Multi-Leg Option Strategies | Mike Follett | 11-4-20 | Trading Post Election Volatility

Multi-Leg Option Strategies | Mike Follett | 11-4-20 | Trading Post Election Volatility

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All right take. Looks like there's a fairly, high probability. Of a split, government, here, which uh. Last time i checked it kind of looked like the markets, uh, light. Nevertheless, there still could be plenty, of volatility. Exposure. And, we'll talk about those things in our session today in particular, plan on learning how, if somebody wants more volatility. Exposure they can do that and if somebody wants to mitigate, volatility. Exposure, and potentially, focus more on price. Exposure. How that can be done as well so, we got a lot to learn today, in our multi-leg, options, class thanks for, coming. By. All right well good morning everybody, my name is mike falette hey how much sleep did you get last night. Maybe a little bit more than last election. Uh wow if you recall, the last election, that one was a wild one, overnight. And uh this one definitely seemed a lot more calm but certainly. A lot of uncertainty, in terms of uh the winner, out there. Um, nevertheless, what i want to do this morning is really focus on uh, some of the volatility. Aspects, and again. Get into uh the logic, of uh, focusing more on price. Versus trades that focus more on volatility, and make sure you understand the difference there. Hey uh if you're interested, in following me on twitter. My twitter handle is at mfolet. Underscore. Tda. And also i need to acknowledge, we got mike fairborne, out there he's helping me out with the chats. Uh and he's already chimed in saying good morning to everybody. And uh he will uh answer, questions, along the way. And uh just generally assist us with our session he's also on twitter. You should uh you should give him a, a follow on twitter as well especially. For those of you who are looking at balancing, out your portfolio. Or, or if there's a. You know an allocation. Kind of in your mindset, toward. A longer term investing, and more on the fundamental. Features, of investing. Uh certainly michael fairborne, he's he's one of the best we have especially, on those. Particular, concepts, all right let's go ahead and hit some disclosures, and then we'll get into, our full agenda here. Uh so this class is for educational, purposes, the following. Is not, a recommendation. Or an endorsement, of any strategy. Also don't forget about transaction, costs especially when you got multi-leg. Options. There's a lot of options in there if you're using multiple legs and so remember the impact of those transaction, costs. In order to demonstrate, the functionality, of the platform, we need to use actual symbols. But hey we're not making recommendations. About strategy. And remember, suitability, so remember, any investment decision you're making your self-directed, account is solely your responsibility. Also what happened in the past is not guaranteed to happen in the future. Paper money is for educational, purposes, only all investing, involves risk including the risk of loss. Uh no soliciting no recording and no taking pictures and while this webcast, does discuss.

Things Like. Volatility. Or technical, analysis, there are other ways to approach the market, options are not suitable for all investors, double check your risk and understand, those uh, risk disclosures. With options. Spread straddles and other multi-leg, strategies, not in not only can they, uh entail, more transaction. Costs but also the, the complexity. Can go up but that's part of the reason why we're here is to help you deal with the complexity. Uh. Probability, analysis, such as the probability of an option being in the money, that's uh theoretical, in nature and it's not guaranteed, of an outcome. Uh also because options are short-lived, investments. Uh you know especially the, weeklies, options. Uh they do require. Uh generally, closer monitoring, delta gamma theta and vega those are measurements, for price time and implied volatility. And, when you're looking at futures. Trading there is speculative, and it's not suitable for all investors. And, uh. And, basically, those are the disclosures, so here's the full agenda here, i wanted to give the market, just a few minutes to kind of calm down. Uh, as we're opening up here i'm sure prices are kind of all over the board. Uh and so i wanted to give things just a couple of minutes to, to, calm down and so what we're going to do today is we're going to start by following, up on. A couple of last week's, examples. Okay kind of examine the outcomes, there what worked. And what didn't frankly, as well, and then we're going to get into, what's happening, with uh with levels of volatility. You know especially, when we're talking about levels of volatility, we're talking about. Implied. Volatility. And in particular. Many traders, are watching. Kind of what's happening in volatility. In the near term, implied volatility, near term, versus multiple months out. And so i want to explore. Some of those, differences. And see if anything's, changing, there, i misspoke, in my, session, last week and somebody on twitter, actually. Mentioned this and i appreciate, that somebody added me on twitter. Saying that hey mike you misspoke, you called uh. Contango. In the futures, market, but isn't it really backwardation. And it is and that's what i thought i said but i didn't, uh but anyhow i want to talk about that, and that could possibly, drive an investor, to think about what type of strategies, to apply by the way. And then we'll talk about ways that a trader could, magnify. Versus nullify. Exposure, to that volatility. Right and certainly. Um. You know i'm noticing, a bunch of uh. Comments there in the chat box already about, you know who actually won this thing, again you're right. Uh you know there's no, actual. Winner that's been called. Uh in the election, and certainly. Uh, it kind of seems like maybe there's gonna be, you know some uncertainty, going forward for a while but uh a lot of these different, um, sites, that kind of um. Uh how should i say they they make markets. Essentially. In presidential. And election, winners. A lot of them are really trending, the way, of a democrat, president, election. And. Trending towards. The republicans. Maintaining, control, of the senate with actually. The republican, senate i think having a little bit better odds. Than um, than the presidential, election, but uh just for example. Um, you know if someone were to put, uh, you know, the ultimate winner, the value of the winner is worth a dollar. And if somebody were, you know investing, money. Uh to have something that could become worth a dollar, it's 86, cents right now. Uh on joe biden or, to uh bet on joe biden and it's 20 cents to bet on donald trump so. Uh anyhow, and those things have kind of shifted, uh further toward the direction, of uh of biden, so anyhow that's where, i think a lot of the market right now if you're paying attention to a lot of the headlines.

