Swing Trading Days to Weeks | John McNichol | 4-27-21 | Defined Risk Swing Trade
good morning everyone john mcnichol here and welcome to swing trading days to weeks action-packed week we got earnings we have the fed a lot of things going on this week we're going to focus on defined risk directional trades utilizing vertical spreads so stick around all right and a great morning to everyone with us here bright and early such as vj michelle brian mark meddy woodsman franco mike sammy fabian mitchell ricardo franco swing big doors and everybody else we got cameron may helping out on the chat if you have any questions i am unable to get to and a shout out to those of you listening to the archive session as well do appreciate you joining us each and every week and if you like what you listen to here today make sure you click like and share feel free to subscribe to trader talks so you can be informed of some of our other great content here at td ameritrade education let's bring up our disclosures and get right into it folks options not suitable for all investors spread straddles other multi-leg option strategies often involve greater more complex risks and single-leg option trades now in order to demonstrate the functionality of the platform we're looking at actual symbols keep in mind t 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 transaction costs should be considered and you're encouraged to practice what you learn here today with tools such as paper money software which is for educational purposes and successful virtual trading does not guarantee successful investment of actual funds during a later time period as market conditions change continuously as always all investing involves risks including the risk of loss and here's our agenda doing a defined risk directional trade we're going to apply that with a long vertical spread and discuss on managing particularly gains as well as time so one of the reasons why we're going to take a look at this today kind of uh multi-tasking dosia may already be attending our advanced concepts workshop started last night we actually discussed long verticals now that was a live only session i'm going to initiate some practice trades that will also follow up with in that workshop so you're welcome to join us for that tonight's uh subject is going to be on iron condors on some of the selling strategies for options uh but for this subject you know in swing trading days to weeks you know we are dealing with earnings events and you know that may create some challenges for traders that are trying to profit from some potential moves uh with earnings hanging over you uh so the examples that we're looking at today are going to be companies where their earnings have came and passed or as far as the timeline on when their expected earnings are are within the context of this trade kind of within 20 to 30 days the other benefit for this example strategy is for a lot of traders you know options can be expensive particularly on long options so a long vertical is a way of reducing the net cost of that trade and may make it conducive for smaller traders to trade more expensive stocks while still defining the risk and the trade-off on that will be there is also a defined gain and looking for a reasonable return on that risk and so we'll be able to visualize that for you today okay let's go ahead and bring that up and let's go ahead and go to thinkorswim platform real quick on looking at the market here today uh once again uh earnings week uh quite a few of the fang stocks uh coming up i believe we may have microsoft uh today we had uh home prices come out uh today uh on the shoulder index i think was up about one percent month over month 12 on the year so i'll report that from utah uh utah is pretty hot uh our real estate median price went up 20 uh year over year um so things are cranking out here uh the s p 500 you know up marginally about uh seven looks like seven tenths of a percent uh if that after making intraday highs yesterday uh the nasdaq ndx once again uh quite a few companies uh 25 of the market cap with earnings this week are certainly going to impact that tesla came out yesterday uh and we're seeing the nasdaq close to those all-time highs the dow on the industrials djx dallas kind of settling in a little bit uh some traders may be looking for you know more of a breakout of this range whether one way or the other so a little bit of a squeeze and then finally last but not least the russell uh actually continues uh momentum over the last week uh after kind of sinking out of a smaller triangle whipped right back and broke to the upside we're seeing a little continuation of that here today and a big driver on that as we look at the s p sectors over on the left energy the financials uh although not on the board material stocks uh you know from previous sessions industrials there's a lot of small caps that are in these groups and we've seen some of that rotation uh whereas the losers today um starting off on utilities looks like some of the more defensive industries so a little more of a risk on you know even though prices aren't uh necessarily materially higher and you know also an impact particularly on the staples with commodities commodities have been cranking up over the last couple of weeks and beyond you know everything from lumber uh to grains to metals and that kind of points towards the big eye word inflation and a lot of the news that's coming out this week and certainly listening to the fed tomorrow uh people are going to be listening to see if any of that talk changes as far as concern for inflation uh saw a tweet from lazanne saunders uh from uh over at charles schwab uh she mentioned that uh the word inflation has been mentioned uh a lot more than normal in those earnings calls uh which means that companies are concerned about that as well all right so that's just a quick rundown there on the market folks the examples we're going to take a look at uh already kind of set them up