Using Probabilities in Trading | Probability Based Option Strategies
[Music] [Music] hey everybody brent here i'm glad you've joined us today for our probability based trading class and you know we talk each week about probability-based trades but i really want to go back and really delve into what we talk about when we talk about probabilities here today so we're going to do that in just a minute but remember you can always follow me on twitter at bmore's underscore tda uh vj and sandeep and el diego and ricardo and monique and neil and mia glad you've joined us and anybody else who's coming in a little later we appreciate you joining us if you're watching and recording that as well remember that the content today is intended for educational educational informational purposes only it's not investment advice or is it a recommendation of any security strategy or account type options are not suitable for all investors as a special risk inherent options trading may expose investors potentially rapid and substantial losses short options can be assigned any time up to expiration regardless of the in the money amount and paper money application is for educational purposes only successful virtual trading during one time period does not guarantee successful investing of actual funds during a later time period market conditions change constantly probability analysis results are theoretical in nature not guaranteed to do not reflect any certainty degree of an event occurring past performance of any security or strategy does not guarantee future results success while this webcast discusses technical analysis other approaches including fundamental analysis may assert very different views stop loss orders trailing stops do not guarantee execution at or near an activation price all invest involves risk including risk of loss please no soliciting no photography no recording uh connie's in the chat by the way so you can give connie a follow on twitter as well at c-h-i-l-l underscore tda i appreciate her help she's always very helpful and let's see anna and sebastian and wayne joined us as well glad you are here so this is our agenda today everybody we're just going to do a quick market review i want to keep it pretty quick because i need to uh i don't want to get cut short on time in terms of like trade management the last item but i want to talk about probabilities and standard deviations here which is really the foundation even though i don't necessarily express it every week it's the foundation of this class and then we'll do a practice trade as well so having said that i'm going to switch over we can see what the market is doing right now you know we've had some retailers come out some big movers in the market the market right now down just a smidge it's not really doing a whole lot in terms of the s p 500 the uh the nasdaq is about the same not doing much the russell 2000 small caps are up just a little bit not a huge move on things couple bigger movers in the market here's one how's that for a chart lows this comes on the heels everybody of yesterday home depot getting crushed in fact lowe's got crushed yesterday but uh nice big reversal of fortune there on that so you know we do have a lot more retailers coming out tj maxx i think came out target came out here's target oops t g t here's target they had earnings and they are down a little bit tj tjx i think tj maxx right no i have the wrong symbol yeah tjx i think maybe that's right yeah that's right dj this is tgax uh that's a pretty positive reaction there and we have nvidia coming out tonight the big news of the day probably is um the fed minutes 10 minutes will be coming out in about an hour or so there so there we go uh that's that's that's what's happening in the market there that's that was quick but i want to talk to you about when we talk about probabilities and let me mention something to you on that if you go to the excuse me i clicked on the wrong thing there i'm trying to bring up i don't know what i'm trying to bring up we'll do that if you go to the td ameritrade website and type in an etf or a mutual fund there is going to be a it will give you a couple stats that you don't get on regular individual stocks those stats are standard deviations and uh means okay and so um that is in that's important in fact so let me let me just show you if i can find my tdmr trade website let me bring this over for you and you're looking at my td ameritrade website right now if you have an individual stock like ford motor companies just an example stock and you have these tabs here there's no there's there's no tab that says risk and ratings and risk if you go to etf or mutual fund i'm not going to go to those right now just notice that they're going to have something that says ratings and risk and you click on that and one of the items will be standard deviations and means so what is all that what does that mean well let's talk about that here today so i'm going to do a little illustration and i'm going to start off with an illustration that is not a financial illustration and then i want to tie it into a financial illustration okay so if you have something that has is what we call normally distributed okay now not everything is normally distributed but some things are and i'm trying to make this as symmetrical as i can and actually i did a decent job on that one so far um there's an average okay so i'm going to call this i'm just going to put