Option Greeks, Implied Volatility, & VIX | James Boyd | 10-28-19 | All About Options

Option Greeks, Implied Volatility, & VIX | James Boyd | 10-28-19 | All About Options


hello and welcome to all about option
series my name is James Boyd today’s date October 28th we welcome you here
today hopefully you’re having a great you had a great weekend and also a great
Monday you saw the markets actually go higher
it’s not actually a bad thing so a nice way to actually start the week hello
Jerry Pierre Paul Hughes Rodriguez and many others we welcome you here today as
we talk about options we’re gonna be Tom an option Greeks and implied volatility
the most important probably word in options is volatility we’ll talk about
what that has to do with trend as well just real quick if this is your first
time here I normally teach at this time myself James Boyd and teach them other
classes throughout the week be aware of that you can also follow me on twitter
jay boy underscore TDA and that’s a way to kind of see me and other things that
i do throughout the week as I’ll mention in just a moment just real quick
remember that as we talked about options options are not suitable for all
investors special risk inherited trading options please make sure that you’ve
read the previously provide a copy of the characteristics of risk of
standardized options as I have and you should make sure you’ve taken a look at
that also be aware of when we talk about examples
remember that TD Ameritrade does not make any recommendations determine
suitability of any security or strategy you get to pick what type of stock and
the strategy you want to pick etc we will be doing some paper trading
examples they’re not recommendations and we also talked about options here
tonight remember the terms of Delta Gamma theta Vega know how they apply and
you’re gonna see it tonight okay so first off just a little fun here so as I
mentioned before you could actually follow me on Twitter yesterday I was
down Michael Keely myself and Todd Doyle we were down at the American invest
American Association investor conference down in Orlando it was actually at the
Omni just a little fun showing you that life can come at you pretty fast okay
yesterday we posted on Twitter this was the picture of what it looked like just
kind of there looking out of the lobby area at the pool and last night
about let’s say 8 o’clock or so and it was on the brink of snowing 30 degrees
problem was I was wearing a t-shirt so I just want to show you I kind of got a
little uh a little funny there so my point is life can come at you fast as it
did and it’s supposed to snow it here in Salt Lake one to three inches tomorrow
so my goodness gracious or land it looks pretty good right now alright little fun
with you hopefully I’d go weekend so what are we talk about here today
well we’re going to take a look at the SP Dow I want talk about the difference
between the Dow and the S&P we’re gonna take a look at the volatility in other
words the VIX okay I watch that a lot today I’m gonna take a look at that
we’re gonna bring up that concept of a bullish MACD divergence oh my goodness
you might have watched that as well okay well we’re gonna talk about that so if
you’re thinking that okay I want you to know that we’re gonna go there and
that’s why I started three times okay so if you’re thinking maybe what other
investors might be thinking just know we’re going to talk about that we’re
gonna take a little option Greeks we’re not going to talk about in terms of the
definitions the can definitions we’re gonna talk about option Greeks in terms
of the strategies okay how do they relate to the strategies and also when
we talk about implied volatility okay how does it relate to strategy selection
and we’re also going to be really kind of mentioning here we’re gonna bring up
let’s say where the VIX is okay and what strategies that an investor might maybe
shun and which ones might they kind of may be considered to alter to now the
learning outcome is to be to become comfortable with the option Greeks in
relationship to the strategy that you are trading so if you’re not trading
iron condors we’re not talking about that if you’re doing short puts I want
you to know what option Greeks relate to that strategy why it matters if you’re
doing cover calls doing verticals things like that I want to get comfortable
Greeks in relationship to that strategy okay so that’s our goal and you’re gonna
see us talk about that as we talk about past examples and new examples now as we
go I want you to promise me something as we
go if you have any questions I need you to type in those questions earlier than
later don’t wait until let’s say one minute to go to the top of the hour
because I won’t see it okay and I’m closing down right so make sure if you
have some questions go ahead and type that in every five or so minutes I’m
going to check the chat and see if there can’t be some questions as we go now
first off let’s take a quick look at the S&P here let’s pull this up so first
off when we take a look at the index and we really zoom in here okay
I’m gonna zoom in if you don’t mind let’s go to the board here let’s bring
it up just check-in something just real quick so we got that let’s go to
actually there we go let’s go to the board all right so the
one actually want to bring up is we’re gonna bring up the the SPX and so if you
230 25 okay had really been our area of resistance we really actually saw that
on Friday that was a bullish engulfing candle right up into the resistance and
what you actually notice is here today we actually did a break above we went to
3040 for brand-new highest November the SP market cap weighted index okay again
heavy technology heavy financials so when you see the SPS you break to new
