Profit and Trade Management | John McNichol | 8-28-19 | Trading Vertical Spreads

Right well good afternoon everyone John McNichol here
you’ve joined trading vertical spreads this is our review o. Ae
everyone that is here whether you’re live or listen to the
archive session do appreciate you being with us here once
again. Also like to thank at some of my friends over the
last couple of weeks for covering or actually last week
for covering down on. This session as I was in beautiful
Orlando Florida pretty hot but it nice time at the advanced
concepts workshop. And then take my granddaughter to Disney
world afterwards so good time good to be back let’s go take
care of disclosures and we’ll get right into it. Options are
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of any security or strategy does not guarantee future
results nor success. All right we’re going to focus on today
is a review some of our open vertical trades talk about a
little trade management there. And we’ll go ahead and review
watchlist candidates for potential vertical trades or
learn objective for today is essentially being able to
manage. Existing verticals I kind of think about how you may
apply this as a routine. On a day to day basis. And it’s good
to see let’s we got to Seri J. Paul sandy with us if you have
any questions feel free to utilize the chat window would
certainly love to hear from you there. And let’s go ahead will
bring up the platform here in just a moment. Okay here we go.
And how you know looking at the market the market continues to
be in that range we’ve been discussing this over the last
several weeks and nothing has changed still in the middle
part of the range. Today pretty good update some technicians
may refer to this as a piercing line as prices that opened
lower and then penetrated into that previous day. Also a
reference in the mid range of that long range day. I believe
it’s somewhere approximate around that twenty eight eighty
mark price action is staying above there so a little more of
an edge to the bulls here. Still in that wild range and
we’ll see how things play out now based off of markets being
in that type of range. Some of these trades that we’ve been
discussing over the last few weeks verticals. I mahay ve
meso benit tt odd profitable like wise from the resistance
side a selling a call spread you know as long as prices
stable low that resistance area I’d those trades may benefit.
We’ve also done some slightly directional trades which may
not necessarily benefit greatly in an overall sideways in a lot
of these spreads prices do not have to move very far two
necessarily turn into a profitable trade we may see
this as we look. At some of our examples there. All right. And
based off of at least bounce and potentially lower part of
the range some traders may look at some of the short puts
spreads or possibly some of the long call spreads for slightly
upward directional movement. How may go ahead and bring up
our monitor tab. And we’ll go ahead and look at some of our
existing positions. No one trade that we had done. A
previous Emma go right click on this and view trades back on
the twelfth around the middle of the month it this is an
example of a long put vertical. Now you know how can we look at
this and without looking at the prices and determine you know
if this is a. A long put vertical. Well one. We can
certainly look at and see that this is a put. So we have puts.
We can see that they are the same expiration date so same
expiration date. And different strikes would make that a
vertical. Now what makes this a long vertical. Well if we go
ahead and or a long put vertical if we look at our
short strike which is one forty five that was the one that was
sold. All right when we look at the direction. Move into that
short strike going from one forty eight to one forty five.
This would be a bear put spread and a bear put spread ends up
being a long vertical. Also looking at the price bought a
more expensive option. And sold a cheaper option. But as far as
that determine in bias on it looking towards that short
strike as you go from the one strike to the short strike
prices going lower. One forty eight to one forty five making
that a- long put vertical. Now by this example we had sold
seven ninety. A correction bought seven ninety and sold
six sixty that would be a net debit eight box thirty. Defined
risk trade we took that Buck thirty and multiply that by
twelve contracts. And we position sized that to a
maximum loss that end up being a little around fifteen hundred
dollars which based off of our net liquidating value at the
top of the area here lines up with. I lines up with
approximately about a half a percent of our account. So
let’s go take a look at the chart. Now when we had reviewed
this we also. Discussed earnings. Earnings is a fact of
life. And earnings did come out price went ahead and gap down
now I actually searched pretty could here during the day
probably should it closed it earlier at the opening but
wanted to leave it on so we can review this during this class.
