Trading a Stock With Collar | Connie Hill, CMT | 11-25-19 | Trading With thinkorswim
You. Good. Afternoon and thank you for joining me today for our webcast, on trading with thinkorswim this. Is a pretty short webcast, where it's, intended, to be demonstrative. In nature and not so much diving. Deep into the theory of a particular strategy, today. We're going to talk, about putting, a collar. On, a stock. And how to do that in one, motion let's. Go through some quick disclosures and, then I'll show you how that's done after. I show you how it's done we're going to have a 15-minute. Question. Answer period, you, can pose whatever questions, you would like to and then. Go ahead and shout them into the chat panel I'm going to keep my eye on it here, so. That I can answer your questions as we go along, all. Right as far as our disclosures, go. Options. Are not suitable for all investors as, a special, risks inherent option. Trading may. Expose, investors, to potentially, wrap it in substantial, losses. Spread. Straddles, and other multi leg option strategies can entail substantial, transaction. Costs. A. Past. Performance, of any security or strategy, does not guarantee, future results or, success. Investing. In the market has risk including, the risk of loss over. Here on our right hand side we have the Delta Gamma Vega theta those, are essentially, some Greeks that influenced the way that the price of the stock or the price, of the option. Trades. And, what, is value, is based. Not only on the price of the stock but some other variables, as well now. Today I mentioned we're going to be doing a, trade. That is the stock with, a colorada, and last week we just did the collar itself this week we're going to combine those together let. Me switch over here to my thinkorswim. Let's. Bring up our chart, we're interested, in and. Let's just take a quick look at it on. Our big screen here we've, got a stock up here we've got deer. One. Of the pretty, good-sized company, all right it's. Been up we're trending we can tell it's been up or trending because of this nice, bright. Red line that's a 30 period moving average we can see that. It, could for some investors, as it, bounces off a support, area here some investors might consider, that an entry, signal on the stock trade I do want you to notice here, something, else I'm, going to zoom in and this. Is possibly. Why some people might want to do a trade now is, that, we've got earnings coming up, alright. On Wednesday, before the market opens, they're. Going to be going through that earnings period, and so, some people might want to put a little bit of a hedge on it as they go ahead and purchase the stock now. What we're going to do. Remember. A color, means, that we're going to buy a put, we're, also going to sell a call and we're. Going to purchase the stock in this case now. I'm going to start on the put side of things. Somebody. Might just consider, buying a put for a hedge. Of sorts all. Right some. People might like to use the Delta to determine, how. How. Much I. Was. Going to say how the hedge they might want if they want it to be a bigger hedge the Delta will be higher if, they just want to buy a little bit of protection and, not spend a lot of money on it then they might go further out of the money for, purposes today we're. Going to do, this. One here that say let's. Do the 170. With a 29, Delta many. Traders might go anywhere from say 20 to. 30 maybe 35 up. To 40 as far as a range of where they might like that Delta to be so. What I'm going to do we're going to put our mouse right here on the 170, I'm going. To do a right mouse-click and, then, I select buy. And. I'm, going to come up here and so, whack. Where. Did it go collar, with, stop, all, right, it's. Primarily a buying strategy, we're going to spend more money buying here than necessarily, selling, on that call site so, what you should notice here is it, brings up a hundred shares of the stock of deer we've, got a long, put. Which is where I started and then we have a long hall at the 170. Strike price, now the, system, just goes and grabs the same strike price for, the call that, you selected, for the put and it would do that vice, versa if you selected, the call first it would just go grab the same strike for. The put that, might not, necessarily be, the actual strike.
