Short Verticals | Ken Rose MBA, CMT | 1-20-21 | Trading Earnings

Short Verticals | Ken Rose MBA, CMT | 1-20-21 | Trading Earnings

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hello investors so interesting day in the market today some huge moves here going into the close particularly communication services up over four percent technology stocks also showing some strength in the light of that we're also entering into the middle of earnings season what can we do with regards to our strategy here short verticals to take advantage of the different things that are going on in the market today investors again do you want to welcome here to short verticals as always we've got some interesting things going on in the market we'll take a look at those to see how they affect our current positions and also present potential positions just a reminder you can follow me on twitter my twitter handle is at krosc underscore tda where i post things related to this area as well as other areas of investing i also want to welcome ben watson over in the chat panel aka chart master perhaps many of you have seen him on the td ameritrade network as the chart master it's great to have i have been here today i'd also encourage you to follow ben on twitter that's b watson underscore tda i'm sure ben would be more than happy to send his twitter handle over there to you in way of disclosures just a reminder that in order to demonstrate the functionality of the platform we need to use actual symbols however td ameritrade does not make recommendations or determine the suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility we also use a paper money software application here this is for educational purposes only we want to keep in mind that successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period as market conditions do change continuously here's a picture of myself been here since about 2014 2016 somewhere somewhere in that area i've been here for for over 16 years so i guess i've been here more more along the lines of about 2006 anyway been here for a while enjoyed a lot i love the work that i do particularly love love learning new things there's always opportunities to learn new stuff in this area love to teach here as well as trade i'm also a contributor on the td ameritrade network i'm a charter market technician and i work and i work with think scripting building indicators triggers and strategies and the like with regards to our session here today we will do an overview of the market we will review our existing positions and also our past performance we'll talk a little bit about earning season and how earning season can provide some potential opportunities as well as risk as it relates to short verticals then we'll look to add some potential led to look to add some additional paper trades to our portfolio so with that let's go ahead and get underway to do that i'm going to bring up the thinkorswim platform and here we have a chart of the s p 500 and you can see what i was talking about a little bit earlier here at the top of our top of our discussion here look at this look at look at the overall trend the overall trend has been very strong and we've been moving up in this upward channel right here making higher highs and higher lows pull down here started bouncing yesterday the interesting thing about today's candle apparently investors liked what they saw with regards to the inauguration and perhaps other things related to the underlying economy right now but if you look at today's candle we're currently trading at the top of today's range that's always that's always a good bullish indicator for trading at the top of today's range so nice overall trend nice bounce that occurred yesterday and a very strong follow-through occurring today putting us up above this resistance level here i'm assuming i'm i'm assuming that's going to be some additional all-time highs right now with regards to the s p 500 looking at where we have strength within this market we can look at these different sector groups this was mentioning at the top here notice communication services up today over four percent also strong as real estate up 2.38 percent it is kind of interesting to see consumer discretionary up here as well you know consumer discretionary these are this this this sector is things like washing machines dryers automobiles those types of things that we're not going to be going out and purchasing unless we have confidence in the economy apparently investors are forecasting that oh that consumers are going to have greater confidence with regards to this area at least with regards to today's trading and here's the technology sector also up strong here as well i was looking at the futures earlier here this morning and you look at the you look at the main indices the main cast futures and the and the nasdaq futures we're up considerably higher than the s p 500 the dow and also the russell so we're seeing some strength here with regards to technology and communication services so if we were looking at doing short verticals we may very we may be very we may very well look in some of these some of these relatively strong areas where we're getting some pullbacks and some bounces here that sort of brings up another area of discussion here and that's what are the type of of of setups that we're looking for when we're looking at potentially doing um short verticals as we've mentioned in previous session perhaps i should boss here just a little bit with regards to that mentioning a previous session just to let you know so because i do see a fair a fair number of new names over there in our in our chat window i do want to i do want to welcome everybody here welcome to frank and augusta and gary and media and lewis and richard and neal and henry and golf shaman frank and everybody else great to have you here also radio wayne ed and dawn and