an m here for mean mean is the average right so if we're talking about say men's height i had to look this up i didn't know this exactly but they say men's height the average men's height and i assume this is for like the u.s is about 70 inches okay that's an average men's height and the standard deviation which we often use this little sigma signal symbol on is about three inches okay so in men's height so the average man is about 70 inches uh tall that's five foot 10 inches if you want to think about that for a sec to convert that 5 foot 10 inches tall and there's there's uh there's what we call a standard deviation and that standard deviation means that one standard deviation people are going to be either plus or minus that three inches so one standard deviation would be 73 inches tall this making sense i hope and one standard deviation down would be about 67 inches tall okay so that encompasses 60 approximately i'm rounding here a little bit everybody and just as i'm sure the mean is not exactly 70 inches but you'll get my purpose here that encompasses about 68 percent of people between between those figures okay and it's fairly normally distributed if it's not normally distributed it doesn't have this nice bell curve that's what that's what we're doing now i am actually a very tall person you probably don't know this from this camera connie knows this because she knows me in person i'm actually six foot four although i'm probably shrinking at my age perhaps a little bit so uh let's go out two standard deviations this was one standard deviation and each standard deviation is three inches so another standard deviation is in 73 inches is going to be three more inches is going to be about 76 inches is which where i right where i'm at or down to 64 inches this is this is about two standard deviations okay and if we look at how many people are encompassed men this is would be adult men are encompassed by two standard deviations that would be about 95 okay all right so there we go that's uh that's one into and that's all i'm going to go we can go out further than that if we want to that's how standard deviations work each standard one standard deviation no matter what we're talking about whether we're talking about stock returns or men's height or whatever that is normally distributed one standard deviation is about 68 and two standard deviations is about 95 okay so the this two standard deviations that 95 of people would fall within this or if we're talking about a stock 95 percent of stock returns would fall into that range there all right now i saw something in the chat at some point on uh z scores okay so uh z scores are not synonymous with standard deviations although they are very closely related if you're up one standard deviation basically we'd say this is a positive z score of 1. now i don't want to dwell on that because that's really kind of off topic but don't think that they're exactly synonymous z scores and standard deviations okay how did i get the three inches for the one standard deviation mia says i looked it up i was told that there's no way from what just logic or anything you could figure that out that's what i'm told but let's let's let's do this let's say we have a stock with a particular return and uh or a fund with a particular return and we say hey look the average let me draw my attempt at a curve okay here's my attempt at a normal curve let's say we have a stock or fund that has a 10 percent mean return 10 percent average so actually that would be right here 10 average and the standard deviation is um i don't know eight percent okay so i'm going to do eight percent i'm just making this up here everybody eight percent standard deviation what's our returns going to be there well of 68 of the time our returns in a given year if that's the time frame we're using are going to be between 2 percent and 18 okay 18 do you see how i got that 2 percent and 18 i just took our mean and i added and subtracted the standard deviation that so so 68 of the time that's what it's going to be okay what about uh what about two standard deviations well i'm gonna take eight percent off the two percent um uh and and so that would give us a minus six percent again this is if it's normally distributed and a positive 26 percent uh that would be two standard deviations or 95 percent of the time okay now that's basically what i want to say on that hopefully that makes sense so let's think about this once let me do one more thing just to answer vj's question because it's an important question and then we're going to move on to looking at some charts and stuff like that okay but i think this is important i think it's an important concept to to understand here's my normal my normal distribution okay and by the way just as a side note you know when they devise iq scores there's controversy about iq scores that i'm not going to get into or whatever but iq scores what's the mean 100 is the mean and what's the standard deviation 15. so uh people 68 of people have a iq between 115 and 85. okay see how that works
