Short Term Trading Using ATR | Long Options
well good morning everyone my name is barbara armstrong delighted to be joining you on this beautiful monday morning in july we are talking long options today and specifically we are going to talk about a short-term trading strategy so if you are interested in a short-term trading strategy that where you might be in this trade for a day you might be in this trade for two or three days you might be in this trade up to a week and then given that you earn a profit you can either use that for income or you can use that to plow back in and help grow your account you are in exactly the right place so stick around there's lots of great stuff coming your way all right i want to say good morning to everyone that is joining us live today we always have many people here and a lot of what i affectionately call the usual suspects good morning to woodsman and vijay and el diego and sandeep and krishna and mike and sherry and keith and um alfred and sebastian and robert and sophia and wayne and many others thank you all for being here um it's so much more fun uh when it's interactive and know that you are welcome to ask questions we have the fabulous connie hill joining us in the chat and so she will field any questions that you might have as we go along that you know may not be as appropriate for me to answer in the body of the webcast and don't think because you have a question you that you're the only one chances if you've got a question there are dozens of others who may be thinking the same thing um if you were watching this in the archives you can always uh put your question in the comments on in the chat and if you loved it you can put that in there too um i do look at those on a daily basis and we'll get back to you quickly the last way to reach us is via twitter so at b armstrong underscore tda connie's is at chill underscore tda we're both posting content on a regular basis i had a lot of people ask me in the comments how to add a group to the monitor page um and and i post to do's like that on thinkorswim on a regular basis so if you're not following uh connie and i on twitter you are you know missing out okay let's get to our important information so we can get out to our agenda quickly and right down to business because as always we have a lot of exciting stuff to cover today first and foremost this is an intermediate level class it's for education and informational purposes only so none of the things that we look at as far as examples today are to be construed as investment advice or a recommendation of any security or trading strategy know that options carry special risks with them not suitable for all investors also if you are new to td ameritrade you've got to apply for option trading privileges um subject to a review and approval and not everybody qualifies so just be aware of that in your paper money you can trade whatever you like and also know a long call or a long put places the entire cost of the option at risk and you could use lose the entire amount you invest know that all investing involves risk including the risk of potential loss so what are we going to talk about today well last week we introduced a strategy called the one atr strategy and i am going to put a a link in in post production to that it will also be in the notes so if you want to catch that class if you missed it or you want to watch it again you'll have access to it afterwards you can also always go to the archives and look it up there so this is a one we call it atr which stands for average to range trading strategy we're going to place some new example trades and then we are going to look at the trades we pla placed last week with this strategy and see how those worked out so that is the plan for this morning's class so let's start you know and i didn't put down that we would do a quick market overview but it's a great way for us to position whether we want to trade bullishly or bearishly so what do we see on the s p 500 i hitting a new all-time high today okay so and what is the trend go ahead and type that into the chat guys what kind of trend are we looking at yeah given it hit a new all-time high today it's pretty much a bullish or uptrend we're hitting a new all-time high on the nasdaq today so tech heavy index no financials how about the dow 30 oh look at that it squeaked through my friends to hit a new all-time high it's still i would say you know a little bit range bound but it's obviously at the top of that range and kind of poking its head above so stay tuned for further updates on that one and then how about our small cap friends some of these are billion dollar companies keep in mind so that is still you know after you know a very robust uptrend in the fourth quarter and through the beginning of this year um we've got a sideways trend you know where it came down and last monday hit this support level which is hit many times in the last several months since march and that support level held and it's bounced and it's moving on up to the upside and vj and el diego and neil and cola you're absolutely right you know bullish on the spx and the ndx and and on the russell we're seeing it's uptrending within this sideways trend so we'll see if it gets back up closer to the top of this range if this time it breaks out or if it comes down and and goes the other way but that's where we are right now and for the fear or the volatility index where are we sitting around 18 so in that you know 15 to 20 range that it's been hanging out in really since the end of march all right so what did we do last week well we talked about this one atr strategy and and what is atr i have it on my chart it's down here at the bottom and atr stands for average true range so if you come to edit studies and you have something you're not sure of so here's atr it's right close to the top if you click this little question mark it will tell you the average to range calculates the true range price range over a time period and you know and the default is 14 days so it