There's A lot of conversation. Or a lot of comments about split government but that could change, uh, certainly, all right let me go ahead and, hit the thinker swim platform. And just real quick in case you're brand new to think or swim. Why don't we just uh quickly, take a look at um, these. Uh, broad markets but i'm going to use the futures. Here, just to kind of get a sense for, uh what's going on in the futures, broad markets. And um, so. Right here is where i want to go, and i do have um. A grid, set up which some people, like and some people don't. But, these grids can be kind of useful, in case you uh. Uh have never set these up before if you like to see multiple, charts on your screen at the same, time. I, i've got a grid set up here where i can actually see, the es, that's going to be the s p 500. The nasdaq. And the russell, 2000. Forward slash rty. Here. And these are just basically, the futures. Indexes, here, uh, and um, you could set up these grids if you wanted to if you go to this upper. Right hand corner. You can choose, basically, the number of boxes, that you want to have and this represents. Charts. That you can have on your screen and kind of the format, that you wanted. And i've just got three of these boxes, selected, right here, and in these boxes, i've just, got these futures. Uh indices, basically indicated, there. And by the way if you've got these grids set up and you wanted to save those. So that you don't have to you know rebuild, them every time and replug, in your ticker symbols. Just a quick reminder. If you go back to that box. Uh, and click the drop down here, you can actually, choose save grid, as at the very bottom you might not be able to see that on your view. But, save grid as it's the very bottom item in that menu. And then you can actually, save that as, as whatever you'd like but anyhow these indexes, we got the s p up about, one, just over one percent. The nasdaq, though, is the one that's uh really been charging, up the most, the nasdaq's, up about two and a half percent. Then we got the russell 2000. Which is, kind of volatile, here. Um, lots of movement, up, then down, and now, back up or. Up and now back down again rather i should say, and so the russell is down about, one, and uh 1.3. Percent, here, so uh anyhow we've got strength, and it kind of seems like especially. Uh the strength is in technology. It's in the nasdaq. And uh who knows maybe that's because. You know, and you know we don't know, the, outcome of the election, but quite possibly. You know maybe a thought here. Is that uh. You know maybe especially, with uh communications. Companies, like the facebooks. The twitters, the alphabets, you know things like that. Uh maybe with uh, split government. And um, you know maybe a democrat. In the. White house, uh maybe the thought there is a little bit less, regulation. On. Some of these technology, companies that have come under uh, scrutiny, as of late but uh who knows for sure, either way technology's. Catching a bid compared to all of them, and quite possibly. You know i know many investors, been watching. Uh quite possibly, these uh. Resistance, here. Levels here at about 11 and a half but right now, it looks like. The nasdaq's, actually flirting, with that level. But uh you know broke through it temporarily, but now it's back down below, so certainly, um you know with market, price is muting here a little bit.

That's Probably reflective, of still uncertainty. Floating around there in the market. All right but now let's um. Shift our attention. Again looking for things to calm down just a little bit on the volatility. End, and just quickly i'm going to take a look at the account, statement. And, we'll take a look at the outcome, of our examples, from last week now if you recall. Last week we talked about using spreads, for protection. Uh in a portfolio. And we did that with uh the, spx. And just so you know. Since last week. The spx, has actually, rallied, a bit. So, those protective, spreads, that we talked about last week, for a couple of days they were beneficial. But right now they're not benefiting. And it's a reminder. Really. If somebody's, putting on bearish spreads, maybe if they're thinking about that in terms of protecting, an entire, portfolio. Uh it does, kind of make sense to think about, using protective, strategies. Maybe in small chunks. And i'm particularly, i'm referring to these two right here, and again i'm on the account statement page in case you're wondering what i'm looking at right now. But this is just showing basically, the trades, within this count that have been executed, over the last eight days. And there was a, uh. A long, put vertical, spread that was purchased here. And that was a twenty dollar wide long put vertical, for eight dollars, and thirty, cents. Um but it was relatively. Small, compared to everything in this portfolio. Now just for your g whisk collection in case you didn't know this. If you're looking at opening. Orders, on the account statement page. And then you're kind of interesting, in what's happening to the price of those trades, now. Um, you know so for example this put spread was bought for eight dollars and 30 cents, and if somebody wanted to see the damage, that's been done, that was a bearish trade so likely it's getting harmed here. But if you wanted to see the current price of that spread. If you just right click. On the, on the executed, order on that filled order right there. What you can do is just create, an opposite, order directly, from that screen. And that'll just cue up the order to close this out. And you can see here that right now that's going for four dollars and seventy cents, so that particular. Spread, has lost nearly, half of its value. Went from what 890. Down to 470. And that's because the market, has rallied. And, some folks, you know they. They're still uncertain. Maybe about different types of verticals. Debit verticals, versus credit verticals. This is a debit, vertical. So we actually want the value of that thing to increase. And so when i'm looking at a closing, order here. This having a credit of 470. That's the exit. Right that's not good, if we paid 49. Or 8.90. To buy this spread. So it's losing money. And now some traders might ask the question well what do you do with this thing now, right it was a protective, spread. The market's, gone up and this thing's lost a significant. Portion, of its value. Some traders, might decide to close a portion of this position. To hopefully avoid, taking, a maximum, loss, on it. Other traders. Might decide. To look at it from this perspective, and this is the perspective, that i'm going to take with it just for the next week anyway in this account. Um, well this this is going to be coming right up on top of expiration, next week, but um, you know, knowing that this is currently worth and it's actually worth less now, worth 440. Right there's only 440, more that it could lose. Now it could become, worth. 20. Though if the market, did sell off right still would you agree that there's probably, uncertainty.

