Profit and Trade Management | John McNichol | 8-28-19 | Trading Vertical Spreads
All. Right we'll get afternoon, everyone, John McNichol here you've joined. Whether. You're live or listening the archived session do, appreciate being with us here once again I also, like to thank some. Of my friends, over the last couple, of weeks for, covering. Or actually last week for. Covering down on this, session as I was in beautiful. Orlando Florida, pretty. Hot, but. Nice. Time at the advanced, concepts, workshop, and then, taking my granddaughter, to Disneyworld afterwards. So good time good, to be back let's, go take care of disclosures, and we'll get right into it, options. Are not suitable for all investors as, these special risks inherent to options trading may expose investors, potentially rapid and substantial, losses carefully. Read the previous body copy of characteristics, and risks of standardized options, spread, straddles, of the motel leg options strategies, may, entail substantial, transaction, costs include multiple Commission's also. Advanced, option, strategies often involve greater and more. Complex risk, than basic, option trades. Utilizing. Tools such as probability, analysis, theoretical, nature not guaranteed, and does not reflect a degree of certainty of an event occurring and also. To endure in order to demonstrate the function area of the platform, we're, using actual symbols, keeping in mind TD Ameritrade does not make recommendations. Or determine, the suitability of any security or strategy, through the use of our tools any, investment, decision you make on your self-directed account is solely your, responsibility now. With some of our practice trades that we're doing is on a demo. Account looks like a real account but it is not you. Have the ability to practice trades, as well with paper money that software, is for educational purposes and successful. Virtual, training does, not translate into success, of. Actual, funds during a later time frame as those market conditions change continuously. Past. Performance, of a security strategy does not guarantee future, results nor, success, all. Right what we're going to focus on today is, review. Some of our open, vertical. Trades talk about a little trade management, there and we'll, go ahead and review watchlist. Candidates, for potential vertical trade so our learn objective, for today is essentially.
Being Able to. Manage existing. Verticals. And kind of think, about how you may apply this. As a routine. On a day. To day basis. And. It's, good to see let's. Say we got so Sara Jay Paul. Sandy, with us if you have any questions feel, free to utilize the chat window would certainly love to hear from you there. And. Let's, go ahead and we'll bring up the platform here, in just. A moment. Okay. Here we go and, you. Know looking at the market the, market continues. To be in, that, range we've, been discussing. This over the last several weeks and. Nothing. Has changed, still. In the middle, part of the range. Today. Pretty good update some. Technicians may refer to this as a. Pierson. Line as prices. That open, lower and then penetrated, into. That previous, day. Also. Reference. In the mid range of that, long range day I believe, it's somewhere approximately, at around that, 2880. Mark price. Action is staying above there so a little more of an edge to the Bulls here. Still. In that, wild, range and we'll. See how things play out now based. Off of markets. Being in that type of range, some. Of these trades, that we've been discussing over the last few weeks. Verticals. May. Have some. Well, likewise. From. The resistance, side selling. A call spread as, long as prices stay below, that. Resistance, area, those. Trades. May benefit, we've, also done some slightly. Directional. Trades which. May, not necessarily benefit. Greatly in an overall, sideways. A lot. Of these spreads prices, do not have to move very far. To. Necessarily, turn into a profitable, trade and we may see this, as we, look at some of our examples there all, right and. Based. Off of at. Least bouncing, potentially, in the lower part of the range some traders may look at. Some. Of the short put, spreads or possibly. Some of the long, call spreads for slightly, upward, directional, movement now. I'm going to go ahead and, bring, up our monitor. Tab. And. We'll. Go ahead and look. At some of our existing, positions. Now. One, trade that, we had done previously. I'm. Going to go right click on this and view. Trades. Back. On the 12th around the middle of the month I, this. Is an example of a long. Put. Vertical now. You, know how can we look at this and without. Looking at the prices, and determine, you know if this, is a, a. Long. Put, vertical well. One we. Can certainly look, at and see that this is a put so. We have puts. We. Can see that they are the same expiration. Date so. Same expiration, date and. Different. Stripes would make that a vertical, now. What makes this a a, long. Vertical. Well. If we go ahead and or a long put vertical if we look at our short strike which, is 145, that. Was the one that was sold, I. When. We look at the direction, move. Into that, short strike don't, from 148, to, 145. This. Would be a bear. Put, spread, and a, bear put spread