highs you should be immediately thinking technology financials consumer
discretionary those three sectors are probably leading the way probably the
most okay utility staples healthcare non biotech they’re probably lagging they
did now if we take up for example a look at let’s say the let’s bring up for
example the Dow again the difference in the Dow versus let’s say the S&P 500 the
essent the SP 500 market cap weighted stock price times the shares outstanding
the Dow is price weighted so meaning what does that mean in English
it means the bigger dollar stocks in the Dow like Boeing they have more of a
material impact on what happens with the index level so if you have like an
apple or a Boeing Boeing not doing very well you get kind of moves that are not
moving up strong with maybe other indexes okay so what we actually saw is
the Dow did not break out to new highs didn’t do bad but it just didn’t go to
new highs like let’s say the the Nasdaq did Boeing again being the anchor off
the back of the boat and we actually see price-wise about 271 resistance level on
that is really about 272 274 so not a break out there yet now when we have
to just take a quick look at let’s say the Nasdaq bring this up that actually
was that kind of more symmetrical triangle that was even last week and if
you take actually you really look at I’m gonna zoom in on that and what you’re
gonna notice is let me kind of there we go so I want you to take a look at this
last week that really broke out on the Nasdaq and what you’re going to notice
is all last week that old resistance really becoming the new support level
okay so very strong price action there and then it actually push up to some
brand new highs hammer candle okay Strong Candle on Friday gapping actually up here today so again Nasdaq being quite strong now
let’s actually go back to the VIX and this is where we’re gonna kind of set up
our discussion here today now remember last week when we talked about looking
for bearish examples okay just because an investor does two to three bearish
trades does not mean it makes their portfolio bearish that is not true okay
we talked about that last week so first off if we take a look at this this being
the VIX level and what I want us to notice here as we take a look is I’m
going to bring up let’s kind of bring this up from the bottom if we can just
try to bring it up just gently drag that up our concern when we actually talked
about the VIX was we said look we don’t really want to be seen investors don’t
really want to be seeing really where the VIX and let’s kind of bring this
let’s you’re gonna see that we actually went down we made a new low right
we actually made a new low right there okay so we had a low and a lower low on
the price we got that the thing is we’re a little concerned about as investors is
when the VIX actually drops down right drops down comes back up pulls back and
when we go from that burgundy color to red back to Burgundy this is where the
momentum is actually not as bad as what it was before
so that’s think of this almost like a volcano where it’s building up momentum
and where it could be almost leading to a potential breakout now that’s not she
not good because if that actually that momentum were to continue that actually
means that the resistance level the ten-day moving average the price could
get back above the ten day moving average so first off if you saw this day
and this was the first day that we saw it that would be a concern to an
investor probably okay that means that if you’re considering doing maybe more
buying strategy or selling strategies you might say look if you’re gonna do
selling strategies you might consider doing more verticals than short puts
because if volatility were to expand that could actually hurt those positions
okay if you sold those if you buy the puts in volatility were to expand and
you already had those puts or calls that doesn’t necessarily hurt is bad because
you’re long that option Greek called Vega now so what you’re going to see in
this portfolio here today is we’re gonna be showing examples of maybe looking to
harvest gains potentially in short puts and not replenishing or setting up new
ones in the short put area okay now so I want to kind of just state that that’s
the concern is when the VIX does a bullish MACD divergence if volatility
were to expand okay any positions that are short Vega can get hurt
directionally and volatility the time decay that you thought you were going to
get you don’t really get it as much so I think this is a discussion
point we really want to bring up here now let’s go back and let’s kind of
talk about some examples but before we do that let me bring up just real quick
some I want to see if there’s any questions here now Jerry mentions with
Vic’s near lows is any positive theta trades good at in for this environment
now Jerry asked that question I saw that before we went to the big board Jerry
when we talk about that when we talk about a trade like a vertical where
you’re not as negative on the Vega okay some investors might choose more
verticals than short puts now let me just give you a quick example what we
mean by this okay so first off I think it’s better to show an example than talk
about it so first off we saw the dating you probably saw that you know for
awhile Microsoft had been up trending we know it’s been up trending because when
we talk about doing a routine we saw that for the week the way that this
ended is we saw the MACD over time increasing okay so in other words the
MACD was getting less down or less bad look at how we went from let’s say the
red to burgundy red to burgundy red to burgundy red to burgundy those who are
becoming less down momentum was building and the way that Friday ended okay