but we'll see how they're looking at right now uh we got an example an autodesk workday and lulu now you know as you look at these strikes which are tied to the underlying you can see that these are relatively you know more expensive stocks let's do them one by one i'm going to go ahead and bring up adx correction ads k for autodesk as we can look here uh their event looks like it's coming out uh closer to the end of may uh so you may be able to have an opportunity to look for a move here uh as we look at the trend you know the trend had previously been down we can see examples of that transition from a downtrend to an uptrend which is higher lows higher highs and more a sign of the reversal when we see at least three to four higher highs and higher lows uh price breaking out of that downtrend and pulling back and re-testing that now we're seeing another swing up to those previous highs now as far as a traditional uh swing trade you know one of the ideas and we talked about this last week is you know looking for that kaholt uh when price closes or trades above the high of the low day and that actually occurred on friday okay and a little follow through here on monday now you know we are trading up to that range right there well you know let's say you know a trader may expect that you know prices may go slightly higher or a little bit higher you know over the course of uh the next uh 20-some days one of the ways of doing that is you know we can just go ahead and and and buy a call uh if i went ahead here and you know from our example uh the call i was looking at was a 21 may 300 strike now notice that 300 strike you know is close to the current price so this would be an example of close to and you know and at the money option uh so the theme is to go ahead and go long one option and let's say as an example we were long an option that was an ad or near the current price and then sell an option at the strike where we believe the price to be trading up to now if we're looking at just you know more of a modest move you know that could be very much the next strike in this case you know a 300 to a 305. now for a long vertical the desired outcome is that the prices trade through the strikes this is how maximum gain is going to be achieved on this strategy now this is unlike a short option or a short vertical where we want the price to stay away from those strikes we want those strikes to stay out of the money in the case of a long vertical desired outcome is that both of those strikes go or stay in the money okay so let me ask you a question from a standpoint of just probabilities we don't have to do fancy analysis here on an analyze tab but riddle me this if we go ahead and let me pull this out a little bit if the outcome is that we want price to trade through that spread which spread would have a higher probability of an outcome if i did a spread at this level or if i did a spread at let's say this level which one's going to have a greater probability of a potential positive outcome and i know there's a little bit of lag on the chat there uh it would be the spread you know where that short strike is closer to that current price even if we did a long spread that was situated let's say right here the greater probability would be the spread that's closest to that price now there's a translation there a lot of you that have already traded higher probabilities okay recognize that higher probability is typically going to be less reward whereas a lower probability or more of a directional trade would be less probability and a higher reward okay so everyone that mentioned it would have been the closer strike there at the 305 absolutely right so do appreciate that and pardon me i got a little background noise i need to go ahead and get rid of there and nobody else heard that very good so let's go ahead and construct an example with this one and you know if i wanted to increase the probability you know instead of doing a a 300 we can maybe go a little bit in the money on the one that we're buying and sell a strike that's above it that may be just slightly out of the money and so let's go ahead and see if i can construct this so i'm going to go to our trade tab i'll kind of set it up from scratch if we go to trade and we go to select our expiration now here's an expiration for uh 21 may and uh looks like it i did get a fill yesterday yesterday on this let's double check this may have happened this morning okay looks like i was able to get a fill here on one i didn't know i placed this i thought i had staged it last night hopefully we got a decent price on it but this is a for a dollar 95 debit uh on a five dollar spread now the nice thing about this spread here the risk and the gain is defined within those strikes so here we have a five dollar wide strike here uh where basically went long the 297 and a half so that's slightly in the money and then basically sold a 302 and a half for a dollar 95 debit now this is a five dollar wide and the debit is a buck ninety five what we pay for the spread is the maximum loss so notice right there on something like autodesk a buck ninety five is a bit cheaper than if we go to that 297 and a half and just did a long option that long option cost about 10 so once again that's another benefit of a spread trade two is when we go ahead and if we just bought that individual option now i'll go to the analyze tab here one of the drawbacks for long options is that dreaded time decay that theta and we can see here that the time is decaying on this to the tune of about 19.92 which means if we just bought that option uh that option would have to increase in value by at least 19 each and every day to compensate for that time decay and that would just be keeping you just above water whereas when we go ahead and take a look uh on the spread itself notice the theta here is actually rather nominal it's only about a buck now it still will suffer from time decay just not necessarily as quickly and if there is more of a