ends up being a long vertical. Also. Looking at the price, bought. A more expensive option and, sold. A cheaper option. But. As far as determining, bias. On it looking. Towards that short strike as you, go from the one strike, to the short strike prices, going lower 148. To 145. Making. That a long. Put, vertical now. This. Example we, had sold, 790. Correction. Bought 790. And sold. 660. That, would be a net, debit, of a, buck, 30. Defined. Risk trade we, took that buck. 30 and. Multiplied. That by 12, contracts, and we. Position size that to a maximum. Loss that. Ended up being a little around, $1,500. Which based off of her net liquidating, value at. The top of the area here lines. Up with. Lines. Up with approximately about, a half a percent of our account. So. Let's go take a look at the chart. Now. When we had reviewed this we, had also. Discussed. Earnings. Earnings. Is. A fact. Of life and. Earnings. Did come out price, went ahead and gapped down now. Actually surged, pretty, good here during today probably. Should have closed it earlier, at the opening but, wanted, to leave it on so, we can review this during this class. The. Strike. 145. That was the one that we sold as long, as the price stays below 145. Between, now and expiration, this. Trade would be profitable in our, examples, of our long, spreads. Where. We had approximately at around the 148, and. The. 145. And, the. Long spreads we wanted prices to trade through this Brett and it, certainly did that. Now. If we went ahead and we paid a buck 30 for it. Let's. See what the value of that is right now we, can right-click on the position select. Create, close. An order and, sell. That position, right, now it's worth two, dollars and twelve cents I believe, earlier in. The day it. Was. Believed. It was as much of a about, 250. And, they hit don't confirm and send, maybe. May, have been a little more than that I think it was. Between. 250, and a 270. So, the. Spread itself is three dollars so the max that this spread can be worth would, be three dollars so a buck, thirty debit. Translated. Into potentially. A three, dollar credit, that, would result the, difference, would result in that maximum.
Gain Which, would, be a. Buck. Let's. See three dollars - a buck thirty our maximum. Gain on this would be $2, correction. A buck. Let's. Do it let's do the math as. We. Get in the afternoon. John's math skills come. In decline I'm certainly happy that the market closes at. 1400. Military. Time Mountain time that's, 2 p.m.. Local. Time out here in Utah, to, bring up the calculator, so. A three. Dollar spread, -. Are debit. That we paid which is a buck 30. So. The maximum gain on this would be a buck 70. With. Currently, at running at about 220. Let's. Say two dollars, and. 20. Cents -. A. Buck. 30. You. Know we have a gain of about 90, cents now you know that's a more, than 50%, of, that maximum, gain some. Traders may utilize that, as a way, to lock, in some of those gains or, scale, out of the tray, for. Instance with 12 contracts, you know we can choose to. Lose half. Of that position. So. If I go ahead and adjust this down to. Six contracts. And. Hit confirm and send. We. Can close out part of the position, going. Off the assumption, that prices, may still stay below, that. 145, strike now, the one thing on scaling, out as, far as pros and cons. One. Of the pros is you're locking in some of those games or realizing, some of those gains the, con is you. Will certainly pay transaction, fees and commissions and, if you're scaling out. Those. Fees, can be more. Or accumulate. If. We wanted to close out the entire position we can go ahead and do that let's, go ahead and we'll just scale out of this and, I'm. Gonna hit to confirm and send, and. One. Thing to keep in mind as you look at the prices. On the bottom. You have the mid, price and the, natural price the natural price is the market price the, mid price is kind of right in between, if. The spread opens up a little bit you know one may not get filled at that desirable, price right, away, and. Those. Prices are changing as we speak let's. Go ahead and I'm gonna lock this here I may. Have to confirm and send will attempt to buy back for or. Sell it for that, $2.15. Notice. The fill didn't come through right away. And. Part. Of it being that Autodesk, looks like it's trying to fill in that gap as. Looks. Like price on the stocks in the market or continuing. To move. Let's, look at some of the other ones Facebook. And. It. Looks like that vertical, closed so we closed out half of that position and. Then. We'll see if prices. Settle, back. Down and, stay, below 145, and possibly close out the rest of the position, and, thanks. For helping out into math Keith and sandy. There's. A little bit of lag on the chat so I may not be able to pick up on that right away but preciate, you, looking. At Facebook. This. Was another put spread. This, is also another, example of, a long, put spread as, we. Have puts. There. The same expiration. Looking. At the short strike the direction, to the short strike going from 185, to, 180. That. Would be going down in price. Go. From 185 to, 1 180. Looking, at the trade. Now when. You're on the platform. You. Could add a column for, trade, price otherwise.