looks at the current high and the current low and then the difference between the current high and the previous close and the difference between the previous close and the current low so that's how it calculates this by default it uses a 14 day period you know but you can change that if you like but i figure that you know people who maybe have perhaps have more experience than me chose 14 days for a reason and so i leave that there i've also posted on twitter you know this kind of stuff within the last couple of weeks i think um so that's average to range and i've added it to the bottom of the chart um and so this average true range strategy is and and let's look at charter as our first example chtr so we looked at charter last week it's been you know in an uptrend basically since the middle of february ish and we saw this bowl flag pattern where it had come down and then we had this bullish configuration and so on monday we placed a trade and we said what if it moved just one you know one atr and so we said okay well it was trading at 709.98 the atr on that well the atr on that now is you know about 12 so it's actually gone down a bit it's 12 17 it was 1268 so we added 1268 it gave us a target of 722.66 and we put that in as our target and then we said you know and i say this tongue antique in the highly unlikely event that we're wrong because we always have to plan for the times that the market doesn't go according to our wishes um and so we said if we're wrong we'll look at the bottom of today's candle which was this day and at that time it was 706.39 which turned out to be the low for the day and we said if it goes one atr or 12.68 below that to 694 we want out
and so if we want to see how we did on something and guys this is an intermediate level class so if the concept of a long call is new to you in post-production i'll put in a link to the getting started with options class but i highly recommend that you check out getting started with options if you're new to all of this it is tuesdays at the same time at noon eastern and um in two weeks we're starting back at the top of the rotation again with long calls and long puts so there's a companion class to every one of those getting started and and this is the companion class i call it for long calls and long puts so but anyway if we come back to the monitor tab and then we come over to account statement which is where we are and we look at charter chtr okay there was our order history okay why is my trade not showing up okay that's weird because it was here this morning c h t r c h t r [Music] oh you know why because i'm in the wrong account there we go so let's try charter again so we got in this trade last monday for 23.60 we bought one long call and um we got out the next day so the 20th at 29.80 and so if we kind of do the math on that and i went ahead and did the math ahead of time so let me just bring up my drawing tool this happens to me it would seem every time okay let me do that again okay so 2980 minus 2360 is 6.20 times our multiplier
so one contract was 100 shares so we made 620 on that trade and how long were we in it we were in it one day from monday to tuesday and what kind of return on that was that so we made 620 on an investment of 23.60 which was our purchase price to get in and so that was a twenty six percent return not bad for an investment we were in for one day and how much did were we expecting it to move or were were we going to be okay with getting out after it moved the average true range the amount it averaged it moves on average in a day so and when we look at our in and out because you you hear many of the coaches say on a regular basis hey you know what when this um you know when we have an exit we're not guaranteed to get out of that price but our exit wasn't a specific price for the option it was when the stock reaches this price whatever the options worth sell it sell it okay so that was charter and so that one worked out well that was a bullish trade we also did one on costco and if we come and we look at the chart on costco similar thing we have a stock that has certainly been up trending and we saw this pulling back for one day but still on this 10-day moving average we got in on the 19th we had a target of 4 16 56 so here our target was that current price plus 516 which gave us a target of 416 and and had we been wrong we wanted to look at the low of that day's candle minus one atr of 518 for 404 86 okay so we ended up in that trade also for only one day and we got it in for 950 and out for 11.75 and you may say well you know that's not much of a profit but it was and 25 cents and if i take that 225 and we divide that by the 950 to get our return on our our risk because how much were we risking you know it is possible that we could lose this entire amount right well that return was still 24 think about it 250 on 10 is 25 right so it was a 24 return for one day and so a lot of people would say well you know that beats a poke in the eye with a sharp stick you know that's a pretty reasonable return a lot of people would love to get that return on their portfolio over the course of an entire year and we got that return on this trade in one day and the other trade was pretty um similar now we did do a third trade so that was charter and this is costco and the third trade we decided to do a bearish trade just because we have you know we've really been ignoring the bears a lot lately and why is that well because the market has been so darn bullish but we decided to um do a you know one for the bears and so when we came because we're just practicing right so we came to the monitor tab let's come back to activities and positions and this one we're still in and we still have our exits so if we come up here to our working orders and we look for c t s x which is right here and we click on this weight condition this little sprocket it'll say we want to get out you know our stop is at 118 because this is bearish so we're our expectation is the stock is going to go down and our