This strike. One forty five that was the one that we sold
as long as the price stays below one forty five between
now and expiration. This trade would be profitable in our
examples of our long spreads. Where we had approximately
around the one forty eight. And one forty five. In the long
spreads we wanted prices to trade through that spread and
it certainly did that. Now if we went ahead it we paid a Buck
thirty four it. Let’s see what the value of that is right now
we can right click on the position select create. Closing
order. And sell that position right now it’s worth two
dollars and twelve cents I believe up earlier in the day
it was. Leave it was as much of a about two fifty. May hit on
confirm and send. May be it may be a little more than that I
think it was a. Twenty two fifty a two seventy so. This
spread itself is three dollars so the Max that this spread can
be worse would be three dollars so a box thirty debit
translated into potentially a three dollar credit that would
result the difference would result in that match maximum
gain which would be a block. Let’s see three dollars minus a
Buck thirty our maximum gain on this would be two dollars
correction a block. Let’s do it let’s do the math. As we get in
the afternoon John’s math skills coming decline it
certainly happy at the market closes at fourteen hundred.
Military time out in time that’s two PM. Local time out
here and you to bring up the calculator. So L. I. three
dollars spread minus art are debit that we paid which is
about thirty. So the maximum gain on this would be a block
seventy. With currently it running at about two twenty.
Let’s say two dollars and- twenty cents minus. About
thirty. Yeah we have a gain of about ninety cents now you know
that’s a more than 50% of that maximum gain some traders may
utilize that as a way that way to lock in some of those gains
or scale out of the trade. For instance with twelve contracts
yeah we can choose to close half of that position. So I go
ahead and adjust this down to six contracts. And hit confirm
and send. We can close out part of the position going off the
assumption that prices may still stay below that one forty
five strike now the one thing on scaling out as far as pros
and cons what the pros is you’re locking in some of those
gains are realized and some of those gains other con is you
you will certainly. Pay transaction fees and
commissions and if you’re scaling out. Yeah those fees
can be more accumulate. I have you want to close out the
entire position we can go and do that. Let’s go ahead and
we’ll just scale out of this. And I’m Eddie had to confirm
and send. And one thing keep in mind as you look at the prices
off the bottom you have the mid price and the natural price the
natural price is the market price the mid price is kind of
right in between. It if the spread opens up a little bit
you know one may not get filled at that desirable price. Right
away. And notice prices are changing as we speak. Let’s go
ahead and I’m a lot this year. I’m it’s confirm and send will
tend to buy it back for or sell it for that two dollars and
fifteen cents. Notice the fill didn’t come through right away.
As part of the beyond that Autodesk looks like it’s trying
to fill in that gap. As looks like price on the stocks in the
market continued to move. Let’s look at some of the other ones
Facebook. And looks like that vertical closed so we closed
out half of that position. And then we’ll see if prices settle
back down and stable at one forty five to possibly close
out the rest of the position. And thanks for helping out the
math Keith and sandy. There’s a little bit a lack on the chat
so I may not be able to pick up on that right away but Preciado
chip looking at Facebook. This is another put spread. I this
is also in another example of a long put spread as we have puts.
Others same expiration. Looking at the short strike the
direction to the short strike going from one eighty five to
one eighty. That would be going down in price. Go from one
eighty five to one one eighty. Looking at the trade now when
you’re on the platform. You could add a column for trade
price otherwise you would right click on the actual symbol and
you can select view trades. If you actually want to view the
prices on. Platform you can go to the far right where there is
a gear. And you can go ahead and select trade price. Double
click on it you can left click and drag that typically put in
a little bit before the mark price which would be the
current price you can make those comparisons. Now let’s go
ahead and look at. In the case of Facebook this is a five
dollars spread. And we had bought six seventy. Sold for
seventy so that would be a two dollar. Debit. And with this
being a five dollar wide the maximum gain would be the five
dollars minus the two dollars spread or minus a two dollar
debit that would be a three dollar per share maximum gain.
Now as we can see this is slightly profitable. I look at
where the current price is FACEBOOK currently is at one
eighty one thirty one. So we’re just above that short strike so
looking at the chart bring up Facebook. This is currently
where we stand. Hi this is taking advantage of the current
trend in Facebook more towards the downside. Another potential
bear flag foreman all the Facebook yelp picking up in the
higher range of the day as many stocks are. Not as high as
maybe some people may expect on the day as are kind of flat.