right um so there we go that's a that's a side note here now vj's question so if we have one standard deviation of uh so here's our mean so that's 50 percent of the population and we said 68 are between uh our one standard deviation does that mean 68 percent or only that means how much above the mean and how much below the mean are encompassed by that and that's going to be about 16 okay so this is going to be about 16 percent or six well maybe i'm off on that six this is going to be 18 i'd said 16 18 percent it's gonna be about eight to eighteen percent um do i have that right yeah um no no no this is gonna be about 16 percent above and 16 below are below the mean but within one standard deviation now the question was from from uh from standard deviations does one star standard deviation line up with out of the money deltas where does deltas fall in del well we're going to get to that we're going to talk about deltas here but uh so i'm hoping that hoping that kind of makes some some sense here let me get out of this and let's look at a chart let me go to the thinkorswim platform and i'm just going to go to the analyze tab and here is a probability analysis chart i'm going to go on the spx okay and uh let me look um at i'm going to get back to the delta question here vg i was thinking i was going to answer it there but i'm going to hold off on that just for a second we have a parabola you can almost envision this parabola as a turn it on side by 90 degrees so it's more of a mountain or the curve similar to what i had before but this is potential movement in this case it's the spx but we can put in whatever stock or index we want in here and we can say uh going out 65 days so this is the number of days out so we'll go about 65 days there is uh on average it's it's going to be about where it's at this stock is now and if if we go up this represents one standard deviation move 68 percent between this price and this price okay 68 chance it's going to be between this price and this price you can change that if you want if you look at the top of the page where it says probability range 68 okay but that's one standard deviation that's the default on there now notice what are the odds that the stock is below let me just move this up a little bit so you can see the percentages you see my cursor look at the percentages what are the odds that the stock is going to be below uh the upper line on our stand deviation about 83 or so now why well i thought i thought i just said it's 68 within here remember it's 68 between here and here but there's also the chance it's down below here and there's a chance it's up above here so the 68 standard deviation works out to be roughly uh 16 chance that it's going to be above there so let's say i want to sell an option okay let's say i want to sell an option that has a um 80 approximately 83 84 chance of being out of the money well i can sell a call option up here for example and that would say there's about a 16 chance that the stock is going to be above there do you see that or what let's say i want to be uh 84 chance it's going to be out of the money and on the and we're going to sell a put well i'm going to go down here and i can just kind of look and see what price i'm pointing at in this case i'm using the index so the price is 41.05 you can see that in the left hand column there so we can do that now do you have to use this graph to figure that out no you could use this to figure it out if you wanted to this gives you a nice easy statistical way but the way we usually do as a shortcut in this class goes to what sandeep mentioned and what vj was saying earlier and that is we use delta delta is approximately it's not exact it's approximately the probability value out of the money so if i have a call option here that expires on say october 29th i'll just put it right up there and that call option is at the 4781 level or something like that what's the delta going to be it's going to be roughly about 16 delta okay let's go to the trade tab and look at this uh i'll stick with spx here as an example let me go out we'll go out 30 days on this here's 30 day well let me go i'll go to the monthly options on this okay there's a monthly option and we'll put in a delta column how do we do that we can just click on layout and go to delta okay so what are the odds that this 4470 option is going to be in the money roughly 42 percent chance now if we don't want to use delta we could use there's other measures such as probability in the money okay and we can see look here's a probability out of them in the money 41 percent and 42 percent you know ballpark they're not always going to match up that neatly sometimes they're more than that off and uh um mia said is there's also me also mentioned there's also probability out of the money i just chose probability in the money if this is our probably out of the money we know also we could pull up a probability in them out of me if that's probability in the money we could also pull up probability out of the money and um these two should roughly add together uh to 100 right i don't know there may be some rounding error actually it looks like it's more or less adding to exactly 100 okay so there we go now where does volatility play into this well if you think about your curve think about your standard your the expected movement of a stock here's our normal here's kind of our normal curve well normal curves can look different ways they can be more kind of more flat okay this and and there's some names for that i'm not going to get into right now but but if you the data can be more spread out this would be a higher implied volatility higher volatility higher expected volatility okay would give us something that looks more like this rather than our normal or you can see something that's more evenly bunched around the