Short Put Verticals & Buy Writes | Trading a Smaller Account

Short Put Verticals & Buy Writes | Trading a Smaller Account

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well good morning everyone welcome to trading a smaller account my name is barbara armstrong and i am a coach with td ameritrade um i can just see that you guys are getting a different feed i was just checking a power source here just before we started great to have you all on board today today we are going to talk about two different strategies short put verticals and buy right covered calls so stick around there's lots of great stuff about to come your way [Music] all righty well i just want to uh thank and applaud all of you who got up early this morning to join this session i know if you're in the eastern time zone it's 9 30 but if you're on pacific time it's you know 6 30 in the morning which shows a certain commitment uh to be on a webcast live at that time of day so thank you all to show up for showing up and and to the many of you who are here and already um participating in the chat before the class even starts a special hello as well to vijay and michael and radio wayne and nidabee whose birthday it is today so happy birthday nita and charles and um many others thank you all for joining us live today thanks also to ken rose who is with us in the chat today he brings a wealth of experience with him so if you have questions hopefully between ken and i we have answers for you so don't hesitate to ask if you've got a question this is an intermediate level class so if you are brand new to the world of trading options because we do a lot of option trading in this class don't think like oh snap i better hang up and you know go learn about options but know that it may be a bit like drinking out of a fire hose for the two strategies that we're going to focus on today i will put links in at the end of this to the getting started with options class on buy rights and on short put verticals if you like these strategies there are dedicated classes to short verticals one is taught by ken and can correct me if i'm wrong it it used to be on wednesdays so if it's still wednesdays if you could just type that into the chat and then there's a class on tuesdays dedicated to covered calls and short puts um taught now by mike fairborne so um if you want more in depth on these strategies i do talk about these strategies a lot in this class as well okay so let's uh get right down to business um and just before i go further if you are watching this in the archives as thousands of people do and you have questions you can always just type them into the comments on the chat or if you love the class you can type that in as well and i do respond to those typically within 24 hours also know that you can reach out to either ken or i by twitter which you can see my handle above my head at b armstrong underscore tda kansas at k rose underscore tda lots of great content being posted so you'll want to take advantage of that okay let's get through our important information so we can get right out to the fun stuff options and know that this class is for educational purposes only everything we we do in this class is intended to be for educational purposes not to be construed as a recommendation on the part of td ameritrade or myself regarding any security or strategy know also that options aren't suitable for all investors as there are special risks inherent to options trading that may expose investors to potentially rapid and substantial losses um also know that in this class we use lots of actual symbols and and it's the a great way to not only demonstrate the concepts but to show you how the platform works but again example purposes only and know that all investing involves risk including the risk of loss okay so now that we've got that under our belts what are we going to talk about today we're going to do a quick market overview we're going to look at a couple of the positions that are currently in in our account and then we're going to focus the majority of the class today on placing new trades okay so let's come out to the thinkorswim platform and we're going to start with the s p 500 and so we can see that today the market which has just opened is up and and yesterday we had a new all-time high the day before that we hit a new intraday high um today we're already starting out with a new high um where we'll be at the end of the day you know hard to say but so far so good the nasdaq posted a new intraday high yesterday and is opening up on the day today as well and the nasdaq of course tech heavy index no financials that's the nasdaq 100. if we come and we look at the russell this is small caps and so the biggest of the small boys and small boys i mean we're talking about billion dollar companies here so i don't think i'd think of myself as a small fry if i had a billion dollar company but it's all relative right and so we can see that um on yesterday actually the all of this week the russell has really rebounded nicely after the pullback of last week and although it isn't hitting a new all-time high today if you had a good arm and could throw a rock you could probably hit it so it too is up on the day when we come and we look at our volatility or fear index we saw that it hit a you know a six month and actually if we come out to one year a one year intraday low yesterday and is continuing to fall just just a smidge but what does this indicate it indicates that there's a fair amount of confidence in the market currently excuse me i need to take just a quick sip okay so that's our quick market overview if you wanted to add a fifth dimension to that you might want to come out to the td platform research and ideas and if you come to sectors and industries we can see that you know we've opened the day with all sectors except real estate and consumer staples in the green and then if we come to the market monitor tab this is just especially if you're new and you haven't set up you know watch lists as such yet if we come to change time frame and we look at the last 30 days which sectors have been leading and we can see that it's energy technology consumer discretionary and real estate which is interesting now energy has been in the top three for all of this year but technology it has fallen kind of out of favor and is just working its way back in along with consumer discretionary now last year technology and consumer discretionary were two of the top three for most of you know from from may onwards um and and real estate um is you know hauling up here into fourth place if we look at the last three months and just take that a second to load again real estate communication technology and energy still in the running and so you know why do we bother to look at these well if you are looking at a market overview and you're saying okay every major indices is hitting new highs or index is hitting a new high or close to it within a stone's throw of a new high so one might interpret that as bullish right not a stretch and then if we come and we look at the top sectors over the last 30 days and over the last 90 days and we say okay energy is in there like a dirty shirt technology is back in there um so maybe these are areas and real estate is in there maybe these are areas where we might want to have a peak in in order to do that you know they call it sector rotation or or sector focus i call it trying to stack the deck in our favor okay so does that make sense so if we come out now and we take a look at some of our positions so one of them is apple we have a short put vertical and for some reason we chose to use an alert in this class typically we put in an exit and say hey when we've got 80 percent of our max gain or 90 percent of our max gain which in this case if we were paid 50 cents a share 48 cents a share coming in we might have put an exit at so we might have chosen to put an exit at five cents that would have been ninety percent or at ten cents but we didn't do that and how many days is left to expiration none it expires today and so some might say well you know what i'm just going to let this expire worthless now while some investors might use this as a strategy often in this class we do not our preference has been to err on the side of caution and take our risk off the table by exiting the position and buying it back when we've got you know 80 or 90 of our max gain but having said that given that and we'll come and look at apple um given that apple has been in a consolidation pattern and has broken this diagonal resistance line to the upside and is thus far positive on the day we're going to go with the example of letting that trade expire worthless in which case you know we will have just added how much to our coffers ninety six dollars and although ninety six dollars doesn't seem like much on a twenty thousand dollar account which is our assumption you know that's almost half of one percent um and so if you can kind of do that consistently it can work out kind of nicely in the longer term okay so could we do this again could this be kind of a wash rinse repeat you know our our strikes here were at 122 and 120 well now um we've got a stock that is trading you know at 130 350.