pierre everybody else i do see some i do see a few new names here so just a little bit of a heads up with our discussion here it is assumed that you do have a basic understanding of options now if you don't have a basic understanding of options you're still welcome to be here i do try to craft the presentation in a way that will be beneficial to everyone but if you do start to feel a little bit overwhelmed let me point you to a couple of resources that could be helpful to you let's just say we'll bring it up here in just a second can we all righty well let's see we can do here just trying to get rid of our drawing tool here for a second and the button that usually gets rid of that for me there we go we got rid of it okay good all right so uh here we are on the td on the td ameritrade website and this is just the standard td ameritrade website and notice over here we have this education tab right here when you click when you roll over that education tab right here you have some choices again if you feel a little bit lost today okay come up here to education roll over come down over here under education center right here where it says options and go ahead and click on options there and what you'll see in here is that we have an options course for those that aren't that that are just kind of starting to get used to options you know right here we have investing basic options this little course right here okay i'd suggest that i'd suggest you maybe come in and and go through this course we're not talking that we're not talking about a huge amount of time i'd probably say somewhere in the neighborhood about five to six hours if you do have some familiarity with options it's gonna it's gonna be less time than that but that will help you help to give you a good fundamental knowledge and understanding of buying and selling option it is assumed in our session that you do have that understanding okay also with regards to earnings season here today we're going to be talking a little bit about multi-leg option strategies we usually we usually don't go into this area with earnings season we are going to look at doing both a short call vertical and a short put vertical if this type of a if these types of setups you if you find them to be intriguing i'd also encourage you to come up here to education right here come down over here to webcast and open up webcast when you open up webcasts you'll see this page right here this is our webcast calendar well you can go and upcoming and going to archive i'd come over here to the webcast calendar and i believe it's on wednesday we have a webcast there it is right there on wednesday at 9 30 a.m we have a webcast on multi-leg option strategies that's taught by mike fallette okay so if you kind of like the type of things we're doing here today i'd encourage you to also attend that little webcast there again on wednesdays at 9 30. that's dedicated to multi-leg option strategies well with that let's come back over here and we were going to discuss our setups here just a little bit we're basically looking at three types of setups when we're looking at doing verticals we're looking at what's called a a breakout setup i think i saw an example of this a little bit earlier today on atvi you can see atvi i'm going to get this little earnings guy off of here because it's clouding up our works we'll go ahead and add that a little bit later or perhaps maybe i can just let's turn off the study so we're not showing it yeah we'll do that okay so this this this is a this is a breakout trade okay we're in here we're usually looking for three different setups and a breakout is one of them when we have a breakout to a bullish side like this and we're looking at doing a short put vertical down below that breakout point so that would be set up number one setup number two that would be looking at would be would be a it would be a flag pattern in an up trending market like this should be looking at a bull flag pattern i thought i saw a pretty good example of this on nike you can see nike right here and both flag patterns basically where the stock's pulled up it's pulled back and it's bouncing and moving to the upside and we're looking for it for a close above the high of the previous day following this pullback and looks like we're going to get this now this isn't a particularly strong bull flag pattern the reason i say this is this movement to the downside takes us almost down to the bottom of what's called the flagpole right here would actually would actually like to get a bounce before then perhaps this is a better example right here movement to the upside pull back here we're getting a bounce you can see this bounce is occurring clearly well above the bottom of the flagpole right there once you get the bounds then again you're looking at setting up in a bullish situation looking at setting up a short put vertical below that bounce level and then last last but not least with regards to our setups is what we refer to as the falling knife i think i saw an example of this on target here a little bit earlier today now this is a falling knife and that's where you have a situation where the underlying security is moved up and it's pulling back okay but we don't have a bounce in other words you're anticipating a bounce to occur and usually in anticipating that bounce you're looking for the stock to pull back to a previous resistance level which could be a theoretical support level so you're you're anticipating the bounds now the the advantage of entering in a short put vertical on a falling knife is if you wait for a bounce let's just say we waited for bounce we were moving up like this this short strike price on our short put vertical is probably going to be somewhere in this area right here for comparison purposes and this is this is the price point where that trade gets into trouble if we're entering it as it's falling