for today so. That's stock, market, conditions, what about the options market conditions this is going to go straight to, was. That your question Jerry little. Earlier yeah can. You briefly review which options strategies work best in a high implied volatility, environment compared to which work in a low implied. Volatility, environment what, are we talking about with implied volatility, well there. Is actually a chart, of how. Volatile. The, S&P is being. So. This is more a reflection of, of. Actual. Volatility but. You also have this the, same logic, can be applied pretty. Directly, to, just implied, volatility. If we're looking at an individual.
Security, And it's implied volatility, tends to is higher than normal or. Higher than average because. Normal, is kind of a squishy term in. Any case let's look at just volatility. And how. Would you describe today's. Volatility. Environment. Do. We have low. And rising, volatility, or, do we have high and falling, volatility. Because. That goes against, rate to the heart of Jerry's question, well. You can see on this six-month, chart and it actually if I switch this up let's go to a one-year chart. On. A one-year chart you can see volatilities. Really have not been much lower than 12, right, there. We've, certainly been higher, than, we are right now but. Going back to a more recent history, let's, switch our timeframe back up if you don't know how to customize, a timeframe go. Up and click on the d4 day or w4 week whatever your current chart, construction, is and. Then I'm going to click on timeframe, and then. I'm gonna go to a time interview interval. Here. I get a little bit more precise let's. Go back to that six-month, interval, I'm, gonna leave my aggregation. Period which is a fancy way of saying the size of the candles are the daily candles weekly candles hourly candles or whatever I believe. That is day and click, OK. But. I think you can see that volatilities, have been comparatively, high recently, and seemed. To be dropping. A bit sandy exactly, right yeah. And. Thank, you for the so Ricardo, thank you for that little sidebar additional. Information, that's why I like this interaction, with I always invite it long. As the interaction is on topic, not a distraction, I think it's great it helps everybody else's learning curve. Yeah. So, Ricardo's, making a point about this, is you. Know those that are here live can see this in the chats when a benefits of being in the class live but, for those that are listening in on the recording, Ricardo's, saying that SPX, options, are, what we call European style options, that can't be exercised, before expiration they, do have a different expiration, though we have to remember that they, expire. Week, earlier than traditional, or. American-style. Options, but. They also can't be exercised. Before. Expiration. So. When, when, doing a spread which involves, getting, into a short, option, position, which. Means we're not in control of when that contract. Is exercised, or assigned to us yeah. That that can be an argument in the favor of something like a european-style, option, okay. It. Doesn't mean that you can't do traditional. American-style, you just have to be aware of the risks associated with it okay. So, here's. Our vixx. Vixx. Recently. Hit a peak and over, the course of course the last couple of trading sessions you can see that we've been sliding in volatility. So. As, volatility. Drops is that theoretically, better, for buyers or for sellers of options and I. Should say not for future. Buyer's or seller's but. Traders. Who have already taken, positions. Is. This providing, a headwind to. Let's. Say buyers or is it a tailwind, is it an advantage or a, disadvantage, or. An advantage, yeah, with volatility dropping. Typically. As volatility. Goes so. Goes options, prices. So. When we see high and falling volatility, that's that's commonly, described as a seller's, market for, options and, a. A. Bear. Call, spread is, net. A selling. Transaction. Now. Interestingly with spreads. You. Can actually structure. Even. A debit spread. To. Mirror. In performance. A credit, spread and I've actually gone into that in some detail in earlier discussions where we weigh the. The, pros, and the cons of. A credit spread and a debit spread set up at the same strikes, on the same stock and what we find is that they are essentially. The same, trade okay. So. It's not universally. True that. Every, credit. Position. Has, let's. Say an advantage. Over a debit position, in, a high implied volatility, environment, now here's something that's interesting though Jerri and for, others who are watching. When.