positive move we can actually even be possibly a little more positive theta where we make money over the passage of time so this is one way of mitigating the cost of the trade as well as the decay of that option all right now with that let me go ahead and bring that trade up so again uh this is a 297 and a half and a 302 and a half now if i go ahead and right click and let's say do a duplicate order just so we can see this looks like the prices are higher as we speak this morning so we're probably already profitable in this example we'll see if we can execute another one i'm gonna hit confirm and send and based off well let me go ahead and edit this uh yeah we got the buck 95 okay there we go so with uh two contracts the risk was 390 dollars the potential gain is 610 that maximum gain is realized if the price is trading at or above that short strike at expiration that's a desired outcome uh the other nice thing with this spread is uh you have potentially a lower break even our break even is 299.45 current stock is at 298.34 that means that this stock just needs to be up a little more than a dollar on a 300 stock for this trade to potentially make money minus commissions and that assumes at expiration now if there's a stronger move beforehand then we have the ability to manage that trade for some profit let me go ahead and find that so here's autodesk right now we're going to go ahead and move that to my long verticals and diagonals by the way i teach a strategy every wednesday or correction thursday at 3 pm eastern time not just on the workshop but there's autodesk right there and you know already with a positive move on autodesk or at least from the option we're doing okay with that also if there is more volatility uh volatility can potentially benefit this spread uh with it rising typically it's going to be more positive on the volatility side all right so we can go ahead and get uh another one in um probably possibly two and notice since this one was selected as far as a 297 3025 when we look at the chart and we plot that here is the 297 and a half plot that let's get a line here there's 297 and a half there's the 302 50 approximately there okay basically the idea is just a positive swing where the price gets above that swing and maintains and holds above that and notice more of a higher probable trade as it doesn't require as much of a move there whereas if i was more directional you know we could have selected a higher strike it would require it to move more we may pay a little more for that spread but we would also have potentially higher return let's see if we can go ahead and take a look at another one here okay we got workday and lulu let's look at the charts for that okay here's workday now some of this analysis too was kind of tied into uh our discussion yesterday and technically speaking you know if you're on youtube you can just type in technically speaking john mcnichol and you should be able to see some of those webcasts we incorporated some uh volume on balance volume uh to find some of these stocks and uh yeah workday recently bounced off of a trend you can kind of see that hold there this would be you know more of a trigger for the bounce you know we may be seeing a bit of a fade and again all these examples are for illustrative purposes on doing a defined risk lightly directional trade now if we go ahead and look for an example here uh i'm going to go to the trade tab for workday we can focus on the 24 days there looking at around 20 to 30 days out as a starting point you know we can you know look at and and at the money if we want to do a little more of a higher probability we can go a little more in the money on this and again the trade-off is a higher probability less reward um let's say i go ahead and i do the the 257 and a half i can right click on this and we can do a buy vertical by vertical what that'll do is by default it's going to go ahead and buy the current strike that we selected it's going to select the very next strike out of the money or the next strike up in this case it's a 260 so that'd be a 250 wide now we can see there are some wider spreads here let's go and double check looking at the bid and the ask this is a spread of about a buck 30.
now spreads are going to be higher at times on some more expensive stocks um with the ask price of being a buck seven uh traders may look for that spread to be less than ten percent of that ask price so we're basically at a buck thirty which puts us a little outside that uh if we look the one that's right at the money you know that is 60 cents now we may put in a limit order if we want to try and improve uh on that price a little bit and let's see if we can do that i'm going to go ahead and let's look at a few of these and some of these spreads are a little bit wider i was expecting them to see them tighten up a little bit here this morning some of these are just a little outside that window let's see if i can improve on this i'm going to right click do a buy vertical now if i want to be a little more directional you know we can select a strike where we believe the price will be above uh at that expiration so this would be a five dollar wide we go ahead and look at the chart uh that would be looking at uh the price being above 260 250. you know here's 260 250 right there so not much higher than it is there and basically looking at i think again we're at that 257 50. so basically just looking for the price to be trading slightly higher and staying above that spread going into expiration i go ahead and bring uh that up again let's see if we can get a better fill on that so here's a spread here the market price is around 305 the mid price is around 240. you know with the 240 spread once again the most we can lose is what we pay for it what's left of that spread is what is the gain so five dollars minus 240 that should be about 260. this is going to be typical on a lot of