not waiting for the bounce in our short put vertical our short strike price on our short put vertical could be all the way down here so we have so we have a greater margin a a what i should say is a potentially greater margin of safety when we're entering in on a falling knife but there's also a potentially greater area of risk and what's that well you know what happens if you try to catch a falling knife right you can get cut so if it doesn't bounce and it just continues to move down well that can cause some damage to our trade so those are the three primary setups that we're looking for with regards to looking for traits that's typical though we have sort of a special situation that's going on right now and that is earning season and let me just come back over here so we wanted to before we get into our discussion of earnings season let's review our existing positions and also see how our performance has been then we'll jump right in here talk a little bit more about our more about earnings season so coming back over here to the thinkorswim platform i'm going to shift gears here we're going to come up here to our existing positions here's our existing positions and we have two positions some of you remember our discussion about twitter yesterday this this position was so close to being in good shape yesterday and today it's taken a turn for the worse we can see this because we've lost thousand dollars of profitability on that position we still have four thousand here however if you take into consideration the short leg that we bought back we're still in an overall negative place right here and we only have nine days left so this is likely going to be a trade where we will incur a maximum loss i'm not i'm we're not what we're going to do for educational purposes we're going to go ahead and stay in it we basically did the same thing last week we just wanted to follow through on this for educational purpose but it does look it does look at this point to work that we are headed for a maximum loss but we still do have we still do have nine days what needs to occur in that nine days well let's come over here and take a look at the chart here for twitter let's change this dwtr here we are right here this is what i'm talking about so close yesterday this is this was our this was our breakeven point right here that price point right there actually that was that was actually a mass a max gain point if we would have gone down to 43.50

the intrinsic value would have been such that we could capture our maximum gain we still have some we still have some time value so we would have been in great shape you can see that we just fell short of it but now we are ramping up here to the upside okay as the overall market is ramping to the upside we still have nine days right so do we have time for this to reverse and get back down here we do we'll go ahead and play the part of the aggressive investor we want to keep in mind in this trade we are risking far more than the original risk and we talked a little bit about that last week we'll discuss this further next week because by next week we should definitely be out of this trade again if we continue to go up like this it's going to get worse and worse if we do get a pullback then there is some possibilities there okay our next trade that we've got here that we want to take a look at is trade that we're currently in here is eog this is a trade that we put on last week you can see we're taking a little bit of a hit today 75 dollars but you can see that we're still overall profitable we have 16 days in the trade we this this stock slid down 0.775 this is an energy stock and if you look at today's performance of all the sectors energy was i believe the only sector that moved to the downside it could be taking a little bit of a rest because energy has been the strongest sector over multiple time frames it could be fading a little bit maybe taking a little bit of a rest or something more significant be could be developing here that's why we position size however if you look at it from a from a technical standpoint we're still in pretty good shape we slid down to 59.70 but for the for our trade to get into trouble we need to drop down here to our short strike price of 55 so we're still in okay shape we still have a little bit of profitability here but it's concerning we definitely like to see this energy stock reverse go to the upside would even be co would be even because we would even be okay if it goes sideways we just don't want it to drop down below 55 so we'll see how we're going with that one we did have one trade that went through it went through expiration well it didn't actually go through expiration what it did is we got taken out of we got taken out of this trade at 85 percent of our max gain that's what we've been doing is setting up our trades to go ahead and take an exit at 85 percent of our max gain and let's just find our trade history right here so here's our history notice we entered this trade on january 8th and this stock like a lot of stocks just shot up like a rocket we were in this trade for what what is that like six days six or seven days and we had an opportunity to get out of the two cent debit so our original credit was 21 we got out of the two cent debit so we kept what we kept 19 cents which is going to be which is going to be somewhere in the neighborhood of 80 to 80 to 90 percent of our max gain on that one so that's one that that's when they gave us a nice expiration how are we doing overall though that's also beneficial to know so here's a here's our spreadsheet just just kind of general numbers number of trades we've done 35 trades this by the way includes our review it includes walls it includes it includes wba it also it does not include eog and it does not include twitter because we're still in those trades so we've done 35 trades the average days in the trade this is incredibly a small number of days 12.26 now part of this is because we