Volatility, Is high. One. Potential, advantage, is that. When. A when, a spray turn a, sprayer, hey that's a new phrase that I've just coined that's a spread trader aspirator. When. A spread, trader. Let's. Say that you that that, a trader has typically, done. Credit spreads, in. A hyppolit, ility environment let me ask the veterans here I think, this is something that a lot of you have noticed. What. Happens, to. The distance, that a trader can go out, of the money in, a higher volatility, environment, and say. And still get similar. Probabilities. And similar. Credits. In. High volatility. Environment. What. Happens to your ability to go further. Out of the money. In. Pursuit, of similar. Credits. Yes. In a higher implied, volatility, environment typically you can get full position. Spread. Further out of the money and, still. Have still. Have a credit similar to what you would have gotten if you had to go closer, to. Add the money when. Volatility. Wasn't as high. Yep, that's it so. I think Jerry, rather than credit. Spread versus debit spread it's, more of the, distance, that one can go out of the money in. A very very. Low volatility, environment, when, the markets, are calm, generally. Options, pricing, reflects that and. So if the markets are calm and not going anywhere but, we want to go way out of the money and try to sell a credit spread what, are we gonna find they're probably not very much credit in, those conditions we have to push that credit spread closer, to at the money in order. To get. Whatever. One defines as a reasonable. Return on. The. Other hand if the markets are moving around quite a bit we. Might be able to move that credit spread further away because there's there's a higher probability that, options traders recognize, that. Those options. May, have some value and therefore del sure they can they'll trade it higher. Values. There. We go yeah all. Right so. Right. Now high. Falling. Volatility. That means as, we go look for those credit spreads let's, go a little bit further out of the money that maybe we would, haven't and you might think well how do I determine that actually. It will be built into the Greeks already we, don't even have to think about it I'll, try to remember to revisit, that logic, as we go to look at these spreads, all. Right so those are the stock market, conditions, when a trader might be looking for a bear call spread those. Are the options market conditions, and I'm kind of conflating, the terms options. Market and volatility. Index you'll. Hear me sometimes, call the volatility, of X index, the options market it's not really, but. When, you recognize that as, volatility. Goes so, generally goes the pricing of options then. It makes sense to, sort of refer, to this as the mark as the options market. But. What else can play into, a traders, decision, to go with a bear, call spread. Bearish. On markets yes higher implied. Volatility, or higher volatility, allowing. Us to go further out of the money may, be reducing, the risk of the trade conceptually. Although. The unless, that volatility dies down the, risk is still there right. Well. A third. Thing that may play play into this the. Discussion is the probability. Of success. Or failure on the trade. Our. Out-of-the-money. Credit. Spreads are. Those higher. Probability. Trades or lower probability trades. Those. By, definition are higher probability, traits and what, we'll typically see as a teeter-totter effect, the. Probability. Success goes up reward, potential a trade goes down and in. The money bear, call spread which. Is a possible, trade is a, more aggressive trade, it, has a larger, reward potential, but, also. Carries. A. Lower. Probability of success so, here, we've just seen things. Tilt the other direction. Okay. So. Let's. Go to an. Example. How about we bring up Apple. All. Right so here's Apple, incorporated, most. Of you are familiar with the company I'm not gonna go too far to that. But. You can see over the course of the last this, is about the last five months, Apple. Has generally, been going, sideways, it, made some progress here. But more recently than, moving sideways, where. We have it looks like an area, of resistance up. Around that to 12 maybe to 13, range area, of support down around 192. And a half and the. Price gapped up today look, at where that's positioned us relative. To resistance, have we gotten higher than that in the last five months yeah on a couple of occasions for a few hours. But. Beyond that. Could. We maybe make a case for a technical, trader, to. Say you know what it'd be it would be interesting to structure, a trade where.
As Long as, Apple, is below. 2 12 and a half to 13. At. Some, point, in the not-too-distant, future. Then. We're in position to make money from that, scenario. Yeah. Let's go bard. Me boys hitched there for just a little bit let's. Go to the trade tab now. That we've seen the technical, logic. For the trade and let's bring up the Apple, option, chain and. Now. What we need to need, to do is determine well what is the not-too-distant future. We. Can go out and do a trade for, just one day. We. Could go out and to exaggerate, things do, a trade that lasts for 659. Days, I. Like. To use exaggerated, examples, to drive home a point. What's. The probability that apples still gonna be below two thirteen, or two twelve and a half tomorrow. It's. Probably pretty strong because it's still five. Bucks below that right now and and. It would have to travel some distance to, get there even with a nice update today it's only up three bucks okay, so it'd have to be an even stronger day tomorrow the. Probability. Is in. Our favor with, that trade. And the. Deals done in one day, now. With. Credit spreads and with with credit, transactions. Generally, with options, to. Just to exaggerate, the point again. What. Would be really nice is if we could collect a huge credit that, expires in five. Minutes, on a trade. That has almost, no probability, of going against us those. Would be that would be a great. Series. Of, factors. To play in our favor, generally. Doesn't happen if we're trying to get a. Short-term. Trade with a high probability of success what's, the reward potential, on that trade it's. Probably going to be quite, nominal. And with. These trades, transaction. Fees are certainly in consideration, and, trades. With a very low reward potential. Can, be significantly, impacted by those transaction, fees so generally. Speaking these very short-term, trades, may. Not be worth it, on. The flip side of that coin if we go all the way out to 659 days what, are the odds that apples gonna be below 212. 659, days from now. That's. A tough call who. Knows where, Apple's going to be literally, two years from now right. Plus. Oh Jerry's got to leave take a phone call, that's all right Jerry you, can catch up on the archived class, you can always you, know if you want to come back and revisit these concepts, go check out the archives. The. Vast majority of these are ultimately. Archived every once in a while we can run into a technical hiccups on a unanticipated. Issue. But. This one's scheduled to be archived, and one unless there, is some, unanticipated, event. Like that should. Be able to catch up on it okay, yeah. But that you're, right, should have. Who. Knows what the probability, is for, the stock, to be below 200, $12.50, and by the way two.