You Would right click on, the. Actual symbol and you can select view trades. If. You actually wanted to view the. Prices, on the, platform. You can go to the, far. Right, where, there's a gear and. You. Can go ahead and select trade, price. Double. Click on it you, can left-click and drag that typically. Putting it a little bit before the mark price which. Would be the current price so you can make those comparisons, now. As we go ahead and look at in, case, of Facebook this, was a five dollar spread. And. We. Had bought 670. And sold. 470, so that would be a two dollar. Debit. And. With. This being a five dollar wide the maximum gain would be the, $5, minus, the. $2, spread or, minus a two dollar debit that would be a $3, per, share maximum, gain. Now. As we can see this is slightly profitable. Looking. At where the current prices, Facebook. Currently, is at, 181, 31, so. We're just, above. That short strike so, looking at the chart bringing. Up Facebook. This. Is currently where we stand. This, was taken advantage of. The. Current, trend in Facebook being. A little more towards the downside. Another, potential bear flag Foreman, although, Facebook you. Know ticking up in the higher range of the day as many stocks are not. As, high as maybe some people may expect on the day as they're, kind of flat and, with. The ESPE and. Other stocks trading, higher, so. For our example we'll. Continue monitoring, this with, the, desired. Result, is the. Price trading, through this spread and being below 180. Between. Now, and expiration, closer, we get to expiration, would. Continue, to see a gain on that now. Some, some. Of you have asked in previous, sessions you, know could, I put in an order, to. Go ahead and close out, this, spread if it hits a certain target, and the. Answer is yes we can go ahead and do that so. If. We paid. $2. For this and, there's. Potential, maximum gain of about, $3. We. Can go ahead and put in an order to try and capture that, at least half of that gain or a buck-50 that, could be a common technique for, some, of the long spreads. So. Let's say if I wanted to do that I can, right click, create. Close an order. Sell. Vertical. Now. What we'd have to do is. Basically. Add, that buck-50, to the $2 that we had paid and so, that would be three, dollars and fifty, cents. Now. One can choose to close out the whole position or use it as an opportunity to scale out. That's. Up to you. Limit. Order and, we'll. Make this GTC. For good till cancel and. Then. We'll go ahead and confirm and send. Now. The. Pros on this is if. That, is your plan. To close out if you've captured 50%. Of the maximum gain on a debit well, this would be execute. In that trade and trade. Executes in that plan kind, of a fire-and-forget. Now. When I go to my monitor tab we can see that we have these, open orders. Attempting. To go ahead and buy that back for 350 some. Traders play well you know you may be leaving some money on the, table. And when, you win to try and capture that maximum, game. It's. A balancing, act a. Lot, of times if you try and hold out for that maximum gain with, the market giveth the market taketh, away and a, good example of, that is. Let's. Go back I'm, gonna go to our account statement, this. Is where we go and look at some trades that we've done previously and, that may have closed out. You. Can go back any number of days let's, say I'll go back. Go. Back 45, days in this instance. Apologize. In advance as we do. Have a lot of trades in here. From. All various classes. That I do. Not. Only an equities but on futures as well. Looking. Down on some, areas. That were closed. Out. There's. Autodesk. And. Let's. See here. We. Did a couple of verticals. Yesterday. Or I'm sorry on Monday, in. Our technically, speaking class, so. A little overlap, on there one. Was a. Credit. Spread on. Newmont, mining a, bull put spread for. A forty four cent credit and. We. Did one a. Long. Put spread on. Capital, One looking. At the price to potentially. Trade down. But. Looking at some of the ones that. I believe we did for this. Class. Let's. Go ahead and look at Apple, we. Had closed out a spread, on Apple, for. A. 19. Cent debit, let's, go ahead and bring that up now. We can isolate a symbol by just typing in the symbol up at the top so a a PL. Let's. Say we have here. And. So. On to 16th. Let's. Go back actually on the 14th. On. The. 14th, we opened, a, long. Correction. A short.