we have been fortunate to be in a strong bullish market we've also been fortunate as far as identifying stocks are having some strong moves taking a look at the sectors taking a look at the move moving the like that's also beneficial our average return on these trades over those 12.26 days has been 27.44 and our winners our winning percentage is currently 97. good possibility next week that could drop down to about 95. we'll see what happens to our to our to our twitter uh we'll see what happens to our twitter position last week this actually isn't isn't too bad though if we drop down to 95 because when you think about it when we enter our trades we're entering our trades with a probability of success of about 77 that's a theoretical probability of success and we're currently doing considerably better than that so a couple things to keep in mind we don't want to sell ourselves short we want to keep in mind what we're doing you know with regards to our technical analysis with regards to the to setups with regards to the rules the different things we're doing and setting these things up we don't want to sell ourselves short on that and say that that hasn't made any difference at all you know those those things do over time tend to make a difference how much of a difference that's that's always going to be in your trading journal the other thing to keep in mind is what's called a reversion to the mean all right and we could be subject to that we could have a a string of losing trades that could push that 95 bring it back a little bit more to reality here at 77 percent the important thing right now investors that i i mentioned this in previous sessions is with our with our level of success right here there is a temptation um now now we are just talking about paper trading okay so all all these are paper trades for example purposes only so let me say if these were live trades if you were looking at a live trading account which were not if you were looking live trading accounts something was going on like this and let's just say you had set aside 20 of your options trading account to do short verticals and you started you started you started incurring this kind of this kind of success there's a temptation hey you know what this thing is working so well let me take and change that 20 percent to 80 of what i've set aside for options trading this is this is statistically that's not a good idea it's from a statistical standpoint stay with your 20 percent and with your profitability you know with your profitability your balance is going to grow okay your balance will grow so that if you stay with 20 percent you're still going to be investing in a greater number and you're still going to be investing you'll be aggressive you'll be a great you sorry you'll be investing in a greater number of these short verticals because your balance is growing but still from a statistical standpoint it's always a good idea to stay with that 20 percent unless over time you know and i'm not talking and usually we're going to be talking about more than 35 trades but maybe over six months or a year you look back and say you know what i could probably allocate more to this or possibly i should allocate less than that those are some of the key factors to keep in mind right there okay with that then let's go ahead and shift gears we'll come back over here to the thinkorswim platform and let's talk a little bit about earnings season because we do have a fair number of stocks in the midst of earnings right here so why do investors what what what are investors looking at with regards to to earnings let me just let me just throw that question out to everybody here why would you consider doing a short doing a doing a short call vertical and a short put vertical over an earnings announcement and typically in these trades we could be in these trades anywhere from say one i'm just saying on average okay one to three days let me just throw that question out to there the question is why and feel free to chat in anything you want okay why would you consider something like this what are what are some of the things what are some of the things that you'd be looking at that could justify something like this i'm just looking over in the chat window and see what i got there i'm not seeing anything yet anybody wanted anything anybody want to make a statement here why would you consider doing a tray doing a trade over an earnings announcement that's only going to be one to three days the question is still there okay i'm not not seeing anything over there now i've got some stuff rolling over here perhaps my chat window is just a little bit slow here and what do you got from rg drop in volatility after earnings yep rg that would be the big one there for sure drop a a drop a a significant drop with droppings regression black belt aj dropping implied volatility donald donald dropped on five volatility thumper high premium sand deep take advantage of raising implied volatility so a lot of you a lot of you are right on target yeah that's basically what you're looking at and let's let's take a look at an example so we have we have united airlines here they're coming out with their earnings after the market their stock is currently trading at 45.06 i think we were recently in a united airlines trade so let's let's pass on that one for now we have an after the market here kmi 1550 that price is a little bit low here we also have it we have a before market so we could put in a trade tonight and would find out what was going on before the market opened tomorrow morning this stock is at 217.55