target is one oh well it should have been 1160. it looks like we have 1135 so we could change that but if we let's go and look at the chart on this so ctsx so when we look at this the last earnings at gapped we've got earnings coming up here's our target it is moving down today but it's been kind of you know a day up a day down a day up a day down this has earnings on the 29th and so one might say you know well hey if it gaps down like it did the last time you know we do we could do very well on this so this is the kind of the yin and the yang the conversation that one has to have with themselves and and this is you know obviously downtrending um still although you know the last few days it's kind of been um consolidating where are we on this as far as profit or loss well we're down 85 dollars you know we were down 90 but we made five dollars back today because it's starting to pull back but this is one that you might want to watch and say you know i was expecting it to move it hasn't moved in i was expecting it to move within a couple of days and it hasn't so it would be totally within the realm of legitimacy for one to say i'm going to take my five dollars and what's left of it and we've still got eighty percent left we're down you know not quite twenty percent on this you know we could choose to just close this out now we do have an exit if it goes up one atr to 18 18 35 one of the things that we need to be careful of is that if it continues to go sideways time will eat away at its value so we're going to watch this for another day or two and it will keep will keep you posted but if you have a vote feel free to put it in there so um yeah so the atr there's a question on where did i find the atr the atr is a study that i've added and it'll make more sense when we go and look at this so there's another question about time frame so this is a very this particular trading strategy that we are talking about today is a very short time frame so what does one atr mean one atr means that in an average day this is how much the stock moves so if we put in and our next trade is going to be on um i think we're going to do netflix first today so the if we look at netflix and we say if in an average day this stock moves 12 dollars then and my expectation is that in the next day you know it's likely to move up how long am i expecting to be in that trade one day two days three days max probably not more than a week now does that mean that all long options that the trading time that's appropriate for long options is a week no we can do leaps which is long expiration options where we might be looking out like a year and and we might be saying you know i'd rather buy a leap because it will cost me less than it would cost me to own the stock and i'm still really bullish but you know i get to control 100 shares of stock by buying that leap and and we'll talk about leaps in an upcoming week but this particular trading strategy is a very short-term trading strategy so this is days to weeks and and weeks not very often is there going to be an s on that week with a an atr trading strategy so you know we could with long options the answer is it can be a short term an intermediate or a long-term trading strategy you know long options it can be any and all of those depending on what you're you're aiming to achieve okay so let's go and look at netflix okay so here's our friend netflix and if we kind of back up to take a longer perspective i'm going to go to two years so two years ago the low on this was back in september at the end of september around 2 252 and it ran all the way up here to about 565 570 that was last july and it has been trading basically in a range between it's a big range kind of between four sixty four seventy ish and 570 ish 565. and so what we saw is on the last earnings although i have done my best i'm not much of a tv watcher but i started watching the crown which i think is on netflix um and uh yeah so you know it didn't turn this around over earnings so it it actually came close but did not beat on earnings um and so the price fell but it's still well within this range and then what are we seeing now we're seeing it moving back to the upside so you know are we saying that we're optimistic it's going to come all the way back up to 565 what how high did it come the last time 554 but if we say well you know what it's it's moving and it's up you know three dollars and 87 cents today for you know over friday's close what if we did a one atr on this and we just our expectation is that you know it it'll move up sometime in the next week by by how much and if we come and look at this right now what is a one the the average amount of moves in a day about 12 dollars and 60 cents and so if we looked at this and said okay our our current high is our current price is 519. let's just call it 519. so here's our example july 26th is today the 26th yeah so if we look at netflix and this would be bullish even though it's trading within a sideways range okay and we are going to look at the current price 519 well now it's moving to the upside 519 at 26 is where it's currently trading and we are going to add to that that 1227 which is one atr and so what's the math on that so there's a little calculator on here i could bring up but i have a calculator at my desk so 519 26 plus 1227 531 53 would be our target so i'm going to come over here we're going to call that our target now if the trade goes against us and that is a possibility we kind of hate to think about it but you know what we're better to think about it when we are not emotional i i've been reading this book atomic habits and and he talked about how emotion can cloud our decision-making process and so one of the great things about deciding when you're getting out before you get in is that you're clear-headed and you're not emotional which really helps so if we take our stop and we say okay so what was the low today well if i hover over that candle the low was 50901 so i'm going to say 509 let's just call it 509 minus 12 27.