Put Spread so, how can we tell it's a short put spread, one. Looking. At that the. Option. That we sold is. More. Expensive than the, one that we bought resulting. In a credit. Bull. Put spread. Because. Look at the directions of the strike going. From the long to the short strike one ninety two fifty. To one ninety five the price, is going up so. A bullish, trade. So. The, expectation. On this is that we expected, that Apple. Would stay above. 195. So. We had sold a sixty, five cent credit now. When we got to the 23rd, let's bring up the chart. So, when we got to the. 23rd. The. Market, had opened, and. Started. Trading down. So, price, it kinda came up to, a bit of resistance, and started. Pulling back when we had looked at the value. When. We looked at the value. Of that. Option. We. Basically had captured about as. I said looks. Like somewhere at around, 70%. Of, that maximum, gain okay. We had captured. Essentially. Was. About 40, 40. Some sense there about. 45, 46, cents, if. You go ahead and look and see what the value of this spread is right now I can. Go ahead and so, we're gonna let me right click, create. Duplicate. Order and, let's. See what the market is right, now right now that spread is worth 40, cents so we had hold onto that we, would have been given back about. Half or, about a third of that gain there so. Little, profit management a good example of managing. Profitable. Trades and. Another. One that we had done. If. You go ahead and bring that up. Got. That with Apple now, on the 23rd. That's. The one that we had closed out also. Back on the 16th. We. Did an example, of. A, in. This. Case a long. Call. Spread. With. The idea of Apple. Trading up to 210. So. Long. Call spread. This. Was a $2 and 70 cent debit, and. If go and look at the chart again for Apple this. One has a little more ways to go. With. The 205, and a, 210. Looking. To see if Apple, made bounce and that was the idea looking. For a bounce and seeing if it's able to trade up through that spread. Now. Looking at the glass half-empty. We've, been talking about some of these patterns these rise in wedges have, been appearing in some of these bellwether, stocks, you. Know after making highs and selling, off you, know these we, saw a pretty good retracement. Of that and. Even though it's been volatile, these last few days you, know prices have still been kind of hanging towards that lower range so. Some technicians maybe keep an eye and looking for that break below if that, occurs then this.
