Power of Patience | Trading a Smaller Account
[Music] [Music] well good morning everyone welcome to trading a smaller account my name is barbara armstrong i'm a coach with td ameritrade and delighted to be joining you all on this fabulous friday so what are we going to talk about today well we're talking about the markets um the whiplash has continued some days have opened up and finished down and vice versa and lots of drama with earnings season and so how can we as traders of smaller a smaller account take advantage of that volatility has been high so i'm thinking today we'll focus on selling um and and selling in a conservative way and what do i mean by that well you are about to find out my friends so i want to welcome all of you to the class thank you all for joining me um you know we have tons of people in the class and i love how interactive the chat is um in the interest of time we're going to go quickly but you know to mansur and frank and jeff and chuck and larry and cindy and ap 514 and lucy and vijay and robert and wiley and marcy and the rest of the gang thank you all for being here and for coming with your a game and i know that peter has said that he has to share his focus between his grandchildren and this class today but the good news is that this will be archived so if the kids spill their cheerios um not to worry you'll be able to watch this in the archives would also like to welcome and thank john mcnichol a friend and fellow coach who has joined us in the chat today he brings a wealth of experience with him teaches several classes throughout the week which you will want to check out if you're not watching them already and um yes and he and i are both on twitter also so if you've got questions feel free to ask between john and i hopefully we've got answers for you also um if you're watching this in the archives as hundreds and hundreds of people do you too can ask questions just type them into the comment section below the last way to reach us is via twitter at the armstrong underscore tda john's is at j mcnichol underscore tda it's a way for us to communicate with you and you to be able to communicate with us it is free um at least it is free for now so take advantage of it yeah and i saw somebody if you're brand new feel free to type a greeting into the chat so we can welcome you um you know stuart is saying it's his first time on a live webcast so welcome um so let's get through our important information so we can get right out to the platform where as i like to say the magic happens this is an intermediate level class so you know somebody has just said stuart that they just finished going through the 12-week course on getting started with options i love teaching that class and i love this class too i know we're not supposed to have favorites but um sorry i had a hair in my mouth but this is an intermediate level class we do move pretty quickly but feel free if i am covering a strategy that you aren't super familiar with the getting started with options webcast series is in the link below and if appropriate i'll put a link up in the in the corner as we go through these strategies and and you can always tap into that so know everything we cover in this class is for education and informational purposes only none of it is to be construed as investment advice or a recommendation to trade any particular free strategy in any particular way know that options aren't suitable for all investors there are special risks inherent to options trading that may expose investors to potentially rapid and substantial losses we always discuss both the risks and the potential returns in this class know that if you're new to td ameritrade both options and futures trading privileges you have to apply for in your live account in paper money which is where we are trading today um you can trade whatever you like um with paper money however there are a couple of differences the biggest since i said we were going to talk about selling strategies today primarily is that um you will never see a short position assigned early in paper money that can happen in your live account have i seen it happen yes i have um does it happen frequently not necessarily but the first time it happens especially if it's part of a spread trade it can kind of take your breath away so i posted something this week on twitter on what happens at expiration with a shortcut vertical you can just flip it um you know on the short call if something uh you know you let something go through expiration and there are three scenarios that can happen and i cover them all okay so what's on the menu for today well first of all i'm going to just very quickly go through a thinkorswim one-to-one walkthrough and and john will post a link in the chat i also will have a link in the archives in the comment section below um for that one-to-one walk-through we're going to look at the current market conditions we're going to discuss some of the positions that we placed in tribute previous classes not every single one or it would take the whole class but we're going to go over a couple of them and then we're going to focus on placing some new trades okay so welcome to all uh welcome to all the first timers really uh glad that you are all here so first of all this one-to-one walk-through if you've done that in the past it's not a one-and-done you can apparently do it every six months so if i were to do it i'd want to spend all my time on the analyze top because it's it's probably the place that i am the least comfortable and and i'm a coach for crying out loud so there's always something you can learn if you're brand new like i would have spent my time brand new on the charts and on the monitor tab there are so many little features that are