these spreads a return on risk of about a hundred percent or more some cases it may be around 80 percent so you'll notice this is again a way of of trading options uh with a relatively smaller capital uh defined risk uh with also a defined gain and the break even which as we look at this 2259.90 259.45 basically the price just needs to be above very slightly above where it's at right now for this trade to be profitable maximum gain which is going to be if the price is at 262.50 or above now let's say if i wanted to risk about 500 on this trade uh we'll position size to a maximum loss in this case uh we can do two contracts or do it two times so we'll go ahead and we'll do that and i'll send this through see if we can get this filled now i may have to go ahead and increase this a little bit to try and improve the probability of being filled now if i pay more for the debit notice that will increase the risk on the trade so this would make it a little less than a 100 percent return on risk so may have to play around with uh some of the uh uh the quotes there for that see if we get it filled closer you get to the natural price the greater probability of being filled i'm gonna send this through and your results may vary but we did get a fill on this practice trade all right let's go ahead and look at some of your questions folks i do appreciate cameron for helping out on the chat there uh there's also a survey and we'll make sure cameron pushes that out a couple of times we'd love to get your feedback on this session for those of you that are listening to the archive session and also for those of you that are live those you live gives you an opportunity to vote twice you can click like on this video if you enjoyed what you learned and uh let's see usually there's going to be some questions pertaining towards assignment versus exercise there so we'll address that i'm trying to see if there's anything else that sticks out that camera may not have answered now you know there's always questions about hey why don't i just do a short spread uh will one i teach long vertical so that's why i'm that does not take away from a short vertical uh a lot of people like short verticals because they result in a credit uh and that credit is the maximum gain that's the most that you can make typically the risk return on risk is going to be less for that short vertical particularly if it's an out of the money versus in the examples of a long vertical here which is our example is more at uh to in the money uh where it's a debit but there's also potential for a greater reward based off of price movement so our example in how we're displaying it is a little more directional greater return on risk and if one is incorporated in volatility in a lot of cases selling options incorporate volatility and time decay if volatility is relatively higher then traders may focus on short verticals whereas if volatility is relatively lower with the expectations for rising they may focus more on the long strategy now in our case there is a little mitigation because there is a long and short strike and when the price does move if we have a favorable move the impact of time and volatility uh are going to be less of an impact and you know these are actually some of the things we discuss uh in our option strategies workshop as well as in the uh advanced concepts that we'll be talking about more tonight okay and so like for instance derek mentioned hey you know if you want you could have done a short put vertical uh where you know one can go ahead and basically sell a put uh at one level and buy a cheaper put to define that risk now this gets to my second point is assignment versus exercise uh in the case of a a short vertical in this case a short put if the price was to end up in between the strikes what's going to happen what's going to happen to that short option if you did a short put vertical it's going to result in an assignment it's going to result in an assignment of a short stock position which some traders may not wish to have okay whereas in this case on a long vertical okay on a long vertical in a case of a long call we're long a call here we're short a call here if the price ends up in between the strikes going into expiration and we didn't close it out in the case of this strategy that we're doing it would result potentially in an automatic automatic exercise of that long call which will result in a long stock position now in this case that's not necessarily a big deal if one is already bullish on the trade because the long call vertical is bullish a long stock position is going to be bullish and in some cases the long vertical uh could be a way of possibly acquiring uh stock if one wanted to but the primary purpose for that is to basically capture a price move for it to trade through those strikes okay so we got that example in here for work day let's talk a little bit about management folks uh of these trades hope you can see some of the benefits of this strategy you know there's always pros and cons for a strategy not necessarily that one is better uh than the other everything has a time and place um so if we uh let's see went ahead and uh and when i talked about this last night most of the ones i have on here are the ones that are losing uh we've already closed the ones for profitability which is uh one of the approaches to take a look at here so i've got a couple here now some of these are actually uh uh long put verticals uh but let's focus on the call side we got walmart this workday we just did uh let's see uh your chr robinson i was looking to see that uh cr robinson would get a bump with ups today looks like that really didn't happen um we also got morgan stanley here so one of the ideas is to you know maintain some profit management having an idea of what your profit goal is and so for instance yesterday we initiated a a long call vertical on morgan stanley when we look at the long call verticals the idea is that short strike is basically the target so with a short strike of 85 the expectation is that the price trades up to 85.