the options on united pacific though they come in and 50 2.50 increments which isn't bad that that is not a bad thing okay but to give ourselves a little bit more versatility let's look for let's look for a stock that has one dollar increments and what we're talking about here is we're talking about strike prices the distance between strike prices now there's nothing wrong with with going two and a half dollars wide or going five dollars wide but in here we've primarily gone with a dollar wide and the reason for that it gives us some additional versatility in the event the trade goes against us okay and so we'll uh however they haven't all been one dollar wides we have done some trades that are that are two and a half dollar wides i don't think we've done any any any that are five dollar wise but for person with this trade let's stay with something that's a dollar wide and that brings us down to ibm and ibm does have dollar wide options available the earnings announcement is coming out tomorrow and it could be tomorrow i believe ibm's ibm is coming out with the earnings announcement tomorrow after the market after the market opens now by the way this custom column right here sometimes i get questions or requests for this those of you that are that are old-timers so i say and again want to want to welcome all the old-timers back here great to have you here you have this earnings tax this is a this is a customized script those of you that don't have it feel free to feel free to contact me on twitter i'm more than happy to send it out to you along with a video on how to load it up we don't really have time for time to do that in here but it but it is nice now you don't need to have this in order to identify these stocks when they have earnings announcements because they do have those earnings announcements one thing you can do is you can just click on these little these little um these little guys right here these little light bulbs you click on that it'll come up and tell you when those announcements are out but this is nice because this is telling us hey this is this is after market this is before the market tomorrow this is tomorrow tomorrow two days out four days out and it takes you all the way out to ten days out then you don't have to click on all these guys to see if any of these are coming up within a day or so so that that can save you a lot of money a lot of time when you're looking at when you're looking at at um when you're looking for potential candidates okay so let's let's look at ibm here for just a second and to do that we're gonna pull up the chart here for ibm so let me just come up here and go over over here to charts here's ibm now i want to turn that study on that one that gives us the the market maker move over here okay so i'm going to come up here to studies i'm going to choose edit studies and here's our market maker move right here i'm going to come in here and turn this on by the way this is also a custom script study and so if you want this one again do feel free to contact me on twitter if again if you've if you've been here you have it so don't worry about it you don't you don't need to request it a second time okay so let's let's talk about an earnings trade and let's talk about the market maker move and let's talk about implied volatility so on the thinkorswim platform thinkorswim provides you with a proprietary calculation it's called the market maker move you can actually pull it up here as a custom column now this is a custom column but it's not a scripted column what does that mean it means you don't need a script for me to bring this up if you do right click on symbol here and choose customize market maker move will be there okay so there's the market maker move it's five dollars and five dollars and ninety four point six cents what this what this custom script over here does is it gives you some nice horizontal lines on the chart so you can pick out that market maker move easily by the way just a little bit of a heads up when you're using the market maker move sometimes because i get this question sometimes hey can you make it so that the number is out here rather than over here you know you can actually do that but i just like to keep my chart area uncluttered so rather than do that if you have moving average lines which we have here what you can do is just come up here and choose edit studies and go to your moving average lines and just turn off the bubbles okay turn off that bubble right there okay and then let's do the other bubble looks like that's going to be on the 50. we can uh turn off that bubble right there and there so so now now we have the bubbles off our moving average lines now we can see the market maker move there in that yellow so what this is this is this is thinkorswim's algorithm is suggesting that as a result of the earnings announcement the stock could move up as high as 136 and as low as 123. so what what do we want to be then as as as short vertical traders well if we're looking at the stuff if the if the market maker move plays out and we stay we don't go any higher than this and we don't go any lower than this and can't we do a short call vertical up here and can't we do a short put vertical down here well yes we can absolutely we can now there's something else that some of you had mentioned and that is implied volatility you know when we set up this short call vertical in this short put vertical how many days are going to be on how many days are going to be on the option chain i'm thinking it's probably going to be two days how can you get a decent premium how can you get a decent premium on a short vertical that's only going out two days well if implied volatility is up high enough you can actually get a decent premium in relationship to that and we'll we'll and what we'll do is we'll take a look at it now it could be on ibm we're not going to get a decent premium okay but we're going to see because sometimes you have them and sometimes you don't one of the indications of that is what's called volatility sku and we can see that when we look at the option