Trading a Strangle on thinkorswim | Connie Hill | 10-21-19 | Trading with thinkorswim
Welcome. To our webcast this, afternoon, on trading, with thinkorswim, this. Is the webcast that's more down than straight up in nature and I'll show you how to place different types, of option trades on the, thinkorswim platform, this. Will be followed by a, five to ten minute question-answer. Period so as you have questions go ahead and shout those in I'll make sure we pick, them up on the tail side of, things, today's, trade is going to be a long strangle. Options. Are not suitable for all investors as, the special risks inherent let's. Get the right guy here as the. Special risks inherent option, trading may, expose investors, to potentially. Substantial. And. Sub. Potentially. Rapid and substantial, losses. In. Order to demonstrate functionality. Of the platform we 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, you make in your transaction, costs, can, be important, factors in trades so. Take notice of those over. Here on our right hand side we have the definitions. For Delta Gamma Vega theta, inasmuch as we're going to be talking about how, to do some option trades those would be important, things to know. Let's. Come over here to thinkorswim. And. I, want to show, you a particular chart, here, that, is going to be our focus for today we're looking at Caterpillar one, stock that's on the Dow Jones Industrial, Average what. I want you to notice with it is kind. Of the. The. Trend that it's had here, let's. See here that didn't go quite as well as I wanted it to, alright. See this trend here see. How it's been a little bit on the sideways side. We, could have had some bottoming, out a brig. Big, break up to the site this. Almost, actually looks like it's getting up to that resistance, area again, the. Big thing we're gonna focus on here is what, we see right there, which. Are little earnings, markers, that they're going to announce their earnings and then they're also going to have. A. Conference. Call on it a little bit later now, we're, going to come over to the trade tab. Again. We're working with Caterpillar here and. What. I want you to notice here, are the different columns, we have I made it in a really, large font so hopefully you can see it good we. Have our delta font our, open our, delta column i should say our open interest column and then our bid and ask prices, same. Thing over here on the right side where the puts are now. A long, straddle. Is what we talked about last week we. Did a long straddle by selecting. The same strike price on. A. Put as well, as a call. Today's. Price of the stock closed at 132, in change so. The closest, strike price, is to. Being at the money it's going to be 132. Now. In a strangle, we're, going to shift a little bit we're going to adjust the strike prices that we choose and so, if we know 132.
Is Out the money we're going to choose an out of the money put and, an, out of the money call now. To put both of those together on the screen I'm going to use my little. And. I'm on a Mac so I'm going to use the command key if you're on a Windows PC you'll. Want to use the control key and all, I'm going to do is once, I am. Ready to click on the strike price that I want in this case the 131, is the first put, out of, the money I'm, just gonna hold down that key and click on the ask price. Let's. See here. We, just want to build oh I know we want to buy a. Strangle. Now. It may not pick, the same strike prices that we may want to use. Match. Let's get our order book out of the way up. And our screen up a little bit better. Let. Me scroll down here. So. It picked up the 131. Put, which, we see down here on the bottom it, also selected. The next strike price here the 132. On the call but. We're going to adjust that to be the 133. Because we want it to be a strike price out, of the money on the put as well as the call so, I'm just going to come down here to the bottom we're. Gonna select on that 132. And we're going to change it to, 133. All. Right that, is, our long strangle, now feel, free to start, typing, in your questions, here as I'm. Going to start answering them, one, thing I want you to note here is that the, net debit is 503. If. Everything. Goes wrong on the trade and both sides lose that's the most that you could lose per trade with. One contract. Let's go ahead and hit confirm and sand, mark. Is not open right now so this orders are going to queue up and. Just. Kind of review it make sure it has what, you're looking for there check, to see if there's any transaction. Costs and then. Go ahead and hit Send. Now. I'm going to start you out with my own question, a, question, that I had when I learned, a little bit about this strategy, or I even even just heard people talking. About the strategy, and, the, first question that I have for myself before, I entertain, your questions is why. Would, I want, to do a long strangle. Here okay, remember the the. Put in that and the color a little bit offset from each other than not the exact same as they were last week in the straddle, why. Would somebody want to do that. Well let's zoom in here, on. Our. Graph and the big thing is when you are expecting, a big move in the price of the stock. The. Expectation. Is perhaps, over. Earnings that it's gonna move really big one way or the other do. We know do, any of us really know when, it's off when it's earning, season what, their company is gonna say we, really don't do we we're, not privy to that information we all get to find out at the same, time and so. The expectation would be okay if this stock drops, then. The put should be making money the, call will be losing. Money very quickly and vice, versa if the stock pops and it runs that. Call. Sides going. To be increasing. But the put side is going to be the side that's losing, the. Next question you might have is well. How, do we manage this, trade, and the. Answer is sometimes you're gonna have to watch it it's. Not one of those types of trades that you put it in and you come back and check it you. Know a couple days later know it's gonna be one of those trades, that, the morning that they announce the earnings in fact on catapillar, it's. Going to be a couple days out it's gonna be on the 23rd, so that's going to be Wednesday morning before the market, opens, that's, when the news is going to be out you'll, be able to see some pre market activity.