really cool that you can learn about um and it's really driven by what you want to learn now if you're brand spanking new it may just be trying to set things up um in a very rudimentary way and then you can book another one you know six months from now and and and do it again so there will be a link uh posted in the chat um and i posted it if you scroll up there's one at the very very top and i saw that john just posted it again okay so on to number two um which is uh sorry let me come over here which is you know what's going on in the market and what are the challenges for me in this class and i'm not complaining um but one of the challenges is that um you know i can't kind of see what's happening until the the day begins now we can look at the futures now we can see that the s p 500 is pulling back but we had you know three big company well two huge companies so we had amazon come with earnings and it has gapped down it's open down 11 and it's a heavy hitter it's a very heavy hitter like so you know if you come to the market watch here and we are um come to the heat map and we look at the s p 500 this is the size of amazon you know it's huge um and apple also an apple you know beat on every metric you could measure and yet at one point it was up in the after hours and then it was down and it's opening fairly flat and then you know when we look at this compared to the nasdaq i mean apple and amazon big hitters big hitters okay so we are not surprised given what happened in the market after hours yesterday with earnings to see that um the s p 500 is down and if we take a look at it year to date and i know we look at this i'm not going to spend a huge amount of time on this but if we come over here to show price as a percentage just makes it really easy we can see the s p is down 11 so that original you know puts it in correction territory you know at one point you know when we looked at this maybe it was last week we were saying well you know could it be it's annoying when that happens that we're setting up for maybe an inverted head and shoulders pattern and then that didn't play out did it so you know now it looks perhaps it could be a double bottom and we got a bounce yesterday so you know the bulls and the crowd are hoping it might come back up here and then break out um but you know it could because you know we're seeing bare flags here potentially you know it it could also keep on going and if it breaks below this support level which it's now hit several times you know that that could be a whole lot of bare territory yeah so that's the s p let's go over to the nasdaq so again as you all know tech heavy index so you know we were kind of having the same conversation a week ago you know could this be you know a head and shoulders setting up and then it's like yeah no and again look like you know we had this candle of indecision where we had a new 52-week low by the way nasdaq on track for the best worst month it's had since 2008 which is not territory you want to be compared to um it bounced yesterday and today well it's opened lower um and is you know looks like it's trying to rally but it has a ways to go so currently down you know almost one percent but the fact that it's open down and is moving to the upside if the bears are looking for something to hang on to that might be it and and we're down almost 20 percent you know so um that isn't good news and that's year-to-date not from the previous high from the high in november we'd probably be down about 20. we'd be down just over 20. okay so that isn't a warm and fuzzy how about our friends the russell well you know this is year to date so year to date you know down 15 percent of course this one untainted by amazon and apple right so you know we're up a smidge i'm talking a smidge like point zero two percent but it's still green um and you know it came down and and once again we've spent a lot of time testing support levels this year and you know we've come down and hit this oops i didn't mean to do that once twice came down into that neighborhood um looked like it closed below you know not instilling great faith um sorry i should have just had a line there not instilling great faith but it still looks like we're you know support and resistance as you know isn't a finite number it's kind of a range so it came down into this neighborhood um made everyone nervous because it hit a new low so yesterday hit a new um year-to-date low and then you know appears this support area appears to be holding yeah but still a whole lot of hurt going on and then of the four major indices the dow seems to be hanging in um the best and that it's down the least it's still negative down you know 7.3 percent
and a slightly different looking chart although you know if we wanted to see an inverted head and shoulders you know playing i spy with my little eye you know it's [Music] was still kind of looking like it might be there only did it actually happen no so it looks now like we may be heading more for that double bottom although we did have this diagonal resistance line and it appears to be holding this line that i drew here [Music] and you know technical analysis you know to some extent can be in the eye of the holder so you know acting as a ceiling or a resistance level but now it appears to be holding as support and so we'll just see if that continues okay now how is our friend the vix doing that's our fear index or volatility index well you know it's up at the high end of the range for the year um you know year to date it's also at the high end of the range you know for the last 12 months if we come back out to a year you know how often if i were to take this line that i drew a couple of days ago and just activate it and say okay here's where it