middle okay and this would be a lower iv okay this would be a low iv so just so you can kind of visualize those uh where our curve works with our implied volatilities so if we have where how's our you know remember we said are 68 or one standard deviation is going to look like this what's our one standard deviation going to look up here well it's going to be wider because it needs to incorporate more things so if you have a higher implied volatility the prices are going to be expanded out as to where our uh where our deltas are going to be or our our standard deviations are going to be okay and if our implied volatility is low then it's not going to be you know it's going to be much white it's going to be more narrow all right and that's a lower implied volatility let me get out of that little drawing tool there so if i look at let's look at some stocks here let's look at let me just pull up tsla we'll look up tesla and that's actually let me actually i'm going to pull up something more t m r and a let's look at modern because i think it's the highest point here's a higher implied volatility on moderna we're going to go out 30 days let's look at our deltas here i'm just going to use delta okay i'm going to use delta and notice how far from out from the current price do we need to go to get to say a 30 delta on this well i can go on the call side i can go down to a 450 is going to give me a 30 delta which is almost 60 out of the money not quite 20 percent out of the money for a 30 delta what if we do this what if we take a stock that doesn't have a high implied volatility what's one that doesn't have a high implied volatility well let's think of something that is let's see what's ge looking at ge's lower um let's do um i'm trying to think of a real low implied volatility stock what does kroger look like kroger's not is is still a little higher but by golly i can't my my brain has just shut down as i think about implied volatilities um here what's after earnings let's see what walmart is yeah walmart's a lower implied volatility okay so look how far to get to our 30 delta there's any isn't even a 30 delta we're going to the stock is only five dollars or about three percent out of the money to get to 25 delta so so do you see if you have a higher implied volatility or higher expected movement in the stock then the deltas to get to equal delta it's going to go out farther further than if you have a low implied volatility stock you don't have to get very far before you get a delta that's closer to that okay i'm hoping that makes sense there all right so uh thank you i you know you guys i asked for help on those and you type them in and there's a delay in when the chat comes in so mia said ford you know so um i appreciate that there so so if we want to do that so what so what's the premise of choosing a delta as we're choosing strike prices well the premise is this the premise is it's giving us kind of a probability when we say this we look for probability based options trades which is kind of the premise of this class or high probability options trades that's what we do so so now when i drew that standard deviation notice i didn't say anything about technical analysis that's assuming equal chances of it going up or down when i draw that normal distribution but if you're using technical analysis your belief your reason for doing that is you believe you know maybe there's maybe trend is going to nudge it one way or another or there's some other indicator you can look at there um so uh so we can incorporate that and we can use a probability based method which is what we're doing we're trying to do but we can also throw in some non-probability based things on top of it doesn't mean we're removing the probability based stuff we're just doing both of them together so let me i'm going to pull up microsoft okay here's microsoft here's a chart on microsoft now i just ran a quick search for microsoft um and uh and there you go and you know let me just read a comment in the chat which it came across which i think is a great illustration of this taz said uh the plinko game on the price is right have you ever seen that you take the ball you drop it in and it goes back and forth bounces back and forth between all these little pegs and it comes up and if you do that it comes out and it kind of gives you this normal distribution graph there now i don't want you to misunderstand me not everything in the world is normally distributed that plinko game is normally distributed but you can't apply standard deviations to everything in the world however with the stock market in general stocks tend to be relatively normally distributed but we're trying to add in another element there and that is the um that is in this case technical analysis okay all right so here we go what what what's your technical analysis on microsoft well i'll give you mine now you may disagree you may come up with something different and that's fine but here's what i would say i have a 50-day moving average i have a 20-day moving average on this chart the stock is above both the both are upward sloping we're past earnings by the way and we've had a nice progression of higher highs and higher lows in other words the trend is strong is fairly strong on this we probably have some support down around this level where we've had some recent bounces but we're well above that the stock went up it retraced a little bit we have a bullish candle today