And As, soon as the bell opens you'll you should have an idea if the market thought it was positive news or negative, news and then see the reaction, of those. To option, prices. Now. To manage it you're going to have to watch it when those announcements. Come out you, may decide to quickly close. Down one side. Of the trade. However. I'm going to say this let's suppose, that the earnings were really, poor let's. Suppose the stock gapped way down, let's. Suppose that your call is worthless. All. Right you're put how's it great you, know it's doing well but, your call isn't doing well let's say it's worthless you. Can ignore it if you wanted to because. There are some times I should say ignore it and do nothing with it because, there are some times when a stock will make, a big, gap down or, gap up and then, throughout the rest of the day at fate or, it starts to recover and so. At that point you, might say fine I'll take the profits, on my put I'm happy, with that and you. Might say okay let's see a little call you're starting to stock, starting to go up now let's see if it starts to gain a little. Bit of price, so. That you have, maybe. He's some salvageable, value. Out of it. No. Again this is your chance to answer or to ask questions and I'll answer them on this particular strategy. Those. Of you that are logged into a gmail, account you're the ones that can ask, those questions if, you, don't have a gmail account you, can sign up for one solely for these purposes, you don't have to go change your email address but, those are the ones that are allowed to participate in, our discussion because. They're they're logged into that account, now. Something else I want to draw to your attention, do. You remember how. Much our net debit was remember. How much that trade cost us was. Five dollars and three sounds, all, right one. Thing we're going to want to pay attention to, here, is. This. Little value, right here the. Strike price selection, that. We selected, for example, here does, not have a lot of time until it expires fact it'll expire, on Friday, so.
The Idea here is to have a very short, turnaround, type. Of trade do, you have to go for that weekly no you don't have to go for the weekly could, we have gone for one of these other weeklies yeah we could have we, could even come out here the November's, are out further if we had wanted to but. For our purposes today in the class we're looking to say hey let's just have a quick move the. Break-even, point on this trade, is when you've been able to recover, the. Five dollars and three cents that was our net debit, what. Is the expected. Move, on, the price, of this stock when. It expires, on Friday, what's. The expected, move, well. That's what this value right here means plus or minus six. Dollars, and 21, cents that's. The expected, move now. If you're sizing up a. That's a strangle. One. Thing you want to check is, to make sure that whatever, that net debit is the. The amount, the expected, move is expected to take some. People will consider that and say if it's not if that amount that the stocks expected, to move is not. Equal. To or greater than, the net debit they, might pass on the trade right, because I want to make sure that the stock really moves as much. As it can for, this type of the trade to really, work out. And. Has a good question here and says how do you how did you pick the. Strikes just one dollar off, what. If you chose to okay. Very good question let's come over here let's open up our. Option. Chain here. Let's. Do that an okay, we. Are going to look at say. You went a little further out of the money instead of 131, let's say you did. 132. Let's do right mouse click on that and. We're gonna say bye, I'll. Just come down here to our strangle. And. So, we're gonna go have dollar further, out of the money so we've got our 130. On our put side. And. Let. Me just collapse this so we see this a little bit better on, the. Call size we would want to go equally. Out as well so on the call size we would want to go our side we would want to go to the 134. So let's come down here to the call and choose. 134. Now. One thing you're gonna notice is, the net debit, isn't, as much, all. Right you're like okay that's nice the net debit isn't, as much however, the. Price of the stock has to move, quite. A bit further in, order to. Have. You get to a break-even on one side what, do I mean by that, initially. We had our 131. Here for, our first trade that we did a demonstration on. So. The price of the stock we, know by the time the by. The time it expires we want it to expire at least a penny in the money right. That's where we get that trinsic value and the value of the price of the option going, up if we're, telling the stock hey. You. Have to move further now. Then. That, means that we're, gonna have to have a bigger move, expected. On the stock right, if you go further and further out of the money man that, the price of the stock truly has to move so. And. We certainly could, we, happen, to have the luxury of having single. Strike prices here and. For. Class purposes that's, what we decided to do if you want to experiment with it certainly experiment, in your paper money account, and see. Run. Some scenarios different different. Strike. Prices if, you want as well as different stocks if you want just, kind of see how, that works. Sandy. Said aren't we fighting a, volatility. Crush Oh baby. Thank. You for that question sandy. Let's. Collapse this one more time. Sandy. Says are we going to have a volatility, crush now typically. We. Are going to have that let's get this back here, up. Here at the well let's, just collapse October, here I've. Heard the top it tells us how much implied, volatility. Is priced. Into, the options. So. For this very first week we, have about 52%. Implied. Volatility. Priced in that's pretty high, anything. Over 35%. We're. Gonna consider in a high range and then, you're gonna notice well if we come away out a week further. Yeah. The implied volatility, isn't. Quite as high some. Might think then. Might. Maybe you could go out of the money a little bit further. And. You certainly could because you're you're not having. Implied.