And with the S. and P. and other stocks trading higher. So
for our example we’ll continue monitoring this with the-
desired result. Trading through this spread and being below one
eighty. Between now and expiration close we get to
expiration would continue to see a gain on that. Now. But
some so we have asked in previous sessions you know
could could I put in an order to go ahead and close out this
spread if it hits a certain target. And the answer is yes
we can go ahead and do that so if we paid. Two dollars for
this. And there’s potential Max gain about three dollars we can
go ahead and put in an order to try and capture that at least
half of that gain or a Buck fifty I could be a common
technique. For some of the long spreads. So let’s say if I want
to do that I can right click. Create closing order. Sell
vertical. Now we have to do is basically add that Buck fifty
to the two dollars that we had paid and so that would be three
dollars. And fifty cents. Now one can choose to close out the
whole position or use as an opportunity to scale out.
That’s up to you. I limit order and we’ll make this GTC for
good till cancel. And we’ll go ahead and confirm and send. Now
the pros on this is if that is your plan to close out if
you’ve captured 50% of the maximum gain on a debit well
this would be executed that trade and trade execution that
plan. Kind of a fire and forget. Now I go to my monitor
tab we can see that we have these open orders. Attempting
to go ahead and buy that back for three fifty. Some traders
may well you know you may be leaving some money on the
table. And when you when to try and capture that maximum gain.
It’s a balancing act. So a lot of times if you try to hold out
for that maximum gain. With the market give us the market take
it away. And a good example of that. Is let’s go back I’m a
good or account statement. We’re going to look at them
trades that we’ve done previously and that may have
closed out. You go back any number eight days let’s say
I’ll go back. The back forty five days in this instance.
Apologize in advance as we do have a lot of trades in here
from. **** that I do. Now in equities but on future as well.
Looking down on some areas that were closed out. There’s auto
desk. And let’s see here. We did a couple of verticals
yesterday or I’m sorry on Monday all right in our
technically speaking class so little overlap on there one was
a credit spread. On mining a bull put spread. For forty four
cent credit. And we did one at a long put spread on Capitol
one looking at the price to potentially trade down. About
looking at some of the one that I believe we did for this class.
Let’s go and look at apple we had closed out a spread on
apple for a- nineteen Santa debit. Let’s go ahead and bring
that up now we can isolate a symbol by just type in the
symbol up at the top so a P. L. let’s see we have here. And so
on the sixteenth. Let’s go back actually on the fourteenth. On
the fourteenth we opened a long correction a short put spread
so how can we tell to short put spread. One looking at that the.
Option that we sold. It’s more expensive than the one that we
bought resulting in a credit. A bull put spread. Because look
at the directions of the strike going from the long to the
short strike. One ninety two fifty to one ninety five the
price is going up. So a bullish trade. So the ex expectation on
this is that we expected that apple would stay above all one
ninety five. So we had sold a sixty five cent credit. Now
when we got to the twenty third let’s bring up the chart. So we
got to the- twenty third. The market had opened. And started
trading down. I so price it kind of came up to be a
resistance and started pulling back when we had looked at the
value. When we look at the value of that. Option we had
sold sty. So w .
All right we had captured. That’s about 30% of the value
that credit so we basically a captured about as they said
looks like somewhere at around 70% of that maximum gain. Okay
we captured essentially was about forty forty some sense
there. Forty five forty six cents I’ll be going to look and
see what the value of this spread is right now I can go
ahead and- so we can let me right click. Create. Duplicate
order and let’s see what the market is right now right now
that spread is worth forty cents a we had hold on to that
a we would have been given back about half we’re about a third
of that game there so we’ll profit management a good
example of managing. Profitable trades. And another one that we
had done. We go ahead and bring that up. Get that with apple
now on the twenty third. That’s one that we closed out also
back on the sixteenth. We did an example of a. In this case a
long call spread. With the idea of apple trading up to two
hundred and ten. So long call spread. This was a two dollars
seventy cent debit. And go look at the chart again for apple
this one has a little more ways to go. With the two oh five and
a two ten. Looking to see if apple may bounce and that was
the idea looking for a bounce and see if it’s able to trade
up through that spread. Now looking at the glass half empty
we’ve been talking about some of these patterns these rising
wedges. Have been appearing in some of these bellwether
stocks. You know after making highs and selling off. You know
these we saw a pretty good retracement of that. In even
though it’s been volatile these last few days your prices have
still been kinda hanging towards that lower range. So
some technicians may be keep in mind looking for that break
below. If that occurs Dan this long call spread would result
into being more of a maximum loss. And that would be that
two seventy debit. Supplied by. Eleven hundred. In this case I
did that right. At B. at two dollars and seventy cents.