Out There. Um you know the max value that this vertical, could have that is if the market did sell off and got down below, 3305. Which is quite a ways away from where we are right now. But if that did happen. This could go back to a value, of 20 bucks, and right now it's uh, worth four bucks right it's losing more and more. Um but with that being worth four dollars, really, the way some investors might look at this is that, there's only four dollars worth of risk remaining. And so now there's basically, sixteen, dollars worth of reward. Not a high probability. Of that playing, out, but, if it did happen that would be nice and useful, in terms of still protecting, the portfolio. So i don't know if hopefully that makes sense but when you're looking at exits on some of these. Many traders are going to consider the remaining, reward, versus risk. And the risk here, is basically, the current value. Of it. The reward, is going to be the difference, between the strikes minus that current value. And right now there's a whole lot of reward. That's, in that versus the remaining, risk so i'm going to let that work for another week but again some investors. If they're pretty confident, the market, is not going to go back down. And re-test, basically. You know essentially. We're talking about the market getting back down to this. Point right in here. Uh, if, if traders are thinking that's not going to happen some of them would pull that off and avoid taking the max loss on that or risking any more. Uh money there, but anyhow, that's one that i wanted to follow up with and in particular. I wanted to talk about, an analysis, there of the reward, risk and kind of the mindset. So again some traders might remove that other traders. Just based on the fact that it's already much closer to max loss than it is max gained would just leave it on there, just in case the market did sell off on some surprise, negative, news, going on okay, now, um. Going back to that monitor, page real quick. From last week um, that was a bear put vertical. There was al, also a bear, call vertical, spread, that got sold so kind of two elements. Of bearishness. One, the the debit spread, gave higher reward, at lower odds. The credit spread. Gives lower, reward. At higher, odds, right out of the money credit spread here, both of them expiring. In the same expiration. Let's go ahead and just do a, create opposite, order here, and see what that credit spreads worth. So the credit spread, is down. Basically. You know sold for 690, or whatever it was. Right now it could be purchased, or bought back for about seven dollars and eighty cents. So this is down, as well. Uh but it's down only about a dollar. Ish, right in that ballpark.

And So this is an example, actually of one. That if you thought about the reward, risk. You know this going to zero. Is basically, going to be equivalent to maximum, gain. Right the. The existing. Re remaining, reward is about eight bucks on it right and i know that we sold it for less than that, but from this point it could, it could benefit us to the tune of about eight dollars. But if the market, continues, to climb. And if these. Calls wind up going in the money so we go all the way up to 34.90. Or higher, and expiration. Comes around. This could go to a value, of 20 bucks. Right so if you think about it the reward. On this being eight dollars. The risk is actually, 12.. So if there's something that a trader, might actually, feel more. Uncomfortable. With in terms of reward, risk. It's likely, this one. Right and i'm just speaking. Purely, reward, risk. Although there is a better chance. That the market, does stay below. About, 3470. And that's where the short strike is, so this is where you kind of have to balance. Probability. Worth re versus, reward, versus, reward, risk. This has. Probabilities. Behind it which is nice. But in reality. That one's got a worse reward, risk. So some traders, might actually, close, that one if they are thinking the market, could maintain. Sort of a rally here. For, now though i'm just gonna leave both of those, and we'll see what happens, uh next week the thing is. Um, you know both of these frankly. Uh they were put on with the risk consideration. In mind relative to the rest of the portfolio. So even if both of these lose, the rest of the portfolio, was bullish. So that's still going to be a, a good thing for this portfolio. Okay, now there's one more trade that i want to look at and then hopefully things have calmed down enough. And we can, really dig into some volatility, discussion, here. But one thing i wanted to talk about here was this. Is really a play on volatility, over earnings. But is this calendar, spread. On, uh fastly. Earnings. If you remember that one from last week. With the strike, price, at seventy, dollars. And effectively, that's just playing. Uh, sort of uh, you know the volatility, that can happen around earnings. This calendar was purchased for two dollars and ten cents. And uh with any kind of a calendar, just some thoughts here, we want the market to be at the strike, price as we get close to expiration. On the short strike. Now we sold the october, 30. That expired. Basically, last week at the 70, strike, price. So the net outcome after earnings is we wanted the market to stay close to 70. And for volatility. To come down especially, in the near term. Anyhow, the way that worked out is uh the next day, effectively. After the earnings came out. The market, was fairly, muted. Um. And so what i did in this portfolio, is i just closed, out. Five of the six of those for three dollars and five cents. And some traders might say. Uh well why didn't you close out all of them mike, uh well the reason is is because. You know there's a chance that calendar, could have profited, more.