Years Is a long time to wait for a payoff so what we're looking for here is. Somewhere. In between, how. About we look at these options. That expire in 22, days. So. I'm going to scroll down here and let's start to set up an example. Trade. Okay so, let me let me lay this out an example. Bear. Call spread. Now. Bear call spread starts, with selling, an option, now. What. Some traders, will do when they're setting up their spreads is they, will use Delta. As a guide because this gives us a rough. Approximation. It's. A it's a it's a. Mathematical, guess the likelihood, that that, the option that we choose to sell will. Expire out of the money as we hope it will so. If. You look at the. Let's. Say the 215. Contract. Hey, that's up above our resistance, level, it. Has a 33. Delta, that tells us there's about a 33 percent mathematical. Chance that, that option will expire in the money we, want it to expire out of the money in other words about a sixty-seven percent chance, that. This. Trade will, go as anticipated. Okay. So how about we use that as our example obviously, we, could go for, an. Even higher probability, trade which is going with the lower deltas, or, a. Lower probability trade, which is going with the higher deltas if, we, go for higher. Probability, higher probability, sounds great right look at this this one only has about a 26. Percent chance, of expiring in-the-money this, one only has a chance of about 19 percent chance, so. The probabilities, are working more and more and more in our favor the. Higher and highest the strikes that we select, but. What's happening with the premium that's offered. Yep. You, get a smaller and smaller credit, as we. Go for higher and higher probabilities, that's a natural trade-off. With options. So. Let's stay with that 33. Delta. Short. Call, so. This is going to start our credit spread so we're gonna sell and. I'll just call it the bear call spread I'll explain, the terminology, quickly, as I can but. We're gonna sell what was that that was the 215. So. It's the 20th of September. 215. Call and that. Looks like that's trading between 277. And 280 how, about we say that we're able to sell that for $2 78 cents that's. One half of our bear call spread to. Complete, the spread, we. Also, purchase, a less, expensive, option. So. If, we're, spending to soar pardon me if we're receiving, to 78, let's, look at a less expensive one we, could go for the two seventeen and a half of the two twenty I think I'm gonna go for the two twenty so. At the same time we sell that to fifteen. We. Buy. The. Two twenty call. It. Didn't have to be the two twenty any more than it had to be the two fifteen, right. But. Let's say with. This one I was, ungenerous, with myself up here with the credit received so, I'm gonna be a little bit more generous, and say let's say we're able to buy this one for one so great it just changed on me 132. I. Was gonna say 131, and then, it changed. Anyway. So if, you're not familiar with spreads. Here's, what we've done we've gotten ourselves into two, contracts. The, first one we. Sold a call which. Means that someone else now has the right to buy shares from us for 215 that's a problem unless. We own shares, that's, an uncovered. Or naked position, well. To cover that position we also bought, the. 220. Call, which. Got ourselves that gets us into a contract, where, we know that worst case scenario, we. Now have the right to buy shares. Of, Apple. For. $220. Per share so, if. We have to sell them at 2:15, well, worst, case scenario we know that we can buy them for 220 so there's only $5 of exposure, to, the account there and. For. Doing that we. Generated, a credit, so. What is the maximum gain of the trade I'm, gonna call it the maximum profit. To. Generate the to calculate, the maximum profit you, take the. Credit received, and subtract. The. Debit paid. What. Does that work out to be 278 -. $1 32, is a dollar 46, right. I'm. Gonna do this in my head but. If you catch me making an error with any of my math it certainly can't happen especially when you're teaching in a live setting. Call. Me out on it because I don't want to let any bad. Information persist, what's, the maximum loss of this trade. Well. We know that we have five dollars of exposure but we also got a dollar forty six credits so what's our real exposure it's. Five dollars -. A dollar forty six which, is gonna make about three dollars and fifty four cents. And. Then. Finally. To. Really break down this, trade where's the break-even on this trade. We. Know that. We're required, to sell, the shares for 215, we don't really want to the. Stocks right now worth 208. If, the, stock keeps going down are we gonna be required to sell shares at 215, no cuz the other trader doesn't have any motivation to do that if. The stock gets up above.