so 509 and 12 we're subtracting 12 27 496 73 so if this hits 496 73 we are out yeah yep it's um yeah so that's i'm just looking at the chat here um i'm loving learning options thank you for saying that um and netflix is best for a swing trade so this is like a very short swing trade um but yes another choice so we're doing a one atr strategy and and maybe next week we'll do a comparing one atr to a swing trade a swing trade might be we're going to trade this back to the previous high around that 553 mark and we could absolutely do that um but we're going for little wins base hit base hit base hit this is a base hit strategy a swing trade can be like a base hit on steroids it's kind of more it could be a double depending on where your your swing target is that could be like a triple if you're a baseball player which i am not not really even a baseball fan but you know i think most people can relate to those analogies so let's go ahead and put this in so how long are we going to be in this trade well the plan is just a few days right so if we give ourselves 25 days and this is kind of getting short because as we approach especially the last three weeks from 21 days on it theta starts chomping away at the value of our options so we want this thing to move quickly and be in and out but if we look at august um this is an expensive option like fifteen hundred dollars you know and you may be going like and theo price which i think is such a cool tool it is on the trade tab and connie does a class in her um in uh platform demo on thinkorswim which she does on wednesdays at connie could you type it into the chat i believe it's at five o'clock eastern um she takes a whole class and talks about this so if you're new to this you may want to go look that one up in the in the archives and and actually i will look it up and i'll put a link in to it in in post production but the first thing you always do it is hit reset and what's our target is for this to go up by 12.27 so if it goes up by that amount um and i look at this and say okay that'd be around that 5 31 mark so we're close and if it does that tomorrow like let's be optimistic so if we're paying 15 for this what might it be worth so and this is a ballpark this isn't a guarantee you know because volatility can change and other things can change so we're paying somewhere in this range and it might be worth about 22.90 and so you know if i round that up to 16 and round that up to 23 that's about a seven dollar gain which is in that neighborhood of 50 return on our investment now what if it goes the other way because you know we've got to always consider what the odds what could happen if we're wrong well 496. so that would be down not up 12 this would be down over 20 so let's say down 25 dollars a share and what if that happened just as fast minus minus 25 okay 494 okay we're close it would actually probably be minus 20 let's call it 23. okay so now we're in that neighborhood 496.
um it's a little bit high but you know we'd have lost so and again you know if we're looking at this 515 strike we're you know looking at losing like over half that's more like 60 percent so what the market giveth the market can take us away so we want to be aware of that okay so we're going to go ahead and put this in we're going to right click anywhere on this line we want to buy custom with an oco bracket and we're going to make both of these good till cancelled and we're actually going to make both of these market orders why is that because we don't know exactly what the price of the option is going to be so we're going to put our target in on the first one and say hey when netflix i always use positive language when netflix goes at or above 531.53 we would like to exit okay save and if it goes against us and hits 496.73 we would like to call it a day 496.73 save confirm and send and then you may want to read this out loud you know like if your default says 10 and you're going uh i didn't i didn't mean to buy 10. you can always come back to edit and change it so this says i want to buy one 515 call cost is going to be 1535 i want to exit the position when the mark goes at or above 531.53 check or at or below 496.73
check what is the cost to get in 65 cents what does it cost us to get out 65 cents it'll fill one order cancel the other how much can we make it says infinite but it isn't really infinite because we have put a cap on our potential gain by putting in that exit and peter you know is saying you know not a favorable risk to reward because we could lose more than we could potentially gain on this one that is true and so some might say i'm either going to put my stop up tighter and we're going to talk more about trade management and we'll do that next week on this but if this moves up tomorrow and doesn't quite get there then we're going to move our stop up to 20 cents below the low of tomorrow's candle and so we could put that let me just and this is a one you can put notes into yourself a one atr example trade well we know they're all example trades because they're in our paper money so if we come down here and talk trade management if it doesn't hit the target the next day moves stop up to 20 cents so 0.20 below the low of that day so you want to manage your risk so thank you for that question so that's one of the you know trade management example i call these mid management strategies when you're in the middle of the trade it hasn't hit your target it hasn't hit your stop but you're still in it so yeah you might want to do that okay so our next example because i always like for us