If The market stayed closer to 70. The stock actually was dropping. It had kind of a trend where it was going down there. Fsly. And so what i did was i closed, out five of those. And, you know, it left one of them basically, on there looking for the possibility, of a rally back up to 70. But yet. If you go back to uh last friday. The way things trended, as we got later in the week the market continued, to drop. So i wound up closing, out the last, one for actually a lower value. But all said and done on that fastly, example, and hopefully this helps. To kind of recap, some of the examples, we went through the week before. But the fastly example, was done for 305. And um. There was a portion of those that were closed, for. Uh where to go. Right there for, um. Oh no that was the exit i'm sorry, yeah a portion of those were closed for 305. And the trade was done for 210. And this is paper money right but, you know that's a 50. Return. And effectively, that was done, uh just overnight. And then uh. That last, one on fastly, was done, at uh whatever it was two dollars and 30 cents so just uh, you know, covering, transaction, costs there basically. Actually better than transaction, costs but anyhow okay so that's what happened with those trades from last week now. Hopefully things have calmed down enough to where we can get a read on volatility. Okay so, um, just a another, quick look to center ourselves, here. What's going on with these indexes. Uh that's still, pretty close to where they were if not a little bit stronger, so just kind of thinking, about this. One might expect, that volatility. You know talking about the vix. Is probably coming down, and so take a look at that the vix. Big move lower here. Boom so a lot of uncertainty. Coming, out of these, markets. Uh and what i'm looking at is vix, which is volatility. On the s p. V xn. Which is volatility. On the nasdaq. Rvx. Which is volatility. On the russell 2000. And all of these. Are just absolutely, collapsing. Now what that means is that if somebody. You know in theory. Has options, sold, as on these indexes, especially, in that near term time frame. You know around about, 30 days or less. Those positions. Are becoming. Fairly, profitable, fairly quickly. So the market is definitely, calming, down. And at least for the time frame of these volatility, indices. Which target about a 30-day, time frame. And they emphasize, kind of the near term right the closer, in options.

Um Certainly those options are dropping, pretty quickly. Now just as a heads up right let me zoom in on one of these, a thought process, here. Is that if a trader. We're kind of looking at this and thinking you know what this is temporary. There is still, a lot of madness. Left to happen. You know in the near term. Somebody might view that as an opportunity, to buy premium. Potentially. You know in they could either buy, a they could buy vix options, potentially, buy calls on vix. Uh or potentially. They could just buy options. On the index, itself, right depending, upon, what bias, they might have. Uh on the underlying. For example, if they thought the markets, could sell off from here, that these gains are going to be given up and that volatility. Could, increase. You know a trader could buy puts and that would give them a lot of positive, volatility. Exposure. So just trying to kill two birds with one stone here i talked about, there i wanted to, talk about strategies, that have, a lot of volatility. Exposure. Uh and if volatility. Is down here and if a trader's expecting, that volatility, to potentially, pick up. And, that might correspond. With. Prices. In the market, dropping. Well one of the, strongest. Ways. To buy that volatility. Is to either a. Buy vix. Calls, right that's one way to do it although, vic's calls do have some complexity. There. That make um. Make the waters a little bit choppy for some investors. Or if we go to the analyze, tab and we just type the ticker symbol spx, in there. And maybe just quickly add a simulated, trade. If we look at for example. A long put. Right now don't get sticker shock here because this is going to be an expensive, look and put. Because it's on a cash index that's trading, for over 3, 000. Right 34. 17. Is that cash value there. But if somebody bought, for example, one of these long puts so i'm just going to add a simulated, trade. Just, left clicking on the ask. A trader could kind of get a sense. For how much volatility. Exposure, they're actually, getting. And the way you could view that, is by looking, at these slices. Down here and also you could look at risk profiles, if you wanted to. Let me hide my existing, positions. And i wanted to take a look at just this simulated. Trade. So just on the navigation, i'm on the analyze, tab add simulated, trades. I just simulated, buying a put here. If. We take a look at these price slices. So just opening those up. Uh these price slices. Reflect. Basically, profit and loss and the greeks. At different price, levels. For this uh simulated, trade, right so if the market, is just right here. Right just, current, levels. Right that's going to be this zero, offset, slice. And here's your greeks. Negative 47. Delta. Negative, 133. Theta. And the vega here is positive. 472. Right and that's the big one i mean if you compared. These greeks to one another. Right. The biggest, one per one, unit of measure right, one point versus, one day. Versus, one point move in implied, volatility. The vega. Is the one that's got the biggest, impact, here, right so. That's, you know if someone, wants, volatility. Exposure and i'm talking about implied volatility. Exposure. Buying, options, here. Is really the strongest, way to get it right and that's what it looks like and that's how you can tell. Is you take a look at the vega. Vega, represents. How much, exposure. That position, is going to have to one point change in implied volatility. And if you're asking the question why are you looking at spx, mike, it's because we were looking at vixx. And, when you're looking at vix, that's the reflection, of option prices, on the s p 500. Right that's s p 500. Implied, volatility. Basically, on average. And so if somebody wanted to be cohesive, with the vix, right wanted to buy that volatility. It the truest, way to do that is to either buy calls, on vix. Or. Buy, uh options, on the spx. If that makes sense, okay. Now, the one big downside, of this is that hey it's bearish, right this is going to have some directional, exposure, as well. And so, really this position, would want the market to drop but, those two things are going to be in sync with each other. Right if the market, did drop. Right there there's, you know profitability. That could come there from the delta. And there's also, a lot of profitability. That could potentially, work its way into this thing because of that volatility. Exposure. Okay but now. What if a trader, is thinking more along the lines, of. Well, mike, i'm not, necessarily. Thinking that that volatility. Is going to explode. And go back up again. But i am thinking that maybe the market, could. Have a bit more of a rally here. Uh, you know is there a way that i could basically, participate. In a bullish, way. And not, have that volatility. Exposure. Right or at least reduce. That volatility. Exposure. Significantly. Right so thinking about different ways that a trader could get volatility.