so if we look at recent support could we come down here maybe around that 130-ish mark you know where we saw some consolidation for several days and do something below that or could we even do something at maybe 129. so if we come to our trade tab and we come out 21 days why 21 days well the interesting thing about doing something three weeks is that that's really when time decay starts to accelerate and of course with a short put vertical and let me just ask this is there anyone that isn't familiar with the short put vertical strategy if so please type something into the chat and i'll spend 20 seconds giving you a quick overview but so if we look at this and say well on the 130 we have a 100 contracts i mean that's insane i mean that's just so are we worried about volume no what's the bid ask spread a penny i mean it doesn't get much tighter than that so could we look at this 130 strike and say that we want to sell a vertical and let's make it two dollars wide well that's 39 cents so if we're saying you know we're in it for 21 days if our rule of thumb is we want to make at least one percent per day we're in the trade and that doesn't mean we're expecting a one percent return per day um what it means is um you know we want an apple apple's way of comparison pardon the pun because we're looking at apple but if we come to our calculator and we say okay if we can make 39 cents how much are we risking the difference between the two strikes are two dollars less than 39 cents so we're risking a dollar 61. so if i take 39 and divide it by dollar 61 what's my return on risk it's 24 and so if that's acceptable um then we could go ahead and place this trade if it's not if you say i don't care how many days i'm in if i don't get at least 25 percent i'm not playing well then you wouldn't take the trade now in this class our maximum risk per trade is 400 so for risking 160 on one contract that means that we could do two contracts and if we wanted to put in an exit when we've got 80 or 90 percent of our max gain we could come here to advanced order i just want to be sure yeah we could come here to advanced order and we're going to click first trigger sequence and then we're going to come up anywhere on these two pink lines right click create an opposite order and say hey when this is worth you know a nickel so just over 10 percent let's buy it back and take our risk off the table and so how much can we make on this trade the most we can make is 78 dollars how much can we lose we could lose up to 322 dollars now would we wait until we had our max loss to exit if the trade starts going against us hopefully not and we would put that in our short put vertical bucket and fire in the hole now i've had a few people say you know i'm not really familiar with this strategy so just to give you an idea and i'm going to get rid of this to make it a little easier so the idea here and i'm going to put a line at this 130. so how do i do that i'm just going to draw a line somewhere close and then i'm going to right click and edit properties and i'm going to come over to value and i'm going to make it 130. now if you're saying to yourself self how does she get that price to show up on the right i just come up here to where it says show price oops and say you know click and say you know show it on the right also if i wanted to put my trade i can type it in here and then say show on the right and so we're going to go ahead and do that so that when you come as you're you know checking your trades day to day you could just type in here spv for short put vertical and it expires what was our expiration date july 20th i think it is let me look at my july 22nd july 15th maybe okay we'll double check that and we've got our we could type 130 128. and we're going to have that show on the right now when i come back here to the monitor tab it's actually july 16th so we were close so if you wanted to correct that you could just come back in here right click uh edit and we'll make that july 16th okay so what is the premise of a or you know in in a nutshell what is a short put vertical a short put vertical is a bullish strategy where what we are doing is saying okay i believe that apple um you know based on my technical analysis and you know we might want to sorry um combine that with some fundamental analysis i believe that since this has broken out of this pennant pattern and and one of the ways people will technicians will look at a pennant pattern is if this went from like about 118 down here to 145 they're expecting a move of about this much to the upside so they're expecting about a say a 27 move and so one of the things that we can do is say okay i have a small account i i don't want to buy shares of apple but i wouldn't mind benefiting from it moving to the upside and so it's trading at 133 i am going to sell a put at 130 and then i am going to yeah when i sell a put what am i agreeing to do i'm agreeing to buy the stock at 1 30.