is right now how often has it been that high in the last year well once twice we had this third time where it was above that for a couple of weeks um and you know but this is not a volatility level we've seen often [Music] and so what does that mean to us as people who are trading a smaller account it means that premiums are higher it means it's more expensive to buy more lucrative to sell but there is no free ride my friends um there's a reason there's you know higher premiums right it's because there's more risk when there's more volatility in the market okay i'm just having a glance at the chat here okay so now we're through the first two pieces the the other thing that i noticed i don't know if i kept my sheet of paper i was cleaning things up yeah so one of the things that i looked at and and to do this i simply come out here to td ameritrade.com come to research and ideas and you can create all kinds of customized watch lists um if you look at john's classes he is a master at this um mr mcnichol is and i tend to take the simplest approach to things that i can find um but you know when we come and look at this and we look at the time frame let's say over the last three months we've got and spoiler alert you know we've got utilities and staples in positions two and four energy leading the pack which is interesting and you know we've done a lot of trading with energy this year energy stocks because energy has been one of the um uh bullish lights but what it tells us when we've got utilities and staples kind of at the top of the pile is that this is where money tends to go when people are are nervous and they're you know they're looking for more risk off investments and again we've got staples and utilities if we go back six months in positions two and three along with energy and if we come back 12 months and this was the first time i looked at the 12 month um hit parade energy still at the top but staples and utilities you know rotating continuing to rotate into favor and so what that tells us is there is a lot of nervousness there is money rotating out of growth and into what may be seen as more conservative investments and so we can look at you know can we take advantage of that or if you know we we want to look at things that are dropping you know do we come and look at this chart we don't always have to look at the top we can say hey where may they there be some bearish opportunities i mean technology in the last three months down seven percent you know and so we could be focusing on the bottom of the chart also consumer discretionary getting beaten up too well you know especially you know when we look at amazon down 10 percent in the last three months and is amazon a good company do we think it's going to continue to be around and influence all our lives um probably is it going through a rough patch right now um undoubtedly undoubtedly okay so that's um our overview so on to section number three and number three is let's look at a couple of our previous positions so i wanted to look at etsy because we had done two trades on etsy okay so etsy we're going to come to the monitor tab account statement i've come back 14 days and we aren't going to look at every position we we placed so just to be clear i went over several positions both bullish and bearish in the long options class on monday and so if you missed that i'll put a link up here in the corner to that class um and you know we reviewed several of our one atr long option trades and there were three that were on energy stocks um and so i'm not going to go over those again okay so moving along okay so here is etsy and we did two trades on etsy okay so we did both a short call vertical and we did a long put vertical and so you know the idea being if i come back to the chart and we come over to etsy and we also on etsy um we also in etsy and we had to put this in the other account unfortunately um we also did a in in the monday class we also did a long put with a one atr target which it did hit but the idea with the short call vertical it's more um it's a more forgiving but you know we're selling a call buying a call above it with the idea being that as long as it stays below our strikes we have a successful trade with a long put vertical and we put these on at the same time with a long put vertical the it's more directional in that ideally it has to go through both our strikes now depends on where you put the strikes because we have done trades where it has to move very little for it to go through both the strikes it's already part way through and we can still have a profitable trade but generally speaking it tends to be more directional and we want it to mo both move through both our strikes and then stay below both our strikes and so the that was those two trades and so here's our short call vertical right here we got in on the 22nd and these tend to take a little more time to percolate we got paid 55 cents and when we got in we said hey when we've got 80 of our max gain we would like to close out the trade that was triggered on the 26th which was tuesday so we could have been golfing or playing with the grandkids or doing whatever you like to do and um we exited that and we made 40 we ended up netting forty five dollars a contract less the transaction fees um right fifty five minus ten times two so we made ninety dollars on that and you may say like well that's not much well you know what this we started the year with this it's a 20 000 account so a hundred dollars is like you know half of one percent so not so bad and then with the long put vertical as you can see here we opened that on the 18th um so i i think what happened is we had done a directional trade in the long options class which i consider a partner class to