Exposure. Or avoid. Volatility, exposure. Well a simple way to do that, is i'm going to go back to that analyze, page. And if they did want to have something that's bullish. That means they'd want something that actually has positive, delta. And if they wanted to, offset. Or. Not have all that implied, volatility. Exposure. They'd want to see that vega, come down dramatically. And also. It might be beneficial, to have a lot less negative, theta as well. But this is where, you know if a trader wants to kind of leave themselves, with. Some sort of a directional, assumption. And really, take the impact, of volatility. Out of it. One of the simple ways to do that, is just through the aspect. Of a vertical, spread. You know in vertical spreads, you know this is multi-leg, options class so some people come here going. You know they want to look at like uh, you know unbalanced. You know uh iron butterflies. And that's fine we do stuff like that in this class too. But just, from a very simplistic, point of view i'm going to go back out to that same expiration. If the trader were just thinking hey they thought the market were going to continue to work its way higher. And therefore, volatility. You know especially. Right that would mean volatility. Might continue to drop or stay flat here so they wanted to get away from that. Just something like this, right go over to the call option side of the market. And take a look at options, that are maybe, one strike in the money. And then, options that are maybe a strike or two out of the money. Uh and i'm actually going to bring, up a couple of more strikes here. Let's go with uh. 15. Strikes. I just see if we can get a few more on the screen here. 15, enter there we go. And so let's say we looked at just a strike, in and a strike out, right so the 3430. Against the 3435. I'm going to right click on that just slightly, in the money call. Choose analyze. Buy, and then we'll go with a vertical spread here, and i'm just simulating. That, and again this is on the spx. Okay so now this is going to be well there's a lot less capital, in play here, right three dollars and ten cents is the total cost on this. But i don't know if. Can you see that. Um, okay so this is the long put, that we were looking at initially. You know it's exposure, to price time, and volatility. Lots of. Lots of exposure, here really to all three of those but especially, that volatility. Now, i'm going to take a look at this simulated, long vertical. And we'll get rid of the other one here. Take a look at the exposure, that this thing has now. And it's not going to look like a lot compared to that last one, certainly, if the investor, scales, up quantity, here, let's say we did a quantity, more like five. On this. Right but if the quantity was more like five let me go back down to about three bucks on that thing. Um take a look at what, happens to these greeks now in terms of the way they evolve. The delta. Is. Three, right but it's positive, so that means this trade is bullish, right not a lot of, delta there. Okay the theta. Is well it's switching, back and forth because these markets are still pretty volatile, here. Um but that theta, is going to be very, negligible. Especially, compared to just buying a single option. And if you notice the vega here. Drops off the planet, as well actually this says there's a little bit of short vega here. But not a lot. Right and if you really kind of compared, these greeks. Although they're switching, all over the place. But. Really, now the trader has a directional. Assumption. Right they're basically. The primary, thing they're trading, here. Is the directional, assumption. They're taking, out the volatility. And they're really reducing, that theta exposure, as well. So this is a way if a trader wanted to mitigate, or offset, those volatility. Effects. They could do that, and that's with something like just a straight vertical, spread. Let me just see if i can outline, quickly. The reason, why that's, happening, so much right um. So when you look at your, individual, options. In the option chain i'm going to bring up. All the greeks here. Next to each other. So we've got delta, gamma theta and vega. Kind of all on the same screen. These show, the. Exposure. Theoretically. Uh to price time and volatility, on all of these options, right. Vega. That's the one that represents, the options exposure to volatility. If the trader bought that call.