to be able to get two or three examples in are you with me have you got your fingers flexed are you ready okay let's go and look at oh i got so many to choose from okay we haven't done anything with crocs in this class and no one is allowed to laugh but you know we started trading this and trading a smaller account which is fridays and um you know back when it was you know a ten dollar stock and you know now we can't afford to have it you know as i own the stock in that class because it's 136 it hit 136 dollars a share after earnings but what we can see is it gapped on earnings and this humble little piece of footwear um you know our atr on this is close to five dollars right it's well let's call it five dollars so our atr on this is five dollars so in an average day you know of late and that includes this gap it can move up five dollars and and so what we may want to do on this is put in a conditional order now this was um bullish just a minute ago it was up a little bit so we could put in a thing to say hey if we you know enter this trade we only want to get in if it goes above today's high of 133.20 so that'll give us a conditional order example so our our high today is 130 320 we're gonna add 25 cents to that so 133 45 is when we get in and then when would we get out so here's our second example uh also bullish and this is in the consumer discretionary sector which has been strong you know one of the top sectors in the last 30 days so if we look at this and say conditional entry at 133 20 which is today's high plus 25 cents 133 45 plus our atr of five so let's just put here our conditional entry first 133 20 plus 25 just so i don't confuse people 133 45 that's our conditional entry and then our target because often and today i saw a lot of these where things moved up so much last week they're starting to pull back a little bit so and then our target is going to be that entry 133 45 given it hits that we're going to add five dollars to it so our target is going to be 138 and then our stop well we're going to look at this and given we get into the trade the low is 129.82
so is today's low 129 82 minus 5 so 124 82 482 okay so how would we put that trade in well if we come to the trade tab and we look again at august and we look at the in the money strike we can just come back to i call it barb's basic setup which has open interest and volume so do we have a tight bid ask spread we do 20 cents apart um do we have lots of volume we do do we have you know for august we have a 56 chance this is going to be at least a penny in the money right now it's already a dollar 38 in the money so we're going to right click anywhere on this line we are going to buy custom with an oco bracket so that's business as usual the difference is we're also making this a market order good till cancelled or we could make this a buy limit but we're going to say we only want to get in this trade if the stock goes above 133.45 so if it doesn't now you know if it it had been up trending when you know we looked at this we might have just gone ahead 25 cents is just saying i want it to at least go a little bit above today's high to show that today's high isn't kind of creating a new resistance level or ceiling and if resistance level and and support level and stuff like that is new to you you're going to want to get to cameron may's class on mondays at night um nine o'clock mountain 11 o'clock eastern so we're making these market orders too and when do we want to get out well if crocs goes at or above 138.45 138 45 and then or if it goes below 124 82 124 82.
and we'll make sure that registers and then when we come to confirm and send you know so how much are we risking here well that option was about five dollars right so if we said well we'd be willing to risk about a thousand dollars on a trade we might do two of these you know so we could come back to our edit and if we were looking at our option chain so i'm going to close this 620 well at 620 you have to consider that we could lose the whole amount so if we're being conservative we might say well if the most we want to lose is a thousand you know but we placed the trade for 1500 on the other account so if we said well you know we we've got an um you know a floor on this to get out so we feel we could do two so if we did that we'd come up here confirm and send and we want to read it through we only want to get in if it goes out or above 133.45 check we want to exit when it hits that one atr target 138 or if it goes below five dollars below today's low 124 82 we would be out so put that in the long call bucket when and if it fills and away we'd go there is a survey listed in the chat and so if you could do me um you know a favor and provide some feedback i would love that you can just click on the link it's a bitly link with four quick questions if you put comments in i promise to read every one but it just helps me gain a better understanding of what you're looking to see more of or perhaps less of so here are some others that you might want to practice in paper money on i'm not in your live account but co part you know has been up trending and you know you have to look at if it's pulling back today do we put in a conditional order and then do you just leave it well no the next day if it pulls back again you'd change the entry on that conditional order and then the next day you'd change the entry again if it were to pull back for three or four days um the same with costco we're seeing a lot of this pattern you know where it's come up nicely and you know might pull back for a couple of