Times. Eleven times one hundred. At that would be a loss of
twenty nine hundred seventy dollars which is about less
than 1% of this account so define risk. As well as a
defined gain. Let’s see there’s one other. One of leave that we
had. Maybe a couple more in there going clear out apple.
We’ll see what else we have going on. I see that dollar
tree was another spread that we had looks like we had put on.
Make sure. Earlier in the week here. Yeah dollar tree is an
example now why did not show area. So on the sixteenth
dollar tree we had sold. Ninety two fifty bought ninety five
this is an example of a. This is an example of a long put
spread again looking at the direction. Going from ninety
five to ninety two. Price trading down. And on the twenty
six we closed it out for a Buck ninety credit basically capture
in. With this being a two and a half wide. Spring upper
calculator here. With the spread itself the difference
between the two strikes two dollars and fifty cents. Minus.
What we paid for it which was a block twenty. The maximum gain
on this would be a box thirty. And what we did we had sold it
for about ninety which was a gain of about seventy cents a
get a little more than fifty percent. Of that maximum gain.
Now if I go ahead and right click and create a duplicate
order. See where the current price is on it. Notice that.
Right now it’s only worth seventy five cents. So
basically again more than half of those gains have been taken
away so we utilize some profit management. And part of that if
we go ahead and look at the chart DLT are. Yeah going back
to the twenty six price it actually started trading lower.
But they came a bit hired so back on the twenty six after it
dipped down we went in and closed it out. Also with
earnings coming up. Now we decided to lock in that game.
So if anything else that we had before will continue on any
questions or a any comments feel free to utilize the chat
would love to hear from you also if you like what you are
seeing here today I believe there’s an opportunity for you
to click the like on the video. That’s something tha. .
It may be Netflix there there wasn’t water or two that we had
done previously where we had put in an order. To close out
that position. And it may have been the case with. On Netflix
here let’s see on Netflix so we actually had a. A long call
spread. We were looking for it to be trading up three three
twenty five this is on seven twenty four. And on eight
fourteen basically closed it out for a fifty cent credit
that actually would have been a loss we go ahead and look at
that for Netflix. One of the reasons for that is as price
was breaking down. Let’s see the date on that was eight
fourteen. On eight fourteen which was. This day here. This
is more of a bearish bounce that price was breaking down
the trend was going down we’re looking for more of a reversal
for Netflix was pretty short lived and price went ahead and
broke. Below support. That could be one way that some
traders may look to close out a position at least recover some.
Equity yeah with fifty cents times seven hundred. It was
about three hundred fifty dollars now rather nominal
amount as far as for this but just kinda at a definition on
out some traders may close out a losing position now that’s
something actually we rarely do in this class we’ve typically
accepted the maximum. Loss based off of our position
sizing. I this is just got a little more of a one off as
prices had already. Broken below support rallied up failed
to hold and failed. To get back above that support. And so we
had retained a little. Little bit of that money now. However
the difference one thing to keep in mind is when it comes
to credipr seadse wre a g. And s goes to sandy’s question how
you decide when to debit spreads verses credit spreads.
One is in the case of a short vertical or at let’s just say
short verticals which are credit spreads. What we can see
tions is. What are you more neutral. Bullish
or slightly bearish and to literally low. Is relatively
high I that may be more conducive to credit spreads as
they would please give a larger premium. Relative to the risk
on the trade so a greater return on risk. If one was to
be more directional as far as price the name may lean more
towards a debit spread now volatility can impact a debit
spread as well but it’s usually going to be a bit more neutral
given the fact that on our debit spreads were closer to
being at the money. And if volatility rises it would
actually positively impact that long that long option. So it’s
a matter of personal preference but as far as the benefits a
short verticals wit lean more towards volatility. And do
apologize for having to ban with issues there may have to
go ahead and look at the record in afterwards hopefully there
will be no issues with that. And so. If I go ahead and
notice when we look at some of these charts here like Netflix
you can actually bring up implied volatility on the chart.
And to do that we can go ahead and go to our beaker for our
studies. The very top there. Click on that well I see click
on the beaker there. If it allows me to. One more time.