well i don't have enough money to buy thousand dollars that would be way too big a position size thirteen thousand dollars worth of apple and we did two contracts so that would be twenty six thousand dollars worth and and it plus what if the stock started to tank and so in order to define my risk i've sold a put now i come underneath that and i buy a put and the difference between the two strikes is two dollars and so what's the most i can lose is two dollars because when i buy a put it gives me the right to sell and so if the stock were put to me at 230 i could turn around and sell it at 128. now there's a question in the chat saying do you ever put a stop in if the trade goes against you you can do that but some investors prefer to manage it because if this were to pull back and go just below 130 it could just be you know a wick and it could be bouncing the next day off this diagonal support line and so it's not to say that one might not exit the trade if it appears to be going against you particularly if it does that early in the proceedings um but that's that's the basics of what a short put vertical is and like i said i will put a link in to a getting started with option class on short put verticals for those for whom this is a new strategy okay so let's look at another one um marvel mrvl so when we look at marvel we had this big kind of double bottom pattern happen here and then it broke above that and i was on vacas my daughter got married in the last couple of weeks so go to twitter i will post a couple of pictures over um you know over the weekend on that but um it has you know so we miss this entry here but hey yesterday it broke above the recent high to post a new all-time high so this is a tech company you know if we come to the analyze tab if you're not familiar with it it is in the technology space a semi-conductor solutions provider and so if we look at this you know part of the tech sector which has been doing well could we sell something at say that 55 level now with the understanding that you know it could well come back and test that 55 level again hopefully old resistance becoming new support uh um you know and is this are the options as heavily traded so when we come and we look at this again if we go out to july 16 21 days would there be enough premium in it for this to be worth our wild now unlike apple that had over a hundred thousand contracts um marvel has a 175 contracts this is at 56 800 at the 55 strike and we have a delta of 36 on this which means we've got a 64 probability and this is kind of like you know guesstimate or rule of thumb based on where the stock is currently trading of this expiring worthless and so if we look at the 55 and and we say okay while i'm looking at this you know i still have only a three cent spread um between the bid and the ask which is pretty solid so if we were okay with that we could come to sell vertical and on a two dollar wide strike we'd make 52 cents so if we take a look at you know and do that math again 52 divided by two dollars is the strike width here minus the 52 so divided by a dollar 48 that's a 35 return on our risk so we might say well you know that's pretty juicy um but maybe i could play it a little safer and do the 54 and the 52 or you might say you know what i'm pretty bullish on marvel on the market in general etc etc but if i come to 54 you know that's almost under all of this so we might just want to check that out so we're going to come back up here we're going to go to 54. now i don't know that this will be viable but we'll we'll see so here we've got 36. that's a little bit light so we might say okay we're going to go with that 55 53 and again if we can risk up to 400 dollars we can do two of those single order we come down to advanced order single order first trigger sequence right click create opposite order now if we say we want to get out when we've got 90 of our max gain but we meet next friday and this thing is worth 10 cents and in one week and a third of the time we've got 80 of the max gain might one choose to close it out absolutely so just because you put an exit in here doesn't mean you can't change it or maybe it continues to go up and you've got 75 percent of your max gain in just a few days and then it looks like it's going to start pulling back well you might say hey you know what bird in the hand i'm going to take it so just because we put something in here doesn't mean that you know we're abandoning our rules or our goals by exiting at a different time or a different you know rate of gain so we're going to put that in here and again in the tech sector which has been leading now in the last 30 days and leading a leading sector over the last 90 days okay so that's marvel i wanted to do one other and this is in the consumer discretionary sector starbucks so when we look at starbucks this is a one-year chart so we can see that it's obviously been up trending and then it started to consolidate seem to be moving a wee bit slow here well that wasn't what i was intending so we'll go to three months so then we saw you know this period of consolidation and you know i had drawn this line before but we saw you know a series here of lower lows and lower highs and then it broke through this diagonal resistance line and this is not uncommon for us to see you know something breaking above comes back and re-tests but here we have a lower high now you know today it's broken above that and others you know where it's interesting technical analysis can be in the eye of the beholder right others might have looked at this chart and said well you know i'm seeing a bit of a a pennant pattern again happening here and if we had looked at this high oh let me change my drawing tool um you know if i get rid of this one they might see a diagonal resistance breakout here and again this could well come back and retest so if you said okay if it comes back and retests it's at 1 1280 where might that retest happen well maybe around the 110 mark so could we do something below at 110 or below and could we be out before the next earnings on july 27th so if we came out here and we can look at this and say okay the 110 we want to be out before the 27th what kind of volume do we have tons of volume but at 83 cents is this likely to pay us enough premium so if we come and we look at the 110 108 at 37 cents that's a little light so we have two choices we can look at going another week out to the 23rd now this is a weekly so one of the advantages of weeklies is we don't have to go another whole month out and this 23rd is still prior to the 27th but we tend to have less volume and when we have less volume that can often mean a tighter bid ask spread but you know or a wider bid ask spread but so you see here we have a two cent spread when we come here we have a 20 cent spread now does that mean you know this isn't tradable or you know here it's actually this is only 6 cents we have 115 contracts a delta of 30 which means we have a 70 percent chance of this expiring worthless well let's see if there's enough premium in that for this to be worth our while we're getting a 20 credit and that's just not enough and and why is that credit so wonky well we can see oh all of a sudden our bid ask spreads here 84 and a dollar 73 like that's just insanely wide where the 110 is 108 114 so i don't know if that's a glitch and that'll correct itself later in the day but because this bid ask spread is so wide it makes that un untreatable so ken thanks for uh answering that question on max gain with a short put vertical the most we can make on the trade is the uh credit we got paid to get in now i want to do one other trade and then if we've got time i'd like to come back and look at a a long call vertical which is a a another bullish strategy and some would argue that it's more bullish and and why is that well if we come to the chart and we look at and i i wanted to look at this on apple so and and you know it now it looks like it's pulling back a little today but if we're really bullish on apple and we're saying you know we're expecting a move you know that's pretty significant as it's broken out of this diagonal resistance line if we do a short put vertical as long as it stays above we are good to go whoops so if it goes up we have a profitable trade if it goes a whole lot of nowhere and goes basically sideways we have a profitable trade and in fact our strike is at 130 so it can even come down by three dollars a share and we still have a profitable trade now if we did a long call vertical how is that different well with a long call vertical let's say we did the 133 135 it has to go up and to get our max gain it would have to go above 135 and stay there but if our max gain and this is one where we pay to get in so let's say we paid a dollar to get in and our max gain is a dollar that's a hundred percent return on our investment but it's more directional it has to go up we have to be right on direction okay in order for that to work out given that this is looking like it's pulling back only to the tune of 22 cents we might wait on that one okay so the last one i wanted to do today was a buy right or the second strategy i wanted us to look at so when we take a look at devon energy so and let's kind of go to a six month we can see that this is an uptrending stock it was in a bit of a sideways range and then it broke to the upside old resistance became new support and you know now today it's moving back when the market first opened this was marching to the upside again but if we look at this and say okay our max position size in this class is a 5 000 um trade which would allow us to do a strategy like a buy right on a stock that's up to 50 in value devon is currently trading at 29.59 so