days um docusign same thing you know and if we had put trades on all of these last week they would have worked out pretty well wouldn't they but you know the ones we did worked out just fine and here's one that i think is pretty interesting because for the technicians in the crowd you know you've got what do you see i always think that technical analysis can be a bit like a rorschach test right it's not the tidiest but i kind of see an inverted head and shoulders but it hasn't broken out yet has it but if we look at our atr on this it's 572 which takes us really just right back to this resistance line oops i didn't mean to do that so if we just placed a trade and said well what if we it just goes up to that resistance level and turns around could we still have a successful trade so it's trading at 121 84 right now if we added 572 to that so peloton and we would have an entry today so our target would be today's price up a whopping 21 cents so far 121.70 plus 572. so 121.70 plus 572. 127.42
so if we made that our target and then our stop well what's the low of today's candle which was pretty much the low of yesterday's candle also 117.75 so our stop would be 117 75 minus 572 so 117 75 minus 572. 123.47 so you'll see when you get the hang of it how you can do that so somebody's asked how to add extra space to the chart on the right i will post this for you on twitter today but if you come up to this sprocket it gives you a bunch of choices and if you come to the time axis and i've added 40 bars to the right which is actually a lot so i might want to change that say just give me 30. i did that because it's earning season so you'll see it push my button a little closer my earnings button but then if i want to you know type something here like my target i'll put the word target on something and if you want to add the word target you would just come to this line edit the property and if our target is 127.42 we can change the price and then
come up here so we can see it on the chart here's our target if you were wondering how i did that show it on the right and now it'll say okay here's our target which is basically the previous high right yeah now i know somebody said can you sell a long call um you know over top of can you sell a short call over top of a long call absolutely we call that a long call vertical and there's a whole class just dedicated to that on thursday mornings it's taught by john mcnichol we do a lot of long-call vertical trades in trading a smaller account on fridays also because we can't afford an option like peloton we don't want to risk more than 400 on any one trade so this is a really kind of uh a good way to do it um a long call vertical so it's just another totally different trading strategy and in this strategy we focus on this one so i want to show you one other super quick way because we have to wrap up but if we come to the trade tab and we looked at this and said august 70 okay if we were willing to do two of these for peloton right click and we're just going to say by custom with stop not with bracket it's like but we are going to put a bracket in aren't we yes we are but what we're going to do is make this market good till canceled and then when i hit this sprocket i can put in both my target on the top line 127 42 127 42 and then i can just come down to the next line and put my stop in of 123.47 so it's just a little bit faster okay so that's it we've done three example trades all of them are bush bullish all of them are for example purposes only we did one on netflix which is going sideways one on peloton which is setting up a um an inverted head and shoulders perhaps but hasn't broken through it yet and and our target is basically that resistance level and then one on crocs that has broken out to a new high and if it hits it it would be an all-time high so my friends that is it for today i appreciate you coming to spend some time with me so we can learn together um oh i don't know why we gotta sell on that so i must have put something in incorrectly i'll go back and look at that and and re-enter it so you know sometimes we can have what we call human error so we're going to come back anyway to our agenda short-term trading we talked about that we talked to about this example strategy the one atr strategy we'll look at the trades we placed again um next week and we'll review those and then we'll look more at mid management and then perhaps we can look at a comparison between a one atr strategy and a swing trading strategy so you'll have to come back so stay tuned keep in mind everything we did was for education and informational purposes only yeah and that all investing involves risk that options carry their own special set of risks aren't suitable for all investors you do have to apply for option trading privileges with um tda so and we did use actual symbols yes can we get a refund for human error sometimes human error has a cost yeah so but i will figure out you know kind of what that was and um stay tuned on twitter with connie and i lots of great stuff coming up and next up is getting started with fundamental analysis with the always entertaining and informative mr james boyd so stay tuned he'll be with you at the top of the hour thank you for joining me and we'll see you in an upcoming webcast soon take care everyone huge thanks to connie hill um for hanging with us and you guys certainly kept her busy in the chat also if you like this please smash the like button hit subscribe and thanks in advance for clicking on that bitly link and filling out the survey thank you bye for now