chains so let's come up here and come up here to the trade page right here for ibm and let's take this off and let's let's collapse our option chains right here and here we have right here here we have these options are going to expire in two days what's the what's the what's the average implied volatility for these options it's 70 percent if we go out further than that what is it what is the average implied volatility for this for this one going out nine days it's 43 percent notice the huge drop off that's this is what we're talking about when we talk about the volatility crush after the earnings announcement is over with tomorrow we should see implied volatility crushed down towards that 43 it may not get all the way down to 43 but we should see it crush down significantly but the fact that we're up at 70 percent here right now that that has the possibility to enable us to sell two short put verticals out of the money and the combined premium give us give us a potential return that is attractive now as we go further down here we kind of look look what the you know where does implied volatility use usually sit on this stock right now looks like it looks like it sits somewhere in the neighborhood of about 30 to 35. so if we wanted to do a if we

wanted to do a another play on earnings we could go out here nine days that would give us a little bit more wiggle room and would still be looking at a potential drop-off of implied volatility we'll play the part of the investor here that's looking for some quick gratification here over two days and looking at doing this on an earnings announcement here on ibm so what have we got here then you know do we do we do we have you know in in looking at this do we have the potential here to have a nice fat premium to give us a nice solid reward over just two days you know that's the question some of these some of these earnings trades are going to have that but some of them are not so let's take a look at unp and see specifically what we have here with regards to unp so i'm going to open up our option chain right here let's first of all go back and review our chart though i just want to jot down the key price point so we want to be at 136 or above you know here's our market maker move at 135.83 we'll round that up to 136. we want to be at 136 or above for a short call vertical down here on the market maker move we're at 123.97 i'm just going to round that down to 123. so on our short put vertical we want our short strike price to be at 123 or lower oh we'll come up here to the trade page then here we have our options are going out two days well let's go ahead and do the call the call side first so we want to be at 1 36 or lower there's 136 let's go ahead and start out right at 136 okay so i'm going to come in here i'm i'm just i'm going to stay with i'm going to stay with the dollar white here i'm going to do a right click here also one of the nice things about ibm if you look at this this the slippage here is very nice between the bid and the ask price this is a hundred and almost 130 stock and the difference between the bid and the ask price on these options is four cents that's that that is that that for for many investors that would be considered to be quite liquid or quite good i guess you could say another way to put it here i'm going to do a right click here though and i'm going to choose cell i'm going to stay with a dollar wide so i don't need to go deep and why because i'm okay just going with what we have there in the on the option chain so i want to sell what do we want to sell i want to sell an iron condor and there's our there's our there's our iron condor right here we know that we set our call strike prices where we wanted to but we know our put strike prices are not where we wanted them to you know we could when you go in here and you do this iron condor you can either set it up from the call side or the put side but you can't do two sides at the same time using the right click you can use your control key and set them up that way that that would be an alternate way to do it but we'll but but i'll show you this way because i think this way is a little bit quicker okay particularly if you already know where where you want your short strike prices to be so on the put side then we want it to sell a 123 so this is selling right here by the way i'm going to collapse our right hand side here just so we can see things a little bit better as you can see right here these these are the puts right here okay this little minus sign here that means we're selling this one and we're buying this one and just as a reminder when we're doing a short put vertical we sell the higher strike price and we buy the lower strike price it's opposite on the short call vertical here's our short call vertical here's our minus one that's so we're selling this when we're buying this one on the short call vertical we sell the lower strike price and we buy the higher strike price now both of these transactions will result in a credit why because we're selling something that has more worth than what we're buying isn't it worth more to be able to buy the stock at 136 than to buy it at 137 and that's what a call option gives you the right to do it gives you the right to buy it isn't it worth more to be able to sell the stock at 135 dollars than it is to sell that 134 dollars well yeah for for for sure it is and that and and and and that's and a put option gives you the right to sell the stock so we're selling on both of these we're selling something that has greater worth than what we're buying so we have two credits and those two credits are going to add up to a number it's not going to be 95 cents because we still need to make an adjustment on our puts here let's make that adjustment so the puts we want to sell on the puts we want to go down outside that market maker move and we want to sell at 123.