And Then sold this one. Those vegas, are the same. Right they'd be buying 475. Positive, vega. They're selling, 475. Negative vega, so the net result, on those vegas, is basically, zero. What is that, that's a long vertical spread is all that is. Now if we looked at the thetas here. Those are basically, offsetting, as well, right we'd have, negative, 126. And we get positive. 125. Right between those two options. And then the delta, basically you get the split, on the delta there as well. Uh although that's saying it's less than uh well it's that's saying that those are the same, but the point is basically, this. That offsets. This volatility. Exposure. So, part of the reason why i wanted to go into this right is to help traders, understand. That um you know with volatility. Flying all over the board. There are ways that a trader can magnify. That volatility, exposure. And there are ways that a trader could reduce that volatility. Exposure. These spreads, these vertical, spreads. Are going to reduce. That volatility, exposure. And it's going to leave a let a trader, with a net greater, influence. To directionality. Here, and so let's let's practice this kind of on some different things um. Technology. Is uh as the markets are kind of rallying, here, my guess is the technology, is continuing, to have a move higher as well, let's take a look at some different stocks here, how about um. How about uh, uh, how about bynd. A little bit of momentum, there and beyond me, uh, not, much of a rally there how about um some of these communication. Stocks that might have some exposure, here. Like, okay maybe a snapchat, something like that. Uh kind of a lower price stock but nevertheless, we'll still kind of use this for illustrated, purposes, anyway. Uh, this has had a big move higher, a little bit of a flag down, kind of looks like it's starting to move up again. But let's say a trader. We're worried about you know implied, volatility. Impact. That this could have but they're they're bullish, right they think this stock could go higher. Well, one thing they could do is they could analyze. Maybe one of these multi-leg. Long call verticals. Uh let me jump over to add simulated, trades. Here. Under add simulated, trades it kind of depends on the duration, that they wanted to use but let's go out 44.

Days. Uh somewhere. You know between a month and maybe, uh. Uh, maybe two months out here we'll just go with these 44-day. Contracts, aspiring, in december. Um. If following, kind of some of the guidelines, that i shared with you. Buy a strike in the money. Sell a strike, out of the money. Right um, you know might look something like this. I'm going to right click on that 42. Maybe one strike price in the money here on those calls. And we'll choose analyze, this is on the analyze, page we'll choose analyze. By, and then vertical. Although you couldn't see that second. Item there or that second menu it popped off the screen. But um this would be a dollar wide, vertical spread here. And. Again, going back to the greeks, and volatility. Exposure. Right what does this trader really, give. Well. It's something like this. Take a look at the delta. The delta, on this is. 523. That's a positive, so is that bullish. Yes this winds up being a bullish, trade. Right, one way to think of that it's almost like um equivalent, for the next one point move, it's almost equivalent, to buying like five shares of the stock. Okay but it's this thing is going to cost about 44. Cents, right in terms of the mid price right there. So if we let me lock that in so it doesn't move around. Now let's take a look at the other greeks. Right theta exposure. Vega, exposure. The theta exposure, says there's a little bit of positive, theta. It says the vega, is a tiny bit negative. Vega there. Right but if you're looking at it really. Those are offset. Right basically, what this trade has. Is directionality. Right so can a trader if they have this knowledge. Where they're combining, long and short options like this. Can they actually, mitigate, that implied, volatility, exposure, well yes they can. And so that's just kind of the concept, of using a vertical, spread here. Now, the if a trader, wanted. To uh. Basically. Uh. Benefit. Or if they had more of an assumption. About, what could happen with implied, volatility. Here, let's say they thought implied volatility, could continue, to calm down. Right now this is an individual, stock. So when you're dealing with an individual, stock it could be completely, exclusive, or different than what's going on with the actual market itself. But let me go with, snap. Here. And um, take a look at the volatility. Graph. Here there's actually a graph. Where you can take a look at implied, volatility. For. This stock by itself. But if the trader, thought that implied volatility, could continue to drop. On that individual, stock. Right which, it's already getting kind of to the lower end of its range. But if they thought it could continue to go down and they wanted to put that to use for them. Or rather than a vertical, spread. What they could consider, is actually one of these individual, options again single options. But rather than being an option, buyer. They could consider. Being an option seller.

But If they wanted to have something that's bullish, right so let me go out um. I'm going to look at the put side of the market here, in this case. On the put side of the market if the trader wanted to have some high probability. Action on their side. They might look at, maybe a put that's out of the money here, some traders will use the delta, as maybe a probability. Guideline. Let's say we looked at something that had a delta of right around 30.. Um, we'll just go to this 40 strike price with a delta of 34., those deltas are negative, because they're puts. But take a look at this what if the trader, sold. A 40, put i'm just going to left click on the bid. And you'll see a 40 put there. Well now, take a look at what this has. Right. Has more delta. Right naturally, it's not a spread. A naked put actually. That puts the trader under obligation, to buy 100 shares of stock at 40.. So this has potentially, a lot more risk, than that call vertical. That call vertical basically. You know is whatever's, invested, that's what could be lost there. This short put. You know could lose unlimited, amounts basically to zero. Because the trader, is under obligation, to buy stock at 40. so somebody does this right you got to remember that risk, basically, it could be equivalent, to buying stock, right. Now, it's going to bring in a lot more positive delta. Take a look at the vega though, right the vega now at least we have a full. Round number in there or a full number there, negative. Uh vega here is five. So comparatively. Speaking, right on, a one lot of these. There's going to be a lot more volatility, exposure, here. Going back to the single option again. Right but the single option just so you know. A single option could be purchased, or a single option could be sold. If the trader wants to buy the volatility. That means they're going to be an option buyer, right if they, uh wanted to sell the volatility. That means they would want to sell. Uh, these, uh, options, right depending upon which way they thought the market might go you know directionally.