that's within our realm of possibility if we come out here again to the td ameritrade platform and we look at devin you know light trading day at a million shares has been absolutely outperforming the nasdaq and the s p um you know rated a nine on on trip tanks uh tip ranks analyst ratings for devon devon energy raised to outperform from market perform by um bernstein devon energy upgrades raises price target to 37. and you know definitely we might want to do a more in-depth uh you know analysis on this analyst rating for devon so there's an average price target among the 10 analysts an average price target of 3258 a high of 40 a low of 27 and it's currently trading at 29.60 so if we come back here and we say okay talk to me about a buy right well a buy write the idea of a buy right is that we're going to buy the stock and sell a covered call at the same time and the goal is i think of it as we're selling our call in the middle of the road in other words if we're bullish on this we're expecting or our technical expectation is that this stock is going to continue to go to the upside and we are going to sell a call which means we're agreeing to sell the stock and we're expecting to be called out the goal is to be called out so this is a short term either income generating strategy or a growth strategy saying you know what this is a dating strategy i may like devon it may be in a sector that's been strong so far this year but i'm not making you know i'm not there's no ring involved you know we're gonna date for a few weeks 15 to 50 days when it's done we'll see how it went if we're both happy maybe we do it again and if we're not we don't um so the commitment is is lower so we're going to come but we are buying the stock so we're going to come out here and we're going to say well it's trading at 29.66 there are 6 000 contracts and this is if we were in this for only 21 days there are 6 000 contracts at a and how much would we be paid at the 30 we'd be paid a dollar 13 to 1.21 and actually when you do a buy right you are paid the mark so the midpoint a dollar 17. you might say well is