All right eleven a little bit of a glitch here. I get some
prices have to shut this whole thing down here. One more time.
Go and click on that beaker and you have I am P. for implied
volatility. Double click on it and allowed the indicator over
here. And so what some of the comparison is. Is looking at
we’re at that volatility it. So he tries highlight again. If
volatility is in kind of a higher range. He’s going to be
areas where it may be more conducive to selling options.
Whereas if volatility is relatively in the lower range
this may be more conducive towards buy and strategies and
not just necessarily debit verticals but I calendars
diagonals could benefit from a low vol expect it to rise.
Another consideration is utilize in the trade tab it’s
good discussion thanks for bringing this up sandy. Is you
can look at the option statistics. On indicator and
look at the IV percentile. At the IV percentile is in the
lower range. Less than fifty would consider to be the lower
half of its historical implied volatility. About fifty would
be higher vol. So if we look at Netflix currently that shown at
around twenty two. Now look at some of our previous archive
sessions I believe I did run a scan in the past for some of
you where you can go ahead and look for. Higher implied
volatility if you wanna primarily focused on selling
options. And while we’re here let’s go ahead and share this
for you. I’ll go heading. Do a share. I’ll go ahead and plug
this in the. Scratch pad. Now it is case sensitive. I’ll just
call this hi. IV scan and essentially it’s looking for
stocks. Potentially stocks that are liquid. I that had a
percentile range of over 60% 290% play around these numbers
see what kind of results that you have. Also looking for
stocks that may be a bit more range bound. I utilizing the
average directional movement indicator typically stocks that
have a value of less than twenty are not trending or
they’re very much weaker trends. But you go ahead right on any
list of stocks I have an example of penny increment
options here. We’ll go and scanned that see what comes up.
And notice it’s a relatively smaller group a lot of these
may be stocks that also have earnings coming up so keep that
in mind. So B. B. Y. for Best Buy. There is going to be an
earnings event coming up so sometimes some traders may try
to avoid that is that. Looks a little bit a hang up here.
There we go. Which explains probably why they’re implied
volatility is relatively high and which may do is possibly
you know right after earnings if you don’t want to speculate
is you know if the volatile is relatively high you still may
be able to sell some of that premium. Thing Lulu was another
one. Yeah in this environment they are probably gonna be a
lot of stocks are coming closer that now if you want you can go
ahead and you know. I just these ranges here too. In a
some greater than fifty. Gone seventy range there. You may
get more stocks that may come up. And looks like not a big
difference from what we’re looking at. Can’t that’s one
way to go and search for stocks that may need certain criteria.
Well I just forty five minutes is gone pretty quick. I did
have an opportunity put on a new trade but that’s okay. What
you can do is continue follow along with us and we’ll be
doing is keep an eye on the range of this market and see if
we’re going to get a break one way or the other. Looks like
it’s still to be determined. And you know looking at the VIX
right now. The I. X. this is another gauge for you sandy as
far as looking at you know buying or selling options is if
we do identify some peaks in the volatility with the
expectation of volatility drop in. In this be the question
mark. Then we can still be an a selling strategy there. Family
actually go out on a limb here and I’m gonna do one. Trade. On
federal express now their earnings are coming up I mean
do an example of a long correction an example of a
short call vertical and a short put vertical it’s called an
iron condor starred in our advanced options strategies. We
try and put this together real quick before we run out of time.
And let’s see if I can actually get that chain up. And I’m
gonna go ahead and just look at. Going out of money in both of
these a little bit further out of the money kind of closer to
some of these twenty deltas. I’m gonna go ahead and sell.
Vertical let’s make. So here is a short call vertical which is
a forty nine cent credit. And then I’m gonna go ahead and
find a put spread on the other side this would end up being
more of a neutral trade expecting federal express to
stay in a range. Going into an after earnings. And I’m gonna
go ahead look at the put side. And around these twenty four
deltas I’m gonna hold down. The control key. I’m in a right
click and do a sell. Vertical here as well. And it looks like
the screen hung up. And we may not be able to get that out. Up
there yeah. Right so there’s eight. And looks at willow
possessed. All right what I’m gonna do folks is since we’re
having a little issue I’m gonna see if I can put that in
afterwards. And just get things wrapped up because coming up
next we’re gonna have

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