Trading a Double Diagonal on thinkorswim® | Connie Hill, CMT | 11-11-19 | Trading with thinkorswim
You. Welcome. To our webcast today on trading. With thinkorswim, this. Particular webcast, is, meant it intended. To be. Demonstrative. What, I mean by that is I'm going to show you how it to do physically. The steps of placing a trade on the, thinkorswim platform and. Then, after I do that we'll have a period of time a tip maybe 10 or 15 minutes for, you to ask any questions, you have either about the. The. Software, and how you do different things it could, be about the particular. Strategy. That we're talking about as well let's, go through some disclosures, and. We'll, get to it. Options. Are not suitable for all investors there's, a special risks inherent option. Trading may expose investors, to, potentially. Wrap it in substantial, losses. In. Order to demonstrate functionality. Of the platform, we need to use actual symbols, TD, Ameritrade does not make recommendations. Or determine, suitability have. Any security, or strategy, for individual, traders any, investment, decision you make in your self-directed account, is so only your responsibility. The. No, soliciting, no photography. And so forth we, are going to be talking about options. Trades in fact we're going to be doing a double, diagonal today, and, so we have our definition, here of the Greeks the Delta, Gamma theta Vega theta. Hopefully. You're familiar somewhat. With those and we're going to be using them in the, course of our just discussion. Here today. Let's. Switch over here. We're. Going to go over to our thinkorswim, platform. Alright. I might, not have mentioned to you we are going to do a double diagonal. On Cisco, we're, going to go through the steps first and then I'll show you. By. Looking at the chart some of the things why we might have wanted to consider doing. This type of the trade, now. The, steps. Here are we're going to select first the short legs that we want to sell last. Week we did a double calendar, in which case we. Did a put. Calendar. Four well I should say we did a put calendar on a call calendar, and put, those together, this. Time we're going to be a little bit different we're not going to be using the exact same strike, prices, as we did in. The long calendar, so. I'm going to start out here first of all I'm going to open up our November 15, options, the. Reason, I'm doing that particular. Series. Is because. Earnings, is coming up and we. Want to take, advantage. Of the implied volatility, that drops, after an announcement has, come back so we're, going to look at our Delta column which is right here and, we're. Going to do similar to what we did last week in the sense of selling, a delta that, is fairly close, to a 30 Delta it might be a little bit over might be a little bit under in. Our case here we're going to use the. Let's. Go use the 46, 50 and I'm, going to hold down my control, key as I click on that, bid. Price. 54. Cents. Now. We're, going to come down to our calls. Again. Here's our our, column. For Delta's and really. If we wanted to use a 30 Delta here we might have a choice here of a 33, Delta which is the 49 50 strike or the. 27. Delta which. Is the 50. Strike and it, really. Doesn't. Matter per se which one you use either one could be fine this, particular one I am going to go ahead and, I'm going to use the. 50 strike price alright, so I'm just going to go ahead do a regular left click well. I'm still holding down the ctrl key on the keyboard. Alright, so we have our short. Legs in the call in the put you're going to notice here out on the left that it says strangle, but we're not finished, building it yet all, right so we're going to continue we're. Going to take and. Set up our long legs to be further out in, the end, as far as time, those now. They could be anywhere from 30 to 50 days if somebody, wanted a shorter term trade you don't have to go out the full 30 days on that long, leg for. Our purposes today. We're. Going to go out here. - we, want to do the December 6 which have about 25, days that's a little bit shorter than the initial window I told you but let's open that up. We're. Gonna start on the put side of things typically. With a double, diagonal the, strike price because we're not going to be matching it to, anything, else the strike price typically we want to look at either at the money or, the first strike in the money alright. So for our purposes on the put we're. Already, going short at the 4650, so the long leg that I'm going to select here that. Looks like it's closest, to the price of the stock with some intrinsic, value it's gonna be this 4850. Again, I'm gonna hold down my control key and I'm going to click on that ask price, I'm. Gonna come over here to the put side of things on. The, put side of things that's, maybe a little too far let's go up here looks. Like our first strike that has some intrinsic value, that has that yellow background is.