is that worthwhile i mean the stock's already at 29.64 it only has to go up by 34 cents for us to be called out how much does this stock move in an average day a dollar 20. yeah and somebody's saying this is a flag pattern absolutely so if we come out here and we say okay let's do the math so if we right click and we buy because we're buying the stock and we're covering it with a call right out of the gate so 2847 is the price we'd pay to get in what's the most we can make well we'd be called out at 30.

and so if we do the math and we say okay well the most we can make on this trade is thirty dollars if we're called out and that's the hope or i hate to use hope hope is a four letter word when it comes to trading the expectation is that we would be called out so what could we make a dollar 53 or when we take the multiplier into account 153 dollars so if i take a dollar 53 and i'm just going to use my calculator here and divide that by our price to get in of 2847 that turns out to be a return potentially of 5.3 7 or 5.4 is the potential return for how long for 21 days so if you're saying hey a 5.4 return in 21 days for a stock that has to go up how much 39 cents um would that be acceptable and so some might say well why are you only going up to the 30 why aren't we doing the 31 well we could we absolutely could but if if you want the odds to be higher you've got a 47 chance and your bid ask spread is quite tight here now it's only 10 cents apart here and you know instead of making a dollar 17 you'd make 96 but then you you know you'd make an extra 50 cents you know so if we look at this and we say okay we're going to go with this strategy now how much are we risking we're risking over two thousand dollars two thousand eight hundred and forty nine dollars to be exact does that mean our requirements for this class so if we look at this and we say okay well if we if we say the 30-day moving average has been acting as support so how about we put a stop in at 28 28.23 if it goes two or three percent below that we want out so if i said okay 2823 times 0.97 so if it goes 3 below that 30-day moving average that's 27.38