right now we're at about 81.76 if i right click on this and do view trades you can see the example uh is uh we bought a buck 89 and sold 85 cents so that is a a debit of 84 cents uh since this is a three dollar wide you know that profit potential is about two dollars remember the spread itself the most could be made or gained is contained with between those strikes so if you had a debit of about 84 cents that would leave about a a buck 15 or correction 215. so if my maximum gain is about 2 dollars and 15 cents one idea is want to try and capture at least 50 percent of that maximum gain um so that would be about a dollar or let's say a buck 10. so if this option increases spread increases by about about a buck 10 that would be trading upwards near of about two dollars so you know as a routine you can make a note and if this spread is worth about two dollars that's a way of closing out the trade at a profit or at least scaling out since we do have five contracts maybe sell half of those contracts and give the other an opportunity for it to trade higher but it's important to have those profit targets in mind um the most recent one i think we had closed at uh at a maximum gain uh was uh was dollar tree um yeah so dollar 95 debit this was around the middle of the month uh short strike 115 and had recently closed it out or about a week ago for a credit of 496. now this is a five dollar wide so the most this spread can be worth is five dollars okay now we also did this pretty close to expiration that's not necessarily recommended i've kind of pushed it on these trade managements to try and do them during class and sometimes i have to kind of sweat it for a week and have not had the necessarily the desired outcomes but it's important to demonstrate trade management keep in mind to look at these about four to ten days from expiration if the price has not hit your target maybe i should redraw that there let's say 4 to 10 days okay if you have not reached your target of whether it's 50 60 what have you is consider closing it out over that time period and that may end up being a slight gain it may be a slight loss and a driver to that is looking at that short strike you know as you're in this time period is the price trading to that strike or is it moving away if it's trading towards that strike then you one may be willing to give it some time but as soon as it backs away from it then to consider closing it out and you know these are some of the techniques we've already taught you in the swing trading class such as looking for those uh bearish candles you know here's morgan stanley right here you know if the price goes ahead and rallies up you know let's say it goes through that spread uh and you see a a red candle at resistance a bearish candle then you know when may particularly if it's in that four to ten day window go ahead and look to close that out alright so hopefully you learned something new today and if you do follow me on that webcast on thursday you can learn more about that uh by going to that uh simply go to the education tab under education go into the webcast there and uh once those webcasts come up you can see the upcoming sessions here for instance for today where james boyd's coming up next with using options as a stock investor if we go to the webcast calendar you can see everything that is situated now if you're very new to technical analysis this class is a little more on the intermediate side uh but you can see our getting started series in green cameron may does getting started with technical analysis on mondays and as far as options we have barbara armstrong uh later in the week if you scroll down and uh you want to learn more in detail i think we went through a bit of detail here today on long verticals and diagonals you can join me every thursday at 3 pm and then ken rose teaches a good companion one on short verticals as always too we also encourage you to go to the coursework which is located for you by the education tab and go to the options link in there you'll see our trading options course for the basics of options and for uh and including long verticals that was discussed here today and then uh for more advanced options options for volatility and we're going to be talking about some of these tonight in the options concepts workshop we got some sample plans that are in here and if you want to attend that workshop this evening you're welcome to join us just simply go to education and in-person events uh every week we got something new that you can learn or reinforce what you've learned whether it's advanced option strategies will continue tonight with iron condors later in the week or following weeks you'll see platform workshops option strategies and i just skipped over it also technical analysis all right so good stuff folks hopefully you learned something new make sure you click like once again and cameron go ahead and push out the survey if you will we'd love to get your feedback remember the strategy has its time and place the idea is to do a slightly directional trade that may go with the trend i.e a swing that we expect the price to stay trade through and stay above that short strike that's how we realized a maximum gain the benefits for a a smaller trader is one can do this on more expensive stocks uh with less capital so a little more efficient use of capital plus one of the drawbacks with long options is that time decay and long verticals is potentially a way of mitigating that time decay risk now we still need to manage those trades but keep in mind a little more forgiving as far as with the lower break even and typically if the price falls within the spread it will result in the case of a long call a a long stock position in the case of a put vertical it would result in a short uh stock position and you know once again we can alleviate that by closing the position prior to expiration all right so that's what we covered here today folks define risk directional trade long vertical spread and managing gains and times go ahead and encourage you to practice what you learn here today folks uh we didn't do the example on lulu but if you wanted to practice with that on your paper money one can can uh consider that again not a recommendation these are all for illustrated purposes or maybe another stock that has already passed their earnings or not expected within the next 30 some days and you can see kind of the example of examples of reversals where prices are starting to trend up again possibly a nice little flag example that we've discussed in previous sessions and we'll follow up on some of these trades next week so remember folks in order to demonstrate the function out of the platform we did have to look at actual symbols keep in mind td ameritrade does not make recommendations or determinability of any security or strategy for individual traders any investment decision you make in your self-directed account is solely your responsibility so click like fill out the survey folks and we will talk to you again real soon bye now you