Has. A 52 Delta, and the strike price is 48. So. Let's go ahead we're gonna buy it I'm. Going to hold down my key. My, control, key still, and then. We are going to end up with a net, debit, trade, looks. Like we have here about two dollars and 18 cents I. Want. To just kind of look at this we've got a 48, and a 46, 50 so those strikes are about a dollar and a half apart. On. The put side we, actually have. A 48 50, and a 46. 50, and. This is going to offset a little bit and if we wanted to we could come out here and say let's, do the the. We. Could do the 49, and step of the 48 50 in fact I'm going to change this one. So. That they're equal, a dollar and dollar 50, apart in terms of the strike prices. So. Since that's two dollars I'm going to change this here I'm, going to make this one 49, our. Net debit goes up a little bit to 46, and, then. I'm gonna hit, confirm. And send I'm. Gonna review this notice, it says out here double, diagonal, now this. Every, single strike, price is different from the other all right so short, legs. Typically around, a 30 Delta longlegs. Typically, maybe. Our first money in or, our first strike price in the money or if. It's at the money that can be okay too but typically go on a little bit of intrinsic value just. Review it make sure it represents, what you're looking for what you want to do and. Go, ahead and notice your transaction, fees and then. Go ahead and hit Center now I'm just doing one. Quantity. In. This particular trade. Ricardo. Has a little bit of, additional information he, wants to share on this strategy Thank You Ricardo. Alright. Let's. Go back let's diagram. This a little bit and I want to show you here. The, chart of Cisco, and. Let, me zoom out here just a little bit. Let's. Take a look here at our big chart, and. What. I like to do is zoom in maybe about, from. Here, on over. All. Right and, what do you notice about, what the price of the stock has been doing well. Since, about mid, September, I'd say.
Let's. Make that a flatline, looks. Like it's been trading. About. Maybe. 249, or so on the top side and on. The low side here, around. 46. So. It's going sideways is, trading, in, a trading, range. That's. Fairly concise. Fairly. Compact. Okay, it's not spread out all over the place that's, one of the keys, to this particular strategy, is not, looking for a huge. Move in the price. Alright. Let's come back to our screen, our. Regular, screen here. Now. What. Is a key, here. What. Is a key going on here that we might be considering, this trade well. Tomorrow, well not tomorrow actually actually it's going to be Wednesday morning, we. Are going to have earnings so the stocks going to have earnings Wednesday. Morning, before the market, opens, all right and so. That, might. Be a key I'm going to go back here to our trade tab and. What I want you to notice here, is. Let. Me scroll up a little bit all right there we go how, high or, how much higher the implied volatility. The. Options. That expire, this week are 53. Almost, 54 percent volatility. Compared. To the, next few weeks out where we've got 37. Drops to 31, drops to 28, all. Right so we're looking for an imbalance, here in terms of once. The news is out the. Expectation, is that the stock might not travel, that far but. Some of the gain is going to be received, because of the volatility, crushing. Out once. The news is, out all, right so let's. Come over here, to. Our monitored. Tab. I'm. Going to bring up our diagonal. Trade and this is the time when you should submit your questions, okay I am. Going to submit, a question here, that we're going to take a look at and, that is when. Might. You use this, particular strategy, and what does it look like on the, risk profile, tab some. People might use it as they're going into an earnings to take advantage, of that crush of volatility, or a big news item could, be another reason to do it I'm. Going to go here, and I'm just gonna say to analyze, the, trade. What. I'm hoping you can see this pretty good, what. You're going to notice here is that, we have. Kind. Of like circus. Tent, peaks, is. Kind of how a lot of people will describe this where. We have a peak, point. That's. A terrible circle, but you get the idea a peak point there, at. The 50 strike price another. Peak part here, at the. 46, 50 strike price and, typically. Your pink profit. Profitability. Is going to be when, the price of the stock goes near. One. Of those two strike prices, remember. Your red line is your profit, and loss at options, expiration, this. Purple line down here is your profit, and loss today. Now, to make sure that this is set. Up properly to show you what you want to see let's get rid of this. We. Want to put a date here, that, corresponds. With. Our. Let's. Get rid of our price, slices, for a minute that. Corresponds. With the, option, that expires the, first, in.