Price That you want and in our case it's not so, we're gonna change it we're. Gonna come over here to the call side I. Apologize. You weren't seeing a little bit of that we're. Gonna come over here to the call side and we're. Going to be looking at the Delta column same. Thing here. Somebody, might be interested, in in, the. Likelihood, that they would get called out of the stock the, color itself, is meant as a protection. Measure alright, it's. It's. If. The stock, has. Some difficulty, maybe doesn't perform over earnings has a little bit of a drop a short. Call could, help in that scenario as, well as a long put so. For, our purposes here, we'll go ahead and use the the strike price that has a 33, Delta that's. Going to be the 180 to 50 price, so. We're going to change this call. To. 180, to 50 and what I want you to notice is the net double price is going. To change it's going to go up quite a bit alright, so, the net value of this is, 176. 61. Alright, the, current price of the stock you'll see up here is 176. 89. And so. It, allows. This to be a little bit cheaper than it otherwise would, have right. Because if you were buying just the the put for protection, or just selling the call those prices would be a little bit different I'm, gonna go ahead and hit to confirm, and send. Just. Review it make sure it represents, what you want, notice. Any transaction. Fees the, markets closed right now I'm just going to go ahead and hit Send but it's going to sit out there in my working orders, till, tomorrow morning when the market opens now. This, is your chance to ask questions. Here sometimes, I'll start you with a question if you don't have some. Looks like we could. Have. A couple of questions, here let me read through both of these and see which one that might be the best order to respond, in. All. Right let's see here. I'm. Going to answer Anne's question, first because it's the easiest, and it's more about the thinkorswim platform and, then, can't I'll answer your question, that, is more theoretical about, this particular strategy, so. Case quit, or Anne's question is how do I reset, the default number of contracts. To, one from, ten hers. Is defaulted, to ten and many of you might notice that yourself, that, there are certain defaults, what we're going to do can. Go. To the upper right hand corner, where it says setup and then. We're going to go to application. Settings as the very first item there and then. Under this general, tab you will have several that you can choose from I'm, going to come down here to the. Positions. Let's see here, what. It was actually under order. Let. Me just look through here real quick. Order. Defaults, it's that tab all right got to go to the right tab first, alright so, order defaults. We. Can see the maximum. Quantity. Or, this default, quantity, for stock is, 100. It. Increments. In increments, of 100 if. We come down here to options, I have. Changed, mine I bet yours and has, a 10, in there and then. The quantity incremented. At that also says 10 so, just with your your, arrow or you can type in here what you'd like prefer the number to be just go ahead and type that in all, right, excellent. I'm. Just gonna hit cancel because mine is already set up that way, and. Chuck. Has a question here it kind of intertwines, a little bit with Kent's, question, chucks, Kent's. Question said could you review how to change, in, the Greeks after. A caller options, value, and this. Is what I think. That you're getting at is basically. How, do we play what if now. That we have this trade, in place. And. How do you would you adjust, that and I think you're talking, about the Theo price, calculator. And and. So we're going to proceed on that assumption and can't. If I'm wrong tell, me okay, tell me no, that's not what I really where I wanted you to go on I can, adjust so. I'm going to select up, here on the field price calculator. And. The. Field price, calculator. Allows you to. Determine. What. Could the price of an option be, based. On the changes, that we're making now. One thing I want you to know I'm going to read it reset, here one, thing you need to know is that. We. Should maybe calculate. The. Net debit of the. Put and the call before, we go. Through this alright. The. Put that we selected, here. Was. The one seventy, that was a long so, I'm just going to kind, of put it up here for a moment I'm, gonna get the could control. Key while I select, on the ask price. And. I'm gonna move this out of our way and. Then. I'm going to select here on this bid price, for. The call that we're looking to sell with. A value, of about 248 now some of you might be interested in doing that at the, midpoint level. Now. Right now it, is showing. That. The price of these two are offsetting, each other a little bit however, before the market closed I went out and looked like. Right about, the time the market closed what the values of those were and the.
Values Of adding those together was, 92. Cents. All, right right now prices. Have adjusted, such and after hours, many. Times they reflect, the bid and the ask prices, for orders, that are being submitted not, necessarily. What the market rate is at this time and so, when we look at that field price calculator. This, is a little bit tricky here let's come back to, let's. Get this out of the way I was hoping to show you that it was 92. Cents, as. Far as an, additional, amount to, pay, when. Buying this stock. However. Let's go through this little example here because. I think this is what Kent is wanting. To see how do they have a Greek effects, after. A color options, value, so, we'll make some assumptions, here today we're on November 25th, and. We. Have the earnings announcement, is Wednesday, so. We have Thanksgiving, the market is closed then we have Friday, now. We don't necessarily have, to choose options, that. Only. Cover, that period of time and would only expire. On, the. 30th. Of November here. We, don't necessarily, have to stay with those in fact, I went out to the next one here where it's December, monthlies that, we selected, on here. Now. If we bring up our calculator, we can say all right what if we go past that time maybe. The, day past. The. Announcement. Day or somebody could play around with the announcement, day if they are looking for this to hedge, let's. Do that let's go - I'm gonna go to Friday okay we're gonna go to the date two. Days after the announcement and, what, if the price of the stock went, I'm, gonna say down all, right - lets go say it may 23, dollars all. Right and that. Result of the price of the stock doing this but what about implied volatility. Implied. Volatility. Would be expected. To change as well because. The news would be out the. Earnings, information. Is out and the. Implied volatility, comes, out and gets crushed out as we, can see over here on the right hand side there's not a lot, of implied, volatility. Priced. Into these particular options right we've, got 28 percent, and 26, percent. 25. Percent it's, not like the, very front, one is. Front. Weekly is like 48, percent, it's not really huge so would have a little, bit of a volatility pullback, but not a ton and so it might not warrant. Doing too much on the, calculator, all. Right let's go. Get. Rid of our drains here and bring the calculator, information. Back up. All. Right click on it here so. The price of the stock goes down three. Dollars to one 7361. We. Could adjust volatility. A little bit I'm going to say minus. Minus. 2%. Which is really minor probably, is not going to make a huge price difference and. Then, if we come out here and we, look. At, the values of our options. And. We come up here the column, we want to look at is this Theo price, column. So, after earnings is out we get to Friday, this. Option, that we paid, roughly 262, for, this. Is saying that's going to be worth, 284. Because, the put would gain in value when the stock drops how. About the call. The. Call this. Is something. We're selling, right, we, catch capture. That credit, up front, we'd. Capture, in the neighborhood of 248, on it and then, this is saying when, the news comes out and the stock drops and the implied volatility, drops the. Value of that options going to be about 115. And so we could take the net of that we could take 115. -. 284. Let. Me do it real, quick in this calculator, here. We. Say. 2.84. Is the new theoretical price on the put and if, we said -, 115. All. Right the difference there is 169. All. Right and because. We're, looking at that credit. Being received that's actually. Where. That helps, the most because, we've already captured that premium, and this, is not all that different the theoretical, price from the put is. Not all that different although it did change what about Oh. 12. Not. About 20. Cents 18 sounds I guess more like that, so. When checks is what is the protection that you get you. Get a, little bit of leeway in terms of, where, the. Price of the stock can, go. So. That if it does pull back and maybe, it doesn't pull back that far like, in our example I just said hey let's just do three dollars all, right it helps, buffer that.