As Well, so this would be bullish. Selling that volatility. Now a trader could also do two things at once. Right some traders will actually combine, right especially if they were comfortable, buying shares of stock here. They might decide, to. Sell a put. As one part. And then to maybe, actually, increase. The profitability. On this if the stock winds up going higher. They could use some of the proceeds, from that short put. Uh to maybe, buy. Uh, you know some of these uh long verticals, here, right so sell a put. Uh, that has the risk of holding the stock shares right that brought in what about a dollar 90 worth of premium not including, transaction, costs. And then use some of that premium, if the trader wanted to get additional benefit, from the market going higher if it did. Right they could use that to maybe, buy a few of these call spreads. Um, let me go back and i just want to double check what we sold that put for the put was sold for a dollar ninety five. Uh each one of these call spreads now is going for about well 48, cents on the mid price. Right and so, um, you know this is just one way to look at it and i'm not recommending, this strategy, but uh, a dollar ninety five that's 195. Dollars coming in. Divide, that by well if each of these spreads is going for 48, cents, right 48, bucks. That means the trader could essentially, buy four of those. Um, you know with that premium, they're bringing in from the short puts, right but let's just say we did this let's say there were two puts that or one put that got sold. And two call spreads that got purchased. Right. I'm just going to go ahead and hit confirm, and send on that and by the way, i always, remember, your risk, whenever you're doing something like this and also the impact of transaction. Costs. But this could actually, have a max profit, here of of theoretically, a dollar, for. Right um. And a risk of well if it depends on what these get filled for. But a risk of 48, cents per, right or 96, cents. Total, 96, dollars, total. I'm gonna go ahead and send that off that got filled. And by the way whenever you're building something like this. You can always circle back around, and actually take a look at a risk profile. To see what you've actually, created. Uh let me go ahead and just, hit the risk profile, here on those positions, and basically. With that those, two positions, we put in there. Uh, you know this is what we we have effectively, right we've got, if we set our slices, to the break-even. Point. Uh we've got a trade that has a lower break even, of, 38.99. Right but it does have a whole lot of risk if the market drops a lot. Uh the current market price is above 42. So if we're at 42. This has a profit. You know the short puts expire worthless. That premium, is kept, and the long calls would actually be in the money a little bit so hopefully that trade would still have some value as well. But if we go up. Right this has, profitability. That would be capped. Right but anything above 43, on expiration. Um you know it's got a fairly. Reasonable, profit here which would be the, uh premium. From the short puts, plus whatever, profit was in the, long call vertical, spreads 100 and something bucks.

So Anyhow. That's one way to kind of take a look at a risk profile to see what you're building here, and everything together it says this could uh, profit to the tune of about uh, uh 301. Uh so anyhow, that's a way to kind of build positions. On top of each other right and everything together here just so you know. If we set slight, or uh i'm just going to go ahead and reset my slices, here. All this stuff together. Has a positive, delta, it looks like. On snapchat. Of 44. Uh positive, theta, of uh, 312. And a vega that's negative. Uh, 557. So that would be. Everything together. A little bit short volatility. And a little bit long, delta so bullish. Short volatility. And uh. Basically, uh profiting, theoretically. Or it has the advantage of theta working for it as well. So think, you know just to kind of in hindsight, here is we're kind of looking back on this. Right one of the significant. Concepts, that i wanted to talk about today. Was this idea. Of magnifying. Versus, nullifying, volatility. Exposure. And we saw that volatility. Was dropping, pretty heavily, in the near term, options. Uh. You know we looked at vixx to kind of analyze, that that's, targeting, about a 30-day, time frame when you're talking about vix. But one thing that. Really i wanted to go into here for a couple of minutes. That hasn't, been covered. That might be uh quite useful. Is to take a look at. How that volatility. Is looking, a little bit longer, duration. Okay. So rather than just the next, 30 days, which is kind of the short term horizon. But what are traders thinking volatility. Wise, maybe. In that time frame up to inauguration. Right or the switchover. If there is a switchover, that could happen in january. Well this is where a trader, might actually take a look at vixx. But. It's going to be a three month version of vix. So vixx. 3m, and also there's a six month version of this as well. But they could kind of get a sense for where, the longer, term volatility. Levels are actually going as well and you can see this this three month vix. Is actually dropping, pretty heavily, also. Um. You know this has gone all the way back down to maybe, we're getting down to some of these lows that we saw early, october. So uh even the volatility, in the longer term is dropping. And one way a trader might look at that well. If they thought that hey. Look this thing is not solved. But they might consider. Well maybe buying premium. But in a longer duration. You know maybe three months out, you know we were looking at like a 30-day, time frame. But a trader might actually look at if they're gonna trade that premium. Uh, you know expecting, more to happen just maybe not in the next 30 days. They might, use this to guide them to their duration. Of options that they're going to trade. And one thing that's, sort of fun to look at as well. Is you could actually set up your chart where you can take the three month, vix. And subtract. The 30 day vix from it. And here's something that um. You know, many traders are watching, right now. Is the fact that uh well, last week. We actually, had, uh, what what they call backwardation. Form and volatility. Where, this uh front month volatility. Went a lot higher. Than back month volatility. So, back month volatility. Was priced, less than, right. Less than, the 30-day, volatility, the vix. But it looks like today that's reversing, here so although the. Three-month. Volatility, had dropped. It looks like we're really seeing a collapse, here, in the 30-day. Volatility, here so if traders, were, uh. You know thinking that that trend could. Could continue. Right they might actually think about selling near-term, options and buying longer-term, options. Which would be potentially, some sort of a calendar. Type of a trade or something like that. So um. What you know in a session like this, when i start to get heavier, into volatility. I do start to worry that i'm throwing so much, information, out there that it might be a little bit difficult, to kind of track along with but.