on it and if i want to pull up say for example a let's do its indicator that we've used before back to histogram let me get rid of the other we'll pull this up our macd has been going up it's leveled off a little bit right now showing maybe a little bit of lowering of the momentum all in all though i think for the most part uh most technicians would call this a relatively bullish chart okay so we're going to use that as the basis here now so how are we going to add in the the um how are we going to add in the technical analysis along with our probability analysis all right so let's let's do it so here we go our presumption here in for this trade is that microsoft we're planning on this continuing to go up it may or may not be what that's what our technical analysis is going to say so i'm going to go to the trade tab i don't know why that did not somehow i had that unlinked um oh let me go to all products so so we're on the trade tab and i'm going to go out about a month okay now notice if we look at our delta or our probability in the money doesn't really matter now notice they're not always it's not always spot on the difference between the two but generally they're relatively close it's going to be different depending on which say the two let me give some more strikes here what's the delta on a 277 50 or 275 strike well it's about 95. 95 or so 96 okay two at 275. let me go to out 30 days 275 strike what's my delta about 84 okay or 82 so um so there you go uh so the time time matters here in what we're saying but what we're saying is hey look that's for calls let me go to puts here because we're looking at a bullish trade i'm going to go to my delta and say hey look i want something that's going to expire you know about a roughly a 70 chance give or take doesn't need to be exactly this roughly a 70 chance that it's going to expire out of the money if i sell the 285 put hopefully that makes sense remember um uh i lost my train of thought i forgot what he's going to say uh so about a 70 percent chance to expire out of the money there so that's just strictly from a probability based measure it is not taking into account uh the fun technicals hopefully the technicals that trend continues and we do fairly well on that now we call this we call these trades high probability trades more than likely if i sell this 285 call and i'll make it a i'll make it a spread trade and i'm going to do a buy the 275 call let me just lower this for a sec uh i where do i want the stock to stay well i want it to stay above the 285 price um it it likely will do so i mean it may not but we're already well above that price so even if it just kind of goes flat or goes down a little bit it's going to be above that price which is why um which is why that why we [Music] will um why we call this a higher probability trade but it's also why when we look at this if we click on confirm and send you're going to see oh look we're our max profit on this is a lot less than our max loss because it's a high probability trade that's the cost so to speak of the high probability trade okay so here we go uh let me go and i'm going to send this order no i'm risking about 840 which is a you know about par for this account and what i'm doing on trades so i'm just going to send that trade and put that in okay so that's how we can do uh the trade and that's you know so my goal for the first part of this was just to kind of give you a couple things one a theoretical basis as to when we're talking about standard deviations and probabilities what we're talking about and what the theoretical foundation for this is of what we're doing the other part is to how do we practically implement that on a fairly basic type trade in this case is short vertical now let me mention something to you if you there's a lot of ways to other factors that go into analyzing short verticals okay i did a webcast on june 16th on analyzing short verticals and uh if you want to take it because i don't i don't have two hours to go through it right now if you want to go through those other aspects look right up here on the recording after the recording's up i'm putting a link to that webcast on there it's called breaking down a short vertical so check that out all right now i wanted to save some time though and talk about trade management i was out last week barb was kind enough to to sub for me last week but the the the problem is uh i i didn't manage some trades that normally i would have managed so for example if i look at apple here uh look well i've got nine actually this is an example this is one nine days expiration i probably wouldn't have done anything on this anyway but maybe because what am i making on this trade right now i'm making 85 on this trade in other words i sold the vertical for 81 cents i could buy it back for 16 cents now so if i'm even if i'm at 15 16 days to go till expiration if i have this kind of high profit loss we're probably going to get good this there um i do not have the link to that connie maybe you can do me assist and assist on that we're asking for the link in the chat um it is uh june 16th is the date of the webcast connie june 16th if you could add that in and we'll see that you can also get them in the archives there john as well uh there so hopefully that i don't have that off the top of my head i probably should have should have copied that over that's my bad there so you know what if we have an 80 gain on these things then