This Case we're, looking at, the. November, 15th, that. Our weeklies that's gonna be on Friday of this week and so. We want to put in this Saturday, date, after. The 15th when they expire so we've got our our Saturday, date set here, and that's. Going to map on that red line the profit, loss, through. That trade now down. At the bottom the. Date we want to put in there is not necessarily, today although it's showing today but. We might want to push this up a little bit and as. We move the date further, along this, is the date that options. Are the earnings will be announced, before the market opens. It. Didn't, change a whole lot our. Profit. Last line as of today did it however. What. If we were to change something like the implied volatility. Let's. Come down here a little bit lower and. Actually. Let, me uncheck. That. Some. Previous, trades, here, I. Didn't. Realize it realize it was. Graphing. Them. Alright, let me scroll down here just a little bit I want to make sure we're only graphing. Or double diagonal trade and it looks like that's the bottom one here so, it looks like we're in good shape now. All. Right it was graphing, a couple of extra things is, changed, it a little bit but notice, here. Is the zero line right. Zero, means zero money. Gained zero, money loss all. Right and so. Yes now that I've only got, just. The strike prices for this double diagonal in place now, our profit, and loss line, actually is positive, today and then. It drops to becoming negative, when the price of the stock hits 50. 130, if, it were to do it all in a vacuum and, implied volatility. We're, not changed, at all all. Right and again, at our 2 peak points, are going to be at the 50 as well. As the 46, 50 for, the pre peak profitability. Depending. On which way maybe the stock decides, to move after, the earnings announcement, comes out. And. Has a question here trade. Management. And. Maybe. A more, specific question, you could put in there I'll. Try to answer what I think you're asking. Yes. This is a trade. You would want to stay on top of it, would not be the type of trade you throw in there kind, of forget about for a couple of days and then come back to it you would want to be monitoring, this as the. The. Information, comes out and the. Trades, or the stock starts trading the, direction, that. Is showing as they. Say. The better end of the deal type, of thing and the, expectation. Is both those short legs the implied volatility, is going to come crushing, out and then, if at night go a little bit higher, perhaps. You're going to work on the long haul diagonal. Close out the put diagonal, or vice versa if, the stock drops the, same thing we saw that the implied volatility, crushing, out however, on a put, that. One, put, that implied volatility. Will probably, help that long leg. Stay a little bit more profitable. Because as implied volatility, goes up what. Happens to an options premium it goes up as well, all. Right so. And. Hopefully the answered your question. You. May or may not close. The whole thing out right. Soon. After the announcement and, that it, starts trading or per have to monitor, it really closely because. Like I said it could be that output, double diagonal still. Could be a profitable, position for. You in the event that the stock drops and implied volatility, moves up helping, enhance the price of that long leg. All. Right now. There's a couple things I did want to point out to you they haven't come up as questions, but I think they. Would be helpful for you to know and. One. Of the questions is where can you find out more about this strategy so that you can go you can study it you can do some practice trades in, your paper money account I'm, going to come over here to. I've. Logged into my. TD Ameritrade, website, I'm gonna select on education. And. I'm gonna come over here, come, back to options. If, you are brand new to options. You. Will want to go through this force first, course here trading, options, course all right it'll get you to familiar. With some of the basics of option trading this. Particular strategy. A double, calendar, and a double diagonal are in, the weekly options course if you were to come in here, let. Me go down just a little bit more and hit continue. Tried. To make it really big so you could see it well, from your point of view and. Here. We have, double. Calendars, and rising, implied, volatility. On a double, by agonal you may hear this the terminology. A straddle. Strangle, swap and following. Implied volatility. But the straddle, strangle, swap is essentially. The same type of trade as a double diagonal alright, you can choose to put it on the way that we did or you can choose to put it on a.
Little. Bit differently or in a little bit different order but ultimately that's you end up with. Coca, has a question here let me go back to the chart here Coco. Coco. Has this question there are probably others, that have this question Coco, said okay in, the, risk profile page what's the difference between this, date in, the upper right hand corner, and this. State kind, of down below, it's where's the bottom end but just right above our traits think that's what your question is. The. Difference, is whatever, you've, got in this date field here, the red, line is going to graph to it and it's intended, to be the, date after that front, leg option, expires all, right so in our case the options, of the Friday is the, 15th but in reality it's, the 16th, when they all expire so that's why you're always going to put in that. Day immediately following, it most of the time it's going to be on a Saturday. Unless. The options expire a little bit earlier in the week the. Date down here, is meant. To be this purple, line all. Right on this purple line it's basically saying. What's. The probability, of certain things happening. Up here on the chart given, some parameters that you might change one. Of those parameters you might change is the date and I had kind of just clicked. In here a little bit for that, we. Could also say, if I go down a little bit further here. If. We. Wanted, to. Where. Did it go. I'm, not getting the right there's, a spot here where I can click and I'm not seeing it right now maybe it's in my price slices, work, we could change the, implied volatility, we could have it go up a certain percentage we could have it go down a certain percentage, but, the bottom line about that date is that, it is graphing, out this, purple line, all. Right it's graphing it out very. Good let's. See what other questions. We have. Ricardo. Is helping me answer that question as well. Yeah. Typically the lower-right date is today's date unless you change it like I did changed. It up a couple of days. Yeah. And the upper-right date is the expiration, date of those options. All. Right, well, folks I do appreciate. You, being here, today, I'm going to go out to our closing disclosures. Again. This is meant to be a very brief. Brief. Webcast. Next. Week the trade, that we're going to focus on is a collar trade, some of you might be familiar with this strategy. Some of you might not I just, need to tell you in closing that in order to demonstrate functionality. Of the platform, we need to use actual symbols, but, TD Ameritrade does not give recommendations, or determine, suitability of, any security, or strategy, any, investment, decision you make in your self-directed, account, is solely, your, responsibility, now. Coming up next is going to be barbar and strong she's, going to be teaching about strategies. In ælis, mauler account, so. Stay tuned for her she is going to hop on here in about ten minutes makes.
Everyone We'll see you next week bye bye. You. You.