215. Now. It's starting to chip away at our. Ability to make money on this trade and the. Most money that we can make is a dollar 46, so. If we get a dollar 46. Above, - 15. Well. Then we're selling the stock at a discount right, let's. Say the stock is up at. 2. 16, 46, and. We. Get assigned, we, have to sell the shares to someone else for 215 we. Have to go out and buy them on the open market at 216, 46. That. Would be a dollar, 46, loss on the stock versus. The dollar 46. Premium. Collected, on the option that, would be a wash so. We to. Calculate this we just take. Our 215, add, the, dollar 46, to it and, that gives us 2 16, 46, I. Want. To reiterate. If you're not familiar with, these concepts. If you feel like you need more repetition, at a slower pace. Then. You may want to go check out barb Armstrong's, class that's getting. Started with options, Fridays, at 11:00 o'clock Eastern, Standard Time but, these are the facts of this trade as it was. Currently, constructed, as of a few minutes ago obviously markets. Are changing but still gonna be pretty close to we might, see right now, so. A. Trader. Who is looking to set up a trade will, weigh, these facts, against. The probabilities, of things happening so. Let's. Talk about what. Could happen with this trade what. Happens. At. Expiration. If. Dot, dot dot. What. If the stock price. Is. Above. The. Spread. This. Is a bear, call, spread. Let's. Let's, drive home that point why is it a bear call spread well. Because we just collected a credit and generally. Speaking when, an options trader sells. Something, what. Do they want to have happen at expiration. They. Probably want that option to expire, worthless it releases, them from all their obligations and then it is gonna keep the money in this case it's the dollar 46. Now. That would only happen if these options expire worthless. But. What if the stock is above our spread meaning, if our spread is 215, and 220 that. Means that we're above 220. Let's. Say we're up at 2:30 okay. The. Stocks up at 2:30 and someone. Has the right to buy the shares from us 4 to 15 are they gonna do it yeah, in. The money options, at expiration, they're all exercised, with only very rare exceptions. Yep. So. If. It's up at 2:30 we. Have to sell our shares for 215, ouch, but. We. Don't have to go out and buy them for 230 we we do have the contractual, right to buy for 220, so. We do that our, contract. That we own is also exercised. By. 4 to 20 sell for 215, that's a $5, loss, against. The dollar 46. That. That. We collected, and if, the stock is above the spread we. Realize. Max. Loss. Okay. That's. What we do not want so, do we want the stock to go up no, this is a bearish strategy, what. If the stock price is. Below. The, spread. I'll. Go back to the the. Contracts. Again let's, say the stock is you, know right now it's a 208 let's just say it stays at 208 or goes lower maybe it's at 200, if. The stock is only worth 200, does, the party, that has the right, to, buy it from us for 215, are. They going to do that no with very very rare exceptions, not, going to do that right. So in, that case that contract, dist expires worthless we. Have the right to buy shares for 220, are, we gonna do that when they're only worth 200 no that expires worthless so. At expiration, if the. Stock is below, the spread the. Contracts, expire worthless, we're, released from our obligations, and we have, a realized. Maximum, the maximum profit. Okay. And finally where. Else can the stock be. Below. The spread is below to 15, above. The spread is above to 20. Is. There a possibility, that the stock can wind up in between those two to. 20 to 15, what if it's at like - 17, - 18. Well. In that case let's. Say that it's a - 18 okay. Someone. Has the right to buy shares from us that are worth 215. Not. Pardon me they're. Worth 218, they only have to pay us to 15, for it are, they going to do it yes. That. Contract, is in the money at expiration. In the money options are assigned and. We. Would be required to sell the shares for 215, and you might think that's okay because, we have the, 220, that, is covering, or you, know protecting, the trade right not. Really that. 220, is out of the money now. Unless we've less left explicit instructions this, might not even be the best idea to exercise. That 220. Contract. That thing just expires, worthless so. Shares are purchased, from us for 215. Our. Other option doesn't actually cover that position in that scenario and, we wind up with a short. Position, on the stock. Okay. Let's.