Volatility. That's quite. The same rate priced, into the options is if, you were to do one of these others that's a little bit further out. All. Right, however. Is, there, going to be as huge. Of a move when, earnings come, out. It'll. Mean it's kind of the same amount that works stood on that front week looks. Like if we had gone for the next week out we would have had about, $1 more. Expectation. That the stock was going to move an extra dollar after, the news came out and before options, expiration, date. Okay. Again, that would be something that you could play around with in. Our class we don't have time to go over a ton of scenarios, and so I just have to pick one now, some people might like to see. Let's. See the next question from. SK, are. We just playing probabilities. Then what's the justification for, buying a strangle, here in. This particular scenario, we. Are not playing, probabilities. We. Are playing, the, news we. Are playing the earnings announcement, that's the expectation, and the catalyst, that we think is going to jet this particular. Stock. One. Direction or the other big, gap down or big gap up and when we see implied volatility. In here at a fairly high number, like. I said anything over 35 is considered, high, when. We see something like that the expectation. Is it is, going to move if we, wanted, to play probabilities. We, would probably sell. Something. Out of the money okay. And, not. Buy. Something. Out of the money okay. When you buy something out of the money it has to make a bigger move benefit, we're simply at the money or in, the money all, right so next. Week we actually will be talking about a strategy. That. Possibly. Could, have probabilities. Baked into it and a consideration. Kim. Asks how much could, you make on the trade example, we placed today. There. Is actually. No number, that I can give you. Because. Let's. Go back to our trade here we're gonna go back to the monitor, and I want to bring this open up here here's. Our trade white right here the 133. 131. Strangle. One. Of these could expire worthless and the, other one, could, drop let's suppose caterpillar. Has bad news we don't know let's. Suppose that they drop. We should expect, to, lose the price of the call we just should expect, that okay, and then, we would expect caterpillar. To drop well if it drops four dollars there's. A certain amount of. Price. That it could go to right, if the, price of the stock drops, seven, dollars man that puts should be even. More. Valuable. To you the price of that put. Option should go up that's. The case and it's, a reverse scenario, we, don't have a limit, on these long options, we never have a limit, as to how far, they. Could go one. Thing is for sure you would need to trade or close this trade out before. The options, expire, all. Right I think we have another question, here so. Kim bottom line is infinite. Paul. Says well time to Kay move rapidly. Pod. Time decay is in a rapidly, melting state right now with. Only four, days till these options expire which will be Friday you. Bet they are in a mode where they are melting, quickly which. Is why it's so important, that the stock have a big move for us if. We come back over here yeah. We're looking for it to make a big move one direction, or the other but, again it's gonna be that earnings down here that's gonna be the catalyst, on Wednesday. Morning. All. Right just, checking through the questions here, you guys asked some great questions. Awesome. I appreciate, that next. Week we are going to do a short, strangle, a, slash. Straddle.
Now That you have the idea of what a straddle is what a strangle is those, have been long we're, gonna do a short one next week and talk through it now, coming up next is going to be, barb. Armstrong she is going to be doing a class on. Essentially. Working. With a smaller, portfolio. And, some, of the different, strategies. You could, use in that particular scenario, if. You're not familiar with options strategies a great place to place, to go to is on Fridays, at. 11:30. Eastern Time, there's a class taught, on getting started with options, back, Barbour Armstrong does that class she does a fabulous. With it if, you, were interested in this particular strategy. Is something, we cover in our Advanced, Options webcast. Ken, Rose teaches one Thursday at 3:00 Eastern Time. You can also get some material, on this when you go into the courses, and you, choose the volatility. Options. For volatility, course, that's, where we get into some of these particular. Scenarios. And strategies, that are spread strategies, again. I thank you for being here today need to remind you 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 on, any. Strategy. Or security, and the investment decision you make in your self-directed account, is solely your responsibility, thanks. For joining me we'll see you again next week bye-bye. You.