If. And when that occurs, if, it doesn't. If. It goes up remember. The foot position, is going to be going, up or, going down in value the. Call is going to be going, up in value and so it's not going to help you. But. It does provide that, it's. Not going to help you in a sense that the values aren't going to be going in the right way that you need them to and, so. Maybe. After the period of time that you wanted to hold it over for. That protection if you feel like the the risk is gone then. You could go ahead and trade it and close down that collar, piece of it if you want it to. Let's. Look at this. Hopefully. I answered your question, there, Chuck Yale says why does the short call and the, long put, provides, similar protection. Inter trade you, know it, why it's just kind of the nature of those. Options, because. We would buy a put, if the expectation, were, that the stock were gonna drop we, would want to profit off of that all. Right and it's, the same thing but, different with a call in the sense that you profit. More, likely than not if the price of the stock drops, it's, gonna drop at the price of that call option, but, you already, brought in some premium, when it was more valuable. All. Right and so, that's how it can, offset if. The. Price, of the stock drops, and it's. Actually having two positions, to, hedging. Positions that you've married together sometimes. People don't marry them together sometimes, they just buy the long put sometimes. They may just sell the call they, don't have to be married all, right but, it is an, option. That's available to, you which is why we talked about this. If you ever got it one of James Boyd's classes. He talks a lot about using, collars, in. Active, trading accounts, as well as, I think, he has a class here, that's. Called. Growth. And value strategies. On Thursdays. At 4:00. Eastern Time, he'll, talk about it a lot in that particular class. Chuck, says if one goes up and the other goes down what is the point of doing it the point is for, that protection, if you're concerned it might drop, okay. It's just for, protection doesn't. Mean it's going to go your way and. Notice. In our example, you said that's kind of the point of it notice, in our example.
We, Actually profited. Quite a bit, from the price of the call option going. From say, 248 to. A buck, 15, all. Right so. There was what about a dollar and. 3030. Worth dollar, thirty cents worth, I'm. Gonna. I'm gonna call it profit. At, least at that point in time based, on these assumptions, all. Right and. So. It did definitely help. The situation if we were to go back and look at a net. And. Chuck, says it seems like the market makers Christmas gift no it really isn't it's, not the market makers Christmas gift but, this is a strategy you, could practice, in your paper account. It. Doesn't even have to be nerding. Snooze that's coming out but maybe the expectation. That there is big news maybe, there is a lawsuit determined. Maybe there's a FDA. Approval. That, a company's waiting, for to, have approval for so, people use it in those big events when they think I might want some protection in case this really goes against me all. Right so. Hopefully that, makes sense, to you my, suggestion, is to practice. It practice it. In your paper account, practice. It by, coming in here to the theoretical calculator. And. Putting. In some assumptions, and then coming out to the field price, to. See what, it all adds up, to all, right that's, the best way that you're going to, this is by starting to practice it, paper, trade it so that's going to be my encouragement, to you now, coming up next at the top of the hour Barbara Armstrong will be here she'll, be doing her class, on, trading. With a smaller account, it's, gonna be on our Investor, insights Channel hopefully, you've subscribed to, that in YouTube, as well as the trader talks in YouTube so you get the updates, when, we're doing, particular things, would love to have you join us as a subscriber. Let, me just go back out here to our final, disclosures. That in. Order to demonstrate functionality. Of the platform, we need to use actual signals, however, TD Ameritrade doesn't, make recommendations. Or determine, suitability of, any, security, or strategy, so any investment, decision you make in yourself directed. Count is, solely a responsibility. Hey, appreciate you being here folks, we'll see you again next week with a new trade bye bye.