Spell That out. I'm. Gonna say it's between our strikes or, in other words it's within. The. Spread oh. Goodness. There we go in. This. Case. Short. Contract, is a. Signed. Long. Contract. Expires. Worthless. So. What does that result in. That's. A. Potential. Gain, or. Loss. Plus. A short. Stock. Position. That's. The net result now. Why do I say potential, gain or loss because, if we, were at 218 and. And. That 215. Contract, is exercised. It's assigned to us well. That means that we'd, have to if we could let's say we can quickly buy the stock for 218, on Monday, sell. It it's, already been sold the, previous week for 215, that's a $3 loss on the stock against. A dollar 46, credit, that's a loss net. But. Let's suppose then. What. If the stock is yeah it's between the, two strikes, but let's say it's only at 216. Let. To 16, we, have to sell it for 215, that's a $1 loss on the stock versus. $1 46, on the, on, the, option. All. Right pardon me on the original credit that, could, be again it, really all boils down. To, how. Much can we get out of the stock position for. The. Next trading day. That's. It so, is this a scenario, that you're comfortable with. As. We're. Approaching expiration. If that stock is starting to creep up into that spread, are. We comfortable with that knowing. That we might get assigned, left. With a short stock, position, over the weekend, and. Yet. To be defined risk scenario, some, traders aren't so if they start to see that credit. Spread under threat especially as we get closer and closer to expiration maybe. They'd consider getting out at that point, now, if the stock is just going nicely downward. That's. Not much of a concern right. It. Can become a concern that's always a possibility when you're in a short contract, there's, always a risk of assignment, especially. If the stock rallies, up and particularly. If it goes in the money and deep the deeper and the money it goes then, the closer to expiration that gets the, higher the risk becomes. But. What. We're now prepared, to do is sort of bottom-line it now, that we understand, the strategy, now that we understand, we've had this discussion we, can start to put some labels on things. What. Are these stock market, conditions, when a trader might consider. A bear, call spread bearish. Right do. We have to be extremely bearish no even. In this case this. Apple really need to go down at all, no. Long. As it's below. The spread, at expiration, the. Maximum game is still realized, on this trade in other words even, with, Apple at 2:08 if our spread is up here, if. The, stock goes up long, as it doesn't go above 215, at expiration, that maximum. Gain is still realized at expiration. It's. Still possible to realize maximum, gain before expiration. If the stock goes dramatically, downward if it pushes those strikes. Far enough out of the money a little. Hiccup there sorry about that that, they go to zero, that. That. Max. Gain might be realized before expiration. Yeah. Chuck is saying okay so in the case of the spread under threat maybe we close it out and we don't realize. That risk of the short position over the weekend now, does, that mean that we're closing out profitably, no under those conditions maybe, we're trading we're closing, it out at a at a net loss and that that would realize that loss however it, is then removing from the equation, the exposure, over the weekend so, we just weighed the pros and the cons at that point but.
I Think for today what we'll do go ahead and let's place this trade. We. Have an apple spread I just want to show you how this might be done there are a couple of different ways that. A spread, can be entered, on thinkorswim. I'm, going to show you a technique that can be used to do really any multi, leg strategy, what. We know here is that we wanted to sell the, 215. For our example, and by. The 220. So. I'm just going to come to the 215, and click. On the bid price that, creates a sell order see, that there's 10 contracts, of the, 215, calls and then, I'm going to come back up to the 220, and here's. The technique we, hold down the ctrl key on our keyboard, so. Can, you see it look up at the top here you'll see some hot buttons pop. Up that that's just showing you that my ctrl key is being held down might. Not do that on your computer but. As. I hold down that ctrl key I'm gonna come to the ask price, for. The option that I was going to buy that's the 220, and click. On the ask and, that's. Created. 10. Contracts. And this is a vertical spread. Okay. 215, 220 we. Have a looks, like the credit has moved from a from a dollar 46, to about a dollar 38, right now that's at the mid-price. So. But basically we're still winding up with about. $3.62. Of risk per. Share on each contract, that's about three hundred sixty two dollars. So. Then. A trader could just look at well, how much. Does. That trader, want. To risk on the trade let's, say that we want to do about a thousand bucks that, would be three. Tracts, be. Right around $1,000, of risk so, I'm gonna dial this down. To. Just three contracts, there, we go. We're. Gonna enter this as a limit, order you know what I'm gonna back off on the credit requirement, here let's put that down to 138. But. What I'm trying to do here is just increase, the likelihood of a relatively quick fill on. The, order but. Anytime you put in a limit order you're running the risk that the order might not fill right I'm. Gonna click confirm and send, selling. Three of these verticals. Max. Profit $414. Combined, max, loss about a thousand, bucks higher, probability, of success on these because, we're looking at about 30. To Delta right now. And. Transaction. Fees are a, consideration, so I'm gonna send that order off.