this and i didn't place the trading class but i said for the trading a smaller account we are going to put in a long put vertical okay so um and and if you were in that class and you know knew how to place one i said i would place one after the class and i did and so we got in and we paid two dollars and forty cents our strikes were at 110 and 105 and we wanted it to move through both strikes and then we put in an exit when we entered and said you know we when we've got four when it's worth four dollars so we haven't quite doubled our money but we were up whoops 66 percent on that you know so we considered that a you know a win um and how much did we make well we made a hundred and sixty dollars because we did one contract our deal in this class is we don't want to risk more than two percent of the account which when we started the year was four hundred dollars and so we were risking 240 dollars so how many contracts did we do we did one with with the other one it allowed us to do two which you know gave us about 300 worth of risk and we ended up making 90 so on the two of them that was about 250 less transaction fees um you know which is over one percent of our total account value and yet in total we risked you know at between the two trades we risk less than eight hundred dollars okay so that was etsy the other one that i want to look at is carvana and carvana we did a long option we had to put it in the other account because it was an expensive option but we also and let's just look at the chart but with carvana we also did a long put vertical and so this one on the on the long put we had a target we did a one atr trade it hit our target um we placed that trade on monday which was the 25th so and we placed this one we also did we want to put this on the chart so today it's it looks like it may be rallying now in the past it's rallied for how much one day one day one day one day so this could be a one day rally or it could be finding a new bottom and so let's come and look at that trade because we didn't put an an exit on that one so carvana we're up 60 dollars or 25 percent we got in for 240 out at three dollars our strikes are at 75 and 70. it's through both strikes that's sitting at 66.97 and so we can decide if we want to let that percolate if we wanted to put in an exit and say we'd like to get out at four dollars we could do that if we're concerned that it could go up more than two days we could take our 70 dollars and and just call it a win as a win so i'd like to run a democratic class you guys let me know what you'd like to do so go ahead and type into the chat and we'll either ring the bell and take that 70 or we'll put in an accident and say hey it's through both strikes we're willing to be a bit patient and wait until it's worth a little bit more so um let me know okay so i've got my chat up here okay so now we're going to move to some new trades and given that the market just opened so carvana it could be one of them okay so because if we're going to do a selling strategy but carvana is up today everybody's saying take the profit take it take the money and run close it take the profit okay so i will close this one out okay um so we're gonna take the profit oh i've got one weight from robert love it okay in this market take the money okay so we're going to take our money let's see if we can get 305 for that okay and i'll make sure we close it out um by the end of the day regardless so with this given that it's coming up today we may wait but here's an opportunity where let's say on monday it starts to go down again let's get rid of this percentage thing you know could we come up here and say okay this is at 68 could we sell a short call vertical on this at say 70. and we just want to come out maybe three weeks somewhere in that 20 to 50 day time frame the shorter the time frame the quicker the time decay works time decay is accelerated so if i bring up theta here we can see that just by the passage of time um you know 18 cents a day on the short strike where if i come out to june it's 11. so we've got time working in our favor but given that it's moving to the upside today we might say well we'd prefer to wait um until monday and see if it starts to go back down again and then we could sell our short call vertical and if you're getting 60 cents on a one dollar spread you could say well i could afford to go higher that's almost a 50 return on our risk because we're risking two dollars or actually it's almost a hundred so we're risking a dollar ten to make ninety if we we think that this seventy would hold it's currently trading at sixty 67.81
so if i took this i don't know weird things are happening so this is how i found that i can get my charts to go back to normal and that happens what the oh here sorry okay uh let me come back to caravana yeah so if i take this one atr and we are thinking about going with 70 if i move this to 70 because we no longer have an atr target we're thinking about lining up a short call vertical in this space instead you know so that's a little tight so what we might say is let's see if we could still get enough premium and go up to maybe 72.50 okay but given that it's moving to the upside today we're going to hold on that so let's go look at adobe while adobe's moving to the upside also and on this one if we wanted to do a short call vertical we're saying okay could this old support form a new ceiling and so could we come above and sell something around that 420 ish neighborhood and so you know if we come out here and we probably don't need 30 strikes so could we come out here to this 420 type neighborhood we want to make sure we've got some volume on this and we do 230 on a five dollar wide strike so you know there's certainly premium there