Maybe, If you're interested. You wanted to keep your eye on that. Uh maybe, create a chart. Where. You're tracking. The three-month, volatility. Compared to the 30-day, volatility. And kind of practice, looking at that and see if you can sort of absorb, or internalize. What that actually, means. What this, actually. Means, is is effectively. The distortion. Or. The difference, between. Three-month. Volatility. And 30-day, volatility. And right now 30-day, volatility. Is going back to where it's priced, heavier. Than 30-day, volatility. Which means, um you know somebody might actually decide to sell the 30-day. Volatility, near-term, options and buy longer-term, options. Some sort of a calendar, or they could use that for duration. In terms of selecting, an option that they might buy. So anyhow. I know i'm throwing a lot of stuff out at you. But um if you wanted to practice that maybe build the chart it's going to be vix. 3m. Minus, vix. And i've actually switched this over to where it's not a candlestick, chart this is actually a line chart, and if you wanted to see how to create a line chart there. Just go to the style, function, at the top of the page. And under style. Just choose, chart, type. And, i went with line on this one. And then you could actually save that. As a grid if you wanted to and that way anytime you go back to that grid i've got mine labeled three month minus vix. Uh and if you just go back to that grid it'll automatically, highlight, it be set up that way. Or if you've created that you'd rather not create a grid, you could right click on this. And go to style. And under style, you could actually, save that as an actual, style. And then. Give it a name, and then if you wanted to come back to this look. Right. You could load, the style that you saved there, but, as you can see here i'm kind of a grid nerd. So. I've actually got that set up as a grid. All right let's um. Take another, quick look. At these markets, before we, wrap this thing up and actually, before we wrap this thing up too, if you want to learn more about trading volatility. Right. About trading volatility. One of the ways to do that. Is to maybe take a look at the webcasts. That we do. On vertical, spreads. Right vertical, spreads, um, is a way to kind of learn about trading volatility. With not as much volatility, exposure. And the way you can view our webcasts. Just go to the education, tab. And there's actually a webcast, button in here in fact ken rose. Does a class. On wednesday, afternoons. On short, verticals. That's a good one to learn more about combining. Volatility. Exposure, with price exposure. So there you can learn more about vertical spreads. Also another way is i do a probability, based options class that's going to be coming up at 12 30 pm eastern time. And also we've got coursework. Right um so more webcasts. Or potentially. The coursework. Is available. Right if you just want to learn more. On self study, right from a self study point of view, when you go to the education, tab.

Just Left click where it says options, here. And you can get involved with the trading options coursework. Right here. Or. There's actually. Options, for volatility. As well, and that goes into, some depth. On strategies, that allow you to trade volatility, so to help you out with the navigation. I just went to options. Right um, this is the course work. And then just scroll, until you see options for volatility. And that'll allow you to get, going with a self-study, course. Okay, hey i'm gonna wrap this up as we close the session though. Remember, uh, if you like these webcasts, and you want easy, access to these webcasts. Subscribe, to the channel, it's an easy way to get back to them, that's one thing. Number two, if you like the session, hit the like button, it kind of helps us kind of acknowledge how we're doing. And also, it might be an easier way for you to find your way back to this session. Through youtube. Through the through the light feature, videos that you've liked, but above anything subscribe, to the channel and that way you can check out all the uh, other education, that we do, guys i'm going to be back talking, more probabilities. In uh, in a couple hours here so hopefully we'll see you then, and hopefully you learned a thing or two, about what we talked about today. And uh certainly, i hope you all have a terrific, day happy, uh election, outcome day, we'll see how uh, how things work out from here. Okay bye. Okay, goodbye, everybody and have a.

2020-11-08 13:47

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