what was this recent low 26.67 so if it comes back to here we would be out so 2738 so if i come to the trade tab how much am i risking i'm risking less than 100 and so you might say well you know what maybe i'd rather put my stop below this recent low to give it every chance to work and so if we looked at that low 26.67 and we went three percent below that so 26 67 times 0.97

that would be 25.86 and if we come to our trade tab you know that's still you know under 300. so that would be acceptable now if if we sell the stock and we get stopped out we also want to make sure we bought back this call that we sold and if we get stopped out on this this call would be less it would be worth less so we'd have made money on the call and it would help ease the pain of what we've lost on the stock does that make sense but in this way we are defining our risk so again first trigger sequence we're going to right click create an opposite order and because we don't know exactly what the value of the call will be we're going to make this a market order good till cancelled and we're going to come to our sprocket beside best and say hey if this stock goes at or below 25.86

let's shut this position down and you'll see it says here this price of the security is equal less than or equal to 25.86 yes and you know what we we have often done in this class slightly out of the money or we put it at closer to an all-time high but i just wanted to give you an example because i want when it comes to the break even this i think that this is quite interesting our break even oh it's saying not applicable well that's interesting or our break even on this if we're paying 28.56 okay it's already trading at 29.79 so you know if at the end of this time it's still at 29.79 in fact

it could go down as long as it's above 28.56 we have a profitable trade because that's what we've paid for this in total and so you know when we look at this our max loss here is saying it's 28.56 it doesn't take our stop loss into account how much can we make the most we can make is 144 dollars but again on an account that's twenty thousand dollars in size that's a five percent return on this trade or it would up the value of our entire portfolio by about a percent and a half or close to it so we're going to put that in our buy right covered call bucket and fire in the hole so i will make sure well there we go that's filled okay so there we go that's our class for today we have added three positions so two are short put verticals one is a buy right we talked about long call verticals and we'll look more at those next week depending on what's happening with the market we do in this class manage the trades that we place so over the coming weeks we'll look at our trade management strategies we'll look at whether or not these have um you know filled so did we have our max gain or did we hit a loss in the upcoming classes and i thank you for being here if you're watching this in the archives or you know if you're new to some of these strategies you may want to come back watch the recording and then tap into the trading a smaller or sorry getting started with option classes on buy rights and covered calls now an easy way to go and dig those up if you don't want to wait for the recording is to come to the education tab and when you do that and then you come to webcasts you're going to want to just it takes a second to load it's funny how impatient we become isn't it archived webcast if you come down to getting started and then you type my name because i'm the one that teaches that you can see well we did covered calls so here was short put verticals on may 14th and then going back to april 30th buy right covered calls so you can also find it that way so guys if you enjoyed this i'd appreciate it if you'd smash that like button if you haven't subscribed to this channel i encourage you to do so there's lots of great content and you won't want to miss anything once again you'll want to follow um ken and i on twitter there's lots of great content being posted there on the daily and on the weekend i try to throw a little humor in just to balance things out so i encourage you to take advantage of that also and just to wrap things up again no everything we covered in this class is for educational purposes only not to be construed as a recommendation on the part of td ameritrade or myself we do use lots of actual symbols in order to demonstrate the functionality of the platform and to illustrate the concepts that we're talking about also know options not suitable for all investors there are special risks inherent in option trading and last but not least all investing involves risk including the risk of loss so thank you for joining me today i hope you have an absolutely awesome weekend and best of success with your trading huge thank you to all of you who are here live and to ken rose for helping in the chat thanks ken bye for now

2021-06-30 13:10

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