you’re gonna see like it it pretty much had like a hammer and or a hanging man
right up near resistance area Microsoft bounces let’s say for this example the
investors trying to way between doing a short vertical put or a short put
example let’s talk about that just real quick and let’s bring this up so first
off if we were to let’s say go to the December expiration yes we are talking
about Christmas presents here yes it’s not a bad idea
nothing wrong with propping up the GDP by yourself there’s nothing wrong with
that now if we take a look at this let’s say the investor chooses the 20
December’s and choose as a strike just for this example
with a delta of 33 okay now what you’re going to notice is on one of those
column headings I’m going to change the column heading and I’m gonna go down to
right where it says option theoretical x’ and Greeks and what I’m gonna do here
isn’t gonna go to Theo price okay now I’ll tell you why we’re gonna
do that right up off where it says strikes you’re gonna see that there’s
the Theo price right above there right above where it says strikes so first off
if an investor were to sell that 231 sell that 140 for 231 the bid price and
all of a sudden volatility were to go up let’s say ah let’s say three percent and
again that’s not a lot okay but if volatility were to go up three percent
and this is where people can get hurt okay if for example you sell it for 231
the volatility goes up just three percent well what happens is it goes
from 231 to 297 now the stock didn’t go out the stock didn’t go down just
volatility increased so the difference between those two prices is about 68
cents okay so in other words 68 cents per contract okay so that’s a concern
when you sell a put its negative Vega you volatility we’re to expand you could
get hurt and we see in this example if you sold it for 231 volatility expands
the option price goes to 297 you don’t want the option prices to increase when
you’re a seller you want them to the to decrease okay now what I’m going to do
is let’s come and go back to something just real quick so when we do a vertical
okay we’re a seller and we’re a buyer and it’s more neutralizing that
volatility the Vega selling a put and then buying a put so Jerry and your
comment as you’ll see in this paper money account not going to be showing
examples of selling new puts short vertical puts yeah
more neutral on the Vega but not selling new puts in this portfolio no okay now if we
click on that what I’m gonna do in this case and let’s kind of show what this
looks like I’m gonna right click on that line analyze the trade now if we analyze
this trade what we’re now gonna see in this case is we’re gonna show what the
option Greeks look like we’re gonna talk about this so first off when we look at
the option Greeks for just selling a put okay let’s take one step at a time
selling a put on Microsoft okay in an upward trend above support just broke
out of resistance Gerry’s common is really in regarding of the volatility
expanding vertical versus selling a put in this example well the Delta here
again is positive positive Delta actually means want the stock price to
go up the higher the Delta is the more directionally bullish you are okay if
you had negative Delta that actually is actually saying that the position is
bearish you want the stock to go down gamma is to change the rate of change in
the Delta okay how much the Delta is changing by per dollar in the stock
theta again is actually right there is really that 344 that’s really saying if
volatility were to remain neutral and a day were to go by how much option how
much would the option erode by its 344 okay now if volatility stayed flat
for the next X number of days that number is not going to say stagnant it’s
going to increase as we come closer closer to expiration when we look at
that Vega right there that negative twenty that’s saying for every one
percent rise in volatility what you’ll notice is we could get hurt by about
twenty cents okay if volatility were to decline one percent okay we could
benefit 20 cents okay so be careful so I’m going to use the word
or the language of short Vega now short Vega is actually saying if volatility
were to expand you would have like it’s showing a negative experience okay be
careful on that okay now if we take a look at this if we go back to let’s kind
of look at this and say vertical now let’s take this back and if I
right-click on that and say sell and now what I’m gonna do is gonna go to
vertical okay now what you’re going to notice is selling the 140 already talked
about that but then what happens if we buy the put well it’s selling a put but
then buying the protection below that strike
that’s the 135 if we right click on that line crit analyze the trade and now if
we take a look at that and only check the vertical at the bottom remember
before we actually saw that the Vega on just the sole put was negative 20
something if we did the vertical the Vega is still negative but it’s only
negative by the tune of about negative 5 so an answer to kind of Jerry’s comment
it’s probably what you think it is want to be a little careful here okay so what
I’m going to do now is when I what I mean careful is in other words picking
strategy if you’re thinking that that volatility has more likelihood to break
out or to go up you want to be careful as far as doing selling strategies where
there is no protection underneath okay so we’re talking on the puts okay now
let’s go back to we’re gonna talk about these options and Greeks not individually
like we did let’s bring them up we’re talking about the short put so let’s
bring this up let’s say I got one two three four five six seven now first