And. We sold it right at a buck 38 there. We go so. If. The stock is is, below. 215, at expiration, that's, the optimal outcome for this trade we'll just see how this goes but. Here's what we've done. We've. Looked at the market conditions, for bear call spreads we've. Weighed the pros and, cons a bear, call spreads how much can we make well how much can we lose where we break even and. We've done an example bear call spread trade. So I would also I wanted to give you a full, understanding. Of, this strategy right from from, theory. To application. So, that you now walk away with an understanding of what, conditions, might be optimal, for the, selection of a bear call spread. All. Right everybody. Lion. Says, yeah you thought the whole point of vertical spreads was to avoid getting assigned you're. Saying you can still get a sign of the price land between the two strikes that sounds terrible, well, whether. It turns out to be terrible or not actually. Isn't. Even decided at the moment of assignment. So. Yes. The the objective. The best case scenario here is for the contracts, to just stay out of money so it, just relieves that psychological. Pressure from, right but. If it does get up into that strike, if. It gets up into that spread then, a trader Nixon needs to make a decision are, we comfortable with. This risk of assignment and, the. Closer you get to expiration while, it's still within that spread or above the spread in this case makes. The probability, of assignment even higher. Yeah. That's that's still a consideration, so, is it a covered, position it is, but. There is a little. Exposure that. You might consider it sort of a naked position, it's not ever truly naked, because until. The moment of expiration, or even, until the moment of assignment, we. Still have the, right to buy shares for 220 so until, that ripe, expires, it, is a covered position. But. If you let it get to expiration, while, this. Short is in the money the long is out of the money at expiration. Its. Uncovered. Okay. Yeah. So yeah. You. Know that might have been an uncomfortable. Revelation, for some in attendance. But. At least it's a revelation right at least it's it's. Revealing. Of a truth that's really there. Very. Good. Okay. Sunita, is saying cam-cam, can can one roll the short strike well we could I'm not gonna get into rolling today but rolling just means. For. One reason another we. Choose to get out of one. Option. And move on to another option. Different. Strike different, month different, month and strike or, expiration and strike, that's. Rolling just. Doing it on one order ticket. It's. A possibility but I won't be getting it too much into the pros and cons right now so. Time. Has come for me to set you loose, hope. You've enjoyed this discussion we accomplished, everything that I set out to do look, if you're not following me yet on Twitter see, may at CMA, underscore, TDA I like.
That Personal, connection the interaction, that we can have there so. If. You might want to make a note to follow, me. Next. Time, let's. Look at at. Law. Call, spreads. Bullish. Spreads right. So we're just examining, one strategy after, another, what, might be the market conditions for those strategies, so. I'm looking forward to that discussion we're going to take a little bit of a break in our education, broadcast, day and then, we're going to come back and it's going to be a Connie Hill doing. Her introduction, to trading stocks. Getting. Started with trading stocks or, stock investing. That's coming up in, let's. See 11:00 o'clock Eastern, Standard Time she, always does a fantastic job so, we'll look forward to that I've. Already recommended barb. Armstrong's, class if you're new to options, trading you might want to check that out but. Time, for me to set you loose everybody, thanks for joining me today quick, reminder of the risks associated with your investing, risks are real we. Did use real examples, in today's discussion it's not a recommendation or endorsement of those securities, or those strategies, all. Right so I'll look forward to talking with you again next. Thursday same, time. Or. You can join me in any my regularly scheduled sessions between now and then but whenever I see you again until that moment arrives I want to wish you the very best of luck happy. Investing. You.