so let's find our 123 there's our 123 right there and then on the puts since we're selling the right to sell the stock at 123 we're going to buy the ride at a dollar lower than that at 122. so let's come over here and we'll do 122 right here okay there we go and there's our credit right here so what's our credit our credit is 29. now we may get filled at 29 we may not okay let's just say we're going to play the part of the investor that's okay coming down to 28 but not lower than that so what is our max loss what is our max gain and what is our probabilities on this trade well on an on when we're doing two options like this keep in mind that we can only lose on one side or the other right you know here we have our market maker move here we have our short call vertical up here here we have our short put vertical down here these verticals are a dollar wide and we're getting a credit here current current currently of 29 cents now if we break up through here and we incur max loss on our short call vertical then we're going to get our max gain i'm going to get our max gain on our short put vertical and we'll get a max loss on our short call vertical what's the max gain going to be on either side it's it's going to be 29 cents okay but if we get the max loss up here which is going to be a dollar and the combined loss on that is going to be what it's going to be we're risking let's say we're going to be risking what 71 dollars here for each one of these contracts but if we move down to 28 then we're going to be risking 72 dollars right but the thing to keep in mind one of the nice things about this strategy is we're getting two credits but we can only lose on one side or the other so we have two credits to go against either one of those max losses here which has a nice impact with regards to our theoretical gain now that's moved up to 30 so of course we're always going to go in here and try to get feel to what we can get here and we'll try to get filtered after we move down to 29 or 28 we're going to we're going to look at this from the standpoint that we're okay doing that so if we're a dollar wide then and we get a credit of 28 here then our max loss is 72.

whoops i i think i think my math might might have been a little bit off there okay so our max loss is going to be 72. so what is our return on risk then our return on risk would be the 28 divided by the 72. so return on wrist down on this is going to be 38 percent so we're looking at a 30 we're looking at a potential 38 percent return on risk over two days now keep in mind we have not included transaction costs there's going to be four of them here so that and that would be something that you'd want to consider because that is going to have an impact with regards to your credit here but there there will be there's transaction questions and you can you could actually have eight transaction costs you could have four going in and four going out it's you know on the with your with regards to going out it's going to be hard to get four going out because like i say you're either going to be on one side or the other so under under i would say under under most circumstances you'd be looking at potentially two going out or potentially none going out if the prices if the price cooperates now for price crop rates and we're looking at the end of trading here and we're sitting right in here you know we really we we can choose not to do anything and just let those options expire worthless we're looking at a 38 return over two days what is our probability of success any anybody wanna anybody wanna take a stab at what our probability of success is on this trade i'm just gonna throw that out there what is our probability of success on this trade okay folks i'm gonna look over there in the chat window it took a little while for those chats for those chats to get into me last time i think there's a little bit of a delay here i'm going to give you a moment or two here to to give me what the probability of success is on this trade what is our probability of success i think we're thinking right now maybe you're perhaps now you i'm just going to pause here for a second because again there's a little bit of a lag here by the time the chats get in here okay what i'm going to do in the interest of time here because we are a little bit short i'm going to go ahead and answer the question and what is what is the probability of success on this trade what is the probability of success on the trade the probability of success on the trade is another big question mark okay going why because you just don't know what's going to happen over over an earnings announcement so that is the price you pay for 38 percent return over two days is you just don't know what the probabilities are we have the market maker move