Long Call spread would result, into being, more of a maximum, loss, and that. Would be that 270, debit. Multiplied. By. 1,100. In this. Case if. I did that right. That'd. Be two dollars and 70 cents. Times. 11. Times. 100. That. That would be a loss of twenty nine hundred and seventy dollars which. Is about less than one percent of this account so define risk as well. As the defined gain. Let's. See there is one other. One. I believe that we had, maybe. A couple more in there let's, go and clear out Apple, we'll. See what else we have going on. See, Dollar. Tree was another spread, that we had looks, like we had put on, make. Sure, this. Is earlier in the week here. Yeah. Dollar Tree is, an example no I did not show it here we go. So. On the 16th Dollar, Tree we had sold. 9250. Bought, 95. This. Is an example of a. Just. An example of a long. Put spread again. Looking at the direction. Going. From 95, to 92. Price. Training down. And. Onto, 26, we closed it out for a buck, 90, credit basically capturing, with. This being a two and a half wide. Let's. Bring up her calculator. Here. With. The spread itself the difference between the the. Two strikes, two dollars and fifty cents. -. What. We paid for it which. Was a buck, 20. The. Maximum gain on this would be a buck 30, and what. We did we had sold it for a, buck 90, which was a gain of about 70, cents again a little more than 50% of that, maximum. Gain, now. If I go ahead and right-click and, create a duplicate, order, see. Where the current price is on it. Notice. That. Right. Now it's. Only worth 75, cents. So. Basically. Again. More. Than half of those gains have been taken, away so, we, utilize some profit management. And. Part of that if we go ahead and look at the chart DLT, are. You. Know going back to the 26, price, it actually started, trading lower. But. Then came a bit higher and so back on the 26, after it dipped down we, went in and closed it out also, with earnings, coming up, we. Decided to lock in that game, see. If there's anything else that we have before we'll continue on if you have any questions or. Any. Comments feel free to utilize the chat would love to hear from you also if you like what, you are seeing. Here today I believe. There's an opportunity for you to click the like on. The video I do that we had done previously where. We had put in an order, to. Close out that position. And. It. May have been the case with. On. Netflix. Here let's see on Netflix. We actually had a a. Long. Call spread. We. Were looking for it to be trading, up through 3:25, this, was on 724, and. On. 814. Basically. It closed it out for. A 50, cent credit that actually, would have been a loss, if. We go ahead and look at that for Netflix. One. Of the reasons for that is as price was breaking down, let's. See the date on that was 814. On. 814. Which was. This. Day here. This. Was more of a bearish, bounce that, price was breaking down the trend was, going down we're looking for more of a reversal, for Netflix, it was pretty short-lived and, price. Went ahead and broke below, support. That. Could be one way that, some traders, may look to, close. Out of position, at least recover. Some, of the equity left you know with 50. Cents times. 700. You. Know it's about $350. Now rather. Nominal. Amount as far as for this but. Just kind of a definition. On how some traders may close, out a losing. Position now that's something actually we rarely, do in this, class we've, typically have accepted, the. Maximum. Loss. Based, off of our position, sizing. This. Was just kind of a little more of a one-off as. Prices. Had already broken. Below support rallied. Up failed to hold and, failed. To. Get back above that support, and, so. We had retained, a little a, little, bit of that money, now. However. The difference one thing to keep in mind is when, it comes to credit spread. Is in, the case of a short vertical, or, let's, just say short. Verticals, which are credit spreads, one. Of the considerations, there is. One. Are you more neutral, below, if implied, volatility. Is relatively. High. That. May be more conducive to credit, spreads as they.
Would, Typically. Give, a larger. Premium. Relative. To the risk on the trade so, a greater, return, on risk. If. One was to be more directional. As far. As price then, they may lean more towards a debit spread now, volatility, can impact a debit spread as well, but, it's usually, going. To be a bit more neutral. Given. The fact that on our, debit spreads were closer to being at the money and if, volatility, Rises it. Would actually positively. Impact that long, that. Long option, so. It's a matter of personal preference but as far, as the benefits of short verticals, would, lean, more towards. Volatility. And. Do. Apologize if we're having some bandwidth issues there may, have to go ahead and look at the record and afterwards hopefully there will be no issues with that and. So. If. I go ahead and notice, when we look at some, of these. Arts here like Netflix, you. Can actually bring, up implied. Volatility. On the chart. And. To. Do that we can go ahead and go to our beaker for, our studies. Very. Top here. Click. On that well, actually, click on the beaker there. If. It allows me to. One. More time. Alright, they're, having a little bit of a glitch here I guess. I'm probably just have to shut this whole thing down here. One. More time. Go. Ahead and click on that beaker and you. Have a mp4. Implied volatility. Double. Click on it and I'll add the indicator over here and so, what's some of the comparison, is is. Looking. At where, that volatility, is. So. He tries to highlight again. If. All Attila T is in kind of a higher range. These. Are going to be areas where it may be more conducive to. Selling. Options. Whereas. If the volatility, is relatively, in the lower range this. May be more conducive towards. Buying, strategies, and not just necessarily. Debit. Verticals. But, calendars. Diagonals. Could benefit, from a low, vol expecting. It to rise. Another. Consideration is. Utilizing. The, trade. Tab it's, a good discussion thanks for bringing this up sandy. Is. You. Can look at the option, statistics. On. An indicator, and, look. At the, IV. Percentile. And. If. The IV percentile. Is in the lower, range, less. Than 50 would, consider to be the lower half of if, its historical, implied volatility. Above. 50 would. Be a, higher. Vol. So if we look at Netflix currently, that's shown at around 22. Now. If you look at some of our previous, archive, sessions I believe I did run a scan in, the past for, some of you where you can go ahead and look for. Higher. Implied. Volatility. If you want to primarily focus on selling.