because volatility is current currently so high in the market um but again this one is continuing to move to the upside so that was adobe and so on monday because i i partnered this class with the long option class if these stocks start to move down on monday we would put those on on monday and i'll make an announcement in that class i won't necessarily put the trades on in the long option class because we're doing long options in that class but i will let everyone know kind of what we're doing okay okay so that was adobe um carvana let's look at docusign it isn't this interesting so docusign moving up also okay how about zoom interesting okay zoom is moving up okay how about autodesk look at that now we had a long put vertical on autodesk and the expectation was that it moved below both of these strikes and stay there and so you know is this setting up another you know um bare flag so the jury is still out okay so given that a lot of things seem it to be moving to the upside let's go over and look at our energy sector and see if that's moving to the upside and look at um some of the airlines which have been pretty bullish as well and so if we're looking at this and saying you know could this be kind of a a bit of a sloppy cup and handle type pattern setting up and and even if it it kind of stays in the same range could we maybe sell a short put vertical around the 42 and so if we come to our trade tab on delta so now we're coming over to more the bullish side 96 and a dollar three we've got lots of volume here is can we get enough premium to make that worth our while so if we go to 42 and 40 we get 42 cents so we're risking i'm rounding here uh a dollar sixty so that's about a 25 return on our risk and how did i get that well i took the two dollars and we're risking a dollar 58 so if we come and we do the math and we say okay 42 divided by a dollar 58 that's a 26 on our return on our risk for a trade we would be in for 21 days if i come and say okay where's 42 sorry let me change my drawing tool so 42 is kind of this recent support level so it's below the low of today's candle it's below this kind of diagonal resistance line and we may even replace that line and this is where you might say but it's not through this line yet and it's not so that could be adding some additional risk um but if we think that this may stay above there would be our strike yes so cindy is saying so we aren't placing trades on carvana and adobe no we're doing a whole wait and see and you know this is this is a point i want to make sometimes the best trade is no trade at all now we could put in a conditional order and say hey if this goes below a certain level then place the trade but we may just choose to put it on a watch list and say we're going to look at these again on monday and see what's happening with those stocks um and that's why we're not placing the trade today and there there haven't been many times in this class but there have probably been there's probably been one class a year where we didn't place any trades in the class and that is pretty rare because in this class we we typically will place several trades each week um but you know we we have to react to what happens when the market opens and what's going on in the overall context of the market so we're going to look at this one and we are going to place a trade here and we're going to do two contracts why are we doing two contracts we're doing two contracts because that's risking 300 we started the year with a 20 000 account now last week we were up like we were at 26 000 so this last week has been brutal for us in this little account but we're still up 4 500 which is close to 25 you know and how do i get that well if i take 45 86 and i divide that by the 20 000 we started with at the beginning of the year you know that's a 23 return and you know the markets are it doesn't matter which major indices we look at they're all down so even though it was tough to give back over a thousand dollars in gains because we had several trades in a row that were not profitable um you know we've had lots of trades that were not winning trades but what if we are disciplined about our position sizing and when we take a loss it's a small loss then and when we're ringing the bell and and recognizing those small gains it's amazing how they can add up over time now the year is a long way from over but that's where we are right now so we're going to come to single order back on this trade on delta come to first trigger sequence we're going to right click create an opposite order and say hey when we've got this is just an example you might say i want to get out when i've got 90 of my max gain then get out when it's worth a nickel we're gonna say you know when this is worth eight cents or nine cents we're going to take our risk off the table and close it out so actually maybe we'll make it eight when it's worth eight cents we'd like to ring the bell short put vertical now what if the trade goes against us so what we do instead of putting in a double exit we're going to watch it because if it comes down just for a couple of days we may just give it some time but we have position size so that if we do take a max loss we're not blowing up the account okay so that's delta okay let's look at vlo because even though a lot of things pulled back and like wouldn't this just frost your petunias so you know vlo hit a new i think it's a new one-year high yesterday i mean it has this is you know pipeline so this is that delivery um we're on the other side of earnings which is kind of handy because that kind of takes some of the risk off the table but today it may be pulling back so this is one where you know we could if if we were interested maybe say i think this is going