so one of the things you could do you know if you wanted to calculate your own probability of success you could take an individual stock maybe and run an earnings trade on it time and time again and there would be nothing wrong with this this could actually be productive run time and time again and kind of get a statistical measurement of how often that stock stays within that market maker move over say five years that may give you a little bit of an idea of a probability success but still earnings is always such an unknown it's best just to look at it as you know you just you don't really have a probability here that you can nail down so what you want to do is you always want to manage your position size and speaking of position sizes here because this is an earnings trade rather you know we've in here we've typically gone with maybe two thousand twenty five hundred because this is an earnings trade let's say we're going to ratchet our wrist down here to fifteen hundred and we're going to divide 72 across that we're looking at doing 20 contracts let's amp this up here to 20. 20 contracts here we go right there at 20. i'm going to go ahead and try to get filled here at 29 if not i'll be okay moving it down to 28 but i'm not going to go down below 28.

so click here short verticals confirm and send and you know for some reason this has been coming up on me but i usually when i do confirm and sends okay so what i'm going to do here folks because i have had an issue with my paper trading account i'm going to go ahead and work on getting this thing filled at 28 cents and for some reason my account's just been doing this all day long and you know what and it's it's just it's just a little bit of a glitch with the paper trading account because i've got plenty of cash in here but for some reason my option buying power is kind of squamous right here and i'm not sure what it is i got plenty of liquidation here i got plenty of cash in here i got 870 000 in cash is what i'm looking at there so anyway i'll i i will try to work i will try to work my way through that and do what i can to get this straight on here um before the earnings announcement comes out tomorrow let's see what that earnings announcement is here we'll come in here and let's just roll over that going to be after the market tomorrow hey you know what that is after the market tomorrow so i have all of the market tomorrow to work through this glitch here in an effort to get the trade in and also by the way there when there would not be anything wrong if you wanted to come in here and do this trade as a paper trade tomorrow always just remember not a recommendation for a live trade we're just talking about as a paper trade okay our purpose here is not to suggest actual trades and actual positions but to take you through a process a process that you can use as a potential as a potential beginning template for how you want to go ahead and structure these trades all right so with that let's go ahead and wrap everything up here then folks and to do that so what did we do here today well um what we did is we did an overview the overall market we reviewed our existing position our current level level performance we talked about earnings season and earning season trades and we also added a potential paper trade it did not get filled off to figure out what's going on with our paper trading account but we looked at doing that on ibm and we'll follow that up next time and just a reminder again i want to thank ben watson over there in the chat window and again folks ben ben post some great things over on twitter i'd encourage you to follow ben on twitter that's at b watson underscore tda aka chart master catch ben on the on the td ameritrade network i think ben's also doing a workshop here today however i think that's full so you might want to catch ben on the next time he next time he's doing a workshop also love to see on twitter at krosc underscore tda wave disclosures here today just reminded that in order to demonstrate the functionality of the platform we do need to use actual symbols however td ameritrade does not make recommendations or determine suitability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility thanks again folks and investors for joining us here for short verticals i hope you have a great afternoon and a great evening a great a great rest of your week best of success you're investing also just a reminder let's be careful out there you know the vaccines on the way this would be a really bad bad time to get sick so let's be careful let's be safe let's get on the other side of covet as happy and healthy investors bye everybody and hope to see you next time we'll see you thanks again you

2021-01-26 03:26

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