Options Like. While we're here let's go ahead and share this for you I'll. Go ahead and, do. A share. And. I'll go ahead and plug this in the. Scratchpad. Now. In this case sensetive, and. I'll. Just call this. High. IV. Scan and, essentially. It's looking for stocks. Potentially. Stocks that are liquid. That. Have a percentile, range of over 60%, to. 90% play. Around these numbers see what kind of results that you have. Also. Looking. For stocks that maybe a bit more range-bound, I'd. Utilizing, the average, directional movement, indicator typically. Stocks, that have a value of less than 20 are not, trending, or they're very much. Weaker, trends. You. Go ahead and run it on any list of stocks I have an example of penny increment, options here we'll. Go ahead and scan that see what comes up and. Notice. It's a relatively smaller group a lot, of these may be stocks that also have earnings coming up so keep that in mind so BBY. For. Best Buy. There. Is going to be an earnings event coming up so, sometimes some traders may try to avoid, that. Event it. Looks like a little bit of a hang-up here. Here. We go. Which, explains probably, why there implied volatilities, relatively. High, and, what you may do is possibly you, know right after earnings if you don't want to speculate is you, know if the volatility is relatively high you still may be able to sell some. Of that premium I think. Lulu was another one. You. Know in this environment or they are probably gonna be a lot of stocks are coming closer to that now, if you want you can go ahead and you, know adjust. These ranges, here to. You. Know maybe some greater than 50. Going. 70 range there you. May get more stocks that may come up and, it. Looks like not a big difference from. What we're looking at okay. But. That's one way to go ahead and search for stocks that may meet certain criteria. Whew, Wow boy this, 45 minutes has gone pretty quick I didn't. Have an opportunity to put on a new trade but that's okay. What. You can do is continue following along with us and what, we'll be doing is keeping an eye on the, range of this market, and see, if we're going to get a break one way or the other, looks. Like it's still to be determined and. You. Know looking at the VIX. Right. Now. VIX. This. Is another gauge for you sandy as far as looking, at you know buying or selling options. Is if. We, do identify some. Peaks in. The volatility, with the expectation, of volatility. Dropping. And. This will be the question mark then. We can still be in a selling. Strategy. There. So. I'm going to actually go out on a limb here and I'm. Going to do one. Trade. On. Federal. Express now, their earnings, are coming up I'm, gonna do an example of a long. Correction. An example, of a short call, vertical and a. Short. Put vertical it's called an iron Condor, it's, taught in our advanced option, strategies. I'm, gonna try and put this together real quick before we run out of time. And. Let's. See if I can actually get that chain up and. I'm. Gonna go ahead and just look at. Going. Out of the money on both of these a little bit further. Out of the money kind, of closer to some of these 20 deltas. I'm. Gonna go ahead and sell. Vertical. It. Lets me. So. Here, is a short call vertical which is a, 49. Cent credit and. Then. I'm going to go ahead and find a put spread on the other side this, would end up being more of a neutral trade expecting Federal Express, to, stay in a range going. Into and after earnings, and, I'm. Going to go ahead and look at the put side and, around these 24 deltas I'm, gonna hold down the. Control. Key I'm, gonna right-click and, do, a sell. Vertical. Here as well and. Looks. Like the screen hung up, and. We, may not be able to get that out look there we go. All. Right so there's a and. Looks, like we're a little possessed. Alright, what I'm going to do folks is since. We're having a little issue I'm going to see if I can put that in afterwards, and just get. Things wrapped up because, coming up next. You.