i'm probably just going to exit this all right now vj said look you can roll this if you are bullish you can absolutely do that that's a great point on that you can absolutely rule that so what would you do before you do that well you would look at the chart you decide pull up apple you decide hey is this still something that i'm bullish on and then you can go and you can roll that but just keep in mind if you're rolling trades keep in mind the commissions it's you know it's there's the extra contract fees there on that if you roll all right so we can close that out we can roll that up just for time sake vj in this case absolutely you could roll that but for this for this purpose um i'm going to um i'm going to close that out so i think that's a great idea though okay but i want to get through these and still have time okay let's go through and look through some others so we're out of that trade we've done that went quite well um that one worked out very well nice profit on that trade uh citigroup oh look not looking so good we're nine days out on this one again um nine days out on this this one's the opposite story we won on the last one we lost on this one we're we're still in it we could go with this look we sold it for 41 cents it's down it's at we could buy it back for one dollar now how much could this mark price be well there's a two dollar spread between these strikes so this could easily go up to two bucks so [Music] the rate things are going it's not looking good i'm just gonna cut the losses and get out of this because if i'm at 10 days or less on this i'm typically just going to exit these uh here if if things are kind of sketchy and i would call that kind of sketchy here on this so i'm going to get out of that trade there all right so that one well you you know you win some you lose some that one was a loser for us uh let's go to some of these others look two days to go this is one that likely we may have managed a week ago because we were under 10 days 10 days of expiration a week ago but um ten days ago uh now we're down to two days how are we doing this what we're doing okay we've made a little bit we've made about seven percent uh but with two days to go no matter what i'm closing out two days to go i can hardly think of any reason why i would not close out at that point there now there's other choices you could make there's pros and cons on that uh but uh just kind of in terms of our class rules that's a typical way we're going to manage that if we're real close to expiration we're going to close out of that let's keep going got got a bunch here i wanted to that's why i wanted to go through the other stuff because i wanted to be able to do this here look we got two days to go as well on this one we've made 98 now this one has turned out quite well uh for us we've made almost everything we could make on this trade look we sold it for 235 it's only worth three cents right now now some people may say look the stock is at 404 bucks our pr our puts are at 360.
you could just let this go to expiration right so i'm saying you close it out with two days to go but i just as our standard rule we're closing them out but you know you could make a case i'm going to stay in this because the chance odds of it going below 360 are pretty remote at this point but we've made 98 of what we're going to make on that so here we go i'm going to close that guy out too okay okay you getting a sense for the management i hope on these on our portfolio let's keep on going uh now let me just i may not be able to get through all these but i do want to get through some look this is a calendar spread our august calendar is just two days so expiration i'm probably just going to roll this out 30 days i'd like bj said spin the nickel and avoid the pickle yeah you know it's 99 chance it was going to work out just fine but there is always that small chance it could really go against us there and the prices could shoot up especially if the stock drops what's going to happen to your implied volatility well very likely your implied volatility is going to shoot up at that point there okay rather than safe than sorry yep absolutely so this is one we can possibly roll out um here and let's see one thing is yeah i'm gonna roll this out it's where the stock's right about right where our strike price is we've made 246 dollars on this short put now the long puts costing us a little bit but the short put is more than made up for this overall we're up 100 bucks on this trade so i can roll this out a month so i'm going to create a ruling order and just remember that there could be extra commissions here on this i'm going to go out a month we're going to buy back that one we're going to go out to september 17th i'm going to roll this for a 196 credit on that one we're going to send that there we go okay now this is not filled you didn't hear a ding this is still a working order um if i i would normally probably gonna let this sit for a little while and see if it fills uh but if i really want to get this in i can always just uh change the price there's our mid price that's at 196. if i go down a little bit on this price i should probably be able to get that filled there it filled and notice i did not have to go all the way down to the natural price on that typically you don't can't you know i can't say always but typically you don't uh let's keep going let's see intel is a short put vertical we have a bunch of short