to pull back for a few days so i'm going to do a short call vertical on that but you are doing a counter trend trade it to do a short call vertical on something that has almost that has doubled in price since august of last year that would be a counter trend trade we are looking to follow the trend and so we are not going to do that okay so that was blo now one thing that we could do is you know if the premiums allowed we could say hey if this continues to go up so if this goes above um you know where today's high we could say we could do a one atr trade and say like if this continues to the upside um we'd like to sell a call or buy a call yes john is right petunia frosting in utah the skin this is the last weekend for some of the ski hills some of them closed last year but yeah you guys are golfing some of us here are still skiing let's look at halliburton okay halliburton was up and now energy is pulling back like geez can i cut a break here let's look at netflix so netflix you know talk about the fall of a giant you know gap down on earnings and then has continued to fall and today it you know the reason that this candle is this oh it's actually bullish so you know it's moving up but is this a bear flag setting up or is this the beginning of a reversal in this trend we don't know so here's another one we will put on the list to look at for monday as a potential short call vertical okay uh halliburton looked at i have got an entire page here um let's look at dollar tree both bullish and bearish so kind of when we look at this and and one of the things you know when you go through an inflationary period dollar tree by the way i was in a dollar tree a few years ago or a few weeks ago and everything is now 1.25 at the dollar tree apparently um so inflation is a real thing but we seen this you know pull back but you know since february it would appear that this 10-day moving average or the 30-day moving average has been acting as support so this would be considered a more aggressive entry but it would appear that this fall is starting to wane in that we had this candle of indecision yesterday a hammer pattern and today you know it's open lower but continuing to the upside so this would be considered more aggressive but could we sell if we were bullish could we sell a a short foot vertical and you know it around this 160 ish level something below the 163.
and so if we come to this 160 out in may we've got a fairly tight bid ask spread we've got lots of volume a delt of about 30 which means we've got about a 69 chance of this expiring worthless which is kind of the goal is for it to go down in value so if we look at this a 250 wide spread we get a credit of 58 so if we look at this and our rule of thumb that we have gone with in this class is if we're in it for 21 days we want at least a 21 return not that we're gonna earn a one percent return a day but it's just a way of trying to equalize comparing different time values so if i took 58 and divide it by the you know 250 minus 58 which would be a dollar 92 that's a 30 return on our risk and so how many of these could we do we could do two um single order first trigger sequence when it's worth so if i round that to 60 cents so when it's worth about 12 cents we would like in this example to buy it back and is this a more aggressive entry it is why and we're going to write this down a more aggressive entry because it is not up today the price isn't up but so what's the advantage of a more aggressive entry you're taking more risk but you're going to get more premium than had it already moved to the upside given where your strikes are so if we come back to the chart and we wanted to draw a line at this 160 and i like to be able to kind of see things on the chart say short put vertical 160 1 57 50 and i think it was may 20th so now we can see that on the chart and say okay it's below the 30-day moving average it's below the low of today um so if the 30-day moving average holds this might be a profitable trade could it still end up being a losing trade yes have we position sized accordingly we have yes okay so guys holy smokes can you believe it we are we are out of time so um it has gone by quickly for me i don't know about you i appreciate all the help from john mcnichol in the chat if you found this helpful please hit the like button you could be helping someone you don't even know find this content and helping us reach more people would um love it if you could do that coming back to our chart or our agenda for today we did the walkthrough i encourage you to take advantage of that we looked at what's going on in the market we reviewed some of our previous trades we looked at several setups and then we placed only two trades today but we got two trades in and we've got several on hold to discuss on monday so keep in mind that everything we do in this class is for example purposes only none of it to be construed as a recommendation on the part of td ameritrade all myself um and oops hit the wrong button yeah and keep in mind that we have to take transaction costs into account when we put in an exit there's no guarantee that we're going to get filled at exactly that price um and know that options aren't suitable for all investors there are special risks inherent to options trading um and we do discuss what those risks are know that all investing involves risk including the risk of loss so thank you thank you thank you for joining me up next will be connie hill with getting started with stock investing she does a great job if you'd like to join here for that um and if i don't see you later today have an absolutely amazing weekend everyone don't forget to join john and i in the land of twitter you will be glad that you did take care bye for now