put verticals how are we doing we're up about 40 if i were out 15 days to go on this i'd probably wait kind of a typical rule we're using in this class is wait until it gets to 50 gain if we're early on but we only have two days to go on this we're definitely going to close that guy out so we're going to buy this back that was a nice profit on that one as well okay now you know we've had a bunch of profits uh it doesn't always work out that way of course um and we've we've certainly had losers in this class and here's an example of one here's a covered call we did two days to go to expiration remember uncovered calls you can always just let it go and get called away if you want right now the stock price is at 178 our call option is at 120 72 50. very typically if you know a lot of traders and i i think it's very valid to just say hey look i sold the call i'm making money on the long stock here and i'm just going to let it let it get called out but for the purposes of this class because i want to keep a position in this class i'm going to roll this out okay i'm going to create a rolling order and i want to keep this in i think very often in real life we just let it go all the way to expiration and it's not a problem in that case but i'm going to roll that out about a month there um doesn't okay so i'm going to actually roll this let me let me go we may have to make this we're going to go out to september 17th johnson johnson i'm going to go out to about a 30 delta we have no 30 delta we have either 20 delta or 40 delta basically so i'll probably go with 39 delta here and that is or the 40 delta is about 180 so i'm going to change this to 180 and unfortunately it's going to cost us a little money but it's going to roll that out there that position out on us okay and let's see how we're doing on time we're running our time but let's just do the last couple 16 days to go to expiration we have a short put we're losing on it micron has been getting crushed you can reevaluate these trades and decide if you still want to be in it you can do a technical analysis on it and if we do a technical analysis on micron i don't think it's going to be pretty but you can decide hey look uh you're going to stay in or not the trend is not good i'm going to let that sit this is a probability based class i'm not going to focus on the technical analysis on this i think a lot of technical traders would actually exit micron at this point um last one um why would i roll for a debit okay let me just do this we got 16 days to go on this i'm going to hold off on this uh trade there let me just finish off with answering vj's question why would i roll for a debit it's a good question vijay let me give you two answers one's a quick answer on this one on this one in this particular case i wanted to stay in the trade because it was a covered call that i didn't want it expired because i want to keep it in this class account because i want to talk about covered call management in the future that's one reason but there's another reason i would roll for a debit at times because if i insist on rolling for a credit what happens is i could end up with a a short option that is then in the money which violates what are we're trying to do here as being a higher probability type trade right because if i'm rolling that short option to one that is in the money it is then going to be a delta that's above 50 and it's more likely than not to expire in the money one last perspective on this and then i need to close when you roll it's it's two trades we call it rolling but keep in mind we're we're we're buying back one trade we're selling a new one by putting them together into one trade the rolling isn't doesn't make it magical whether we end up with a profit or loss on this it's the same thing as if i just closed out that trade and looked at a separate point of doing a new trade on it so to me that's an artificial metric of whether we're actually getting a credit or a debit when we roll so there's three answers for you on that bj i hope that makes sense and um consider the role almost when you're thinking about it as two separate trades and the trade that you're entering the new one that's short trade that you're entering think of uh think of that as um whether that trade is appropriate or not regardless of whatever we're buying the other contract back for all right i'm hoping that makes sense everybody what we do today we did a quick market review we talked about probabilities and standard deviations we did a practice trade and we talked about trade management options not suitable for all investors especially risk inherent to options trading may expose investors potentially rapid and substantial losses content today was intended for educational informational purposes only paper money application is for educational purposes only in order to demonstrate the function of the platform we had to use actual symbol set today however tdm ameritrade does not make any recommendations or determine the suitability of any security strategy for individual traders trailing stop orders stop loss orders do not guarantee execution out or near an activation price all invest involves risk including risk of loss please no soliciting photography or recording thank you everybody for joining me today coming up next market in sector analysis with pat milali thanks connie for helping out in chat always appreciate you and thank you for joining me we will see you