thing we’re actually going to do here is we could just take a look at the profit
loss here and we could just kind of look at this and say hey a lot of those
something at all but a lot of those are doing quite well remember you could only
make a hundred percent okay so the closer you get to a hundred percent the
bulk you have the bulk of the gain okay now what we’re gonna do here is as
that volatility is low and the VIX can sit down for a long time and we’re not
saying it’s gonna break out tomorrow okay
but what we’re gonna do is if those gains are here you’re gonna notice that
this these short puts their negative Vega okay now what I’m going to do in
this example is I’m going to show if we if we had profits of let’s say 50% 65 or
in this case let’s say 80% we’re gonna take the position off okay so we’re
gonna look for positions that are really 65% let’s just start with that number
okay the higher the number obviously the
greater it is now what I’m going to do here ight here is when we come to let’s
say an example like Costco let’s pull up Costco and if we look at let’s say
Costco what you’re going to notice is got two of those we have the 295 put we
have the 285 put now I’m not going to spend a lot of time but we’re gonna go
through this and what we’re gonna see is well the trade price is 410 we have it’s
94 cents now so it was at 410 now it’s gone to 94 cents the Delta again has
gone down to 13 number remember back to our learning outcome we said we want to
understand actually option Greeks in relationship to the strategy we’re
talkin about short puts here so when we take a look at this how do the option Greeks
relate here well first off when we bring this up when an investor sells a put
they might choose and I’m not saying everyone does the same thing I’m not
saying that but if we come to this we might say you know what and let’s kind
of go to the board here let’s pull this up so when we take a look at this what
an investor actually sells a put they might actually have a delta of let’s say
30 to 40 okay probably right and a bigger and bigger percentage of
that maximum gain so what do we notice well we have 77 percent of the maximum
gain now again this is where we can fall so in love with being right but then
forget the goal was if there are profits there prior to the expiration there
could be a potential exit there now let’s talk about that we said in this
example okay we said in this example that if we for example had in the paper
one account 65% of profits we were going to be showing an example of exiting the
position okay so let’s whoops so let’s go ahead and actually take that off okay
and what I’m now going to do is let’s just right click on that line create
closing order buy that back so the only amount of meat left on this bone so to
say is 97 cents the only way you get that last 97 cents is you’ve got to go
all the way to expiration but the stock has to go up a lot in a short period of
time the mid-price is really about 94 cents and now if we say look we’ll buy
it back for 94 cents or less because hence the limit go to confirm and send
94 cents were given back off that premium transaction fee for the one
option 65 cents it’s kind of amazing you could buy a soda okay you could do an
option trade for less than a soda can okay kind of interesting and now what
you’re gonna notice there’s the total now if we send that right there just
trying to harvest that now we go down to the next one real quick and we’re going
to fast fire through these again think about that diagram okay we come down to
actually clack what you’re gonna notice is the trade price was 610 the mark
value is actually 170 and now what you’re gonna see in this case is 72% we
said anything if it was greater than 65% just going to buy it back now a we could
just hold the position to expiration – we could actually just say take the
profits three we could roll the position now again notice what’s happening
here when the Delta becomes less it’s saying the stock has gone further and
further away above the strike price and time is elapsed okay now what see what
we’re doing is here is when we actually buy it back that time decay is not
decaying because we’re buying it back shutting down the position now let’s
kind of take this one so let’s take number two so the first one we actually
looked at is is about 316 dollars okay so let’s take 316 got a calculator if
that were to buy back in 94 cents or less about 316 ish if we buy this one
back we do not replenish it meaning we roll it let’s say we try to buy that
back for a dollar seventy okay if we buy that back confirm and send there’s 170
plus the transaction fee gake 170 65 send the order now what you’re going to
notice is come down now by the way that’s 440 okay the Nike example right
there you’re gonna see that that Delta this would be a good teaching moment so
when we take a look at the position like Nike okay let’s go back to the big board
just real quick let’s talk about this so when we take actually looking let’s say
the position like Nike what you’re gonna notice our Nike is the following okay we
see on the position of Nike the Delta is really at 40 if the Delta is at 40 it’s
really saying that the stock really hasn’t moved yet and what you’re going
to notice is the trade price and the mark value I’m actually surprised that
it’s that different 235 113 so there’s about 50% of the value the
option that’s there but the problem is there’s actually only 18 days left ok
this one actually right there has about 52 percent of the profit so there’s a
good chunk but it’s not at 65 let’s do this real quick so let’s kind of think
about just real quick what is 65 percent of the premium ok well let’s first take
a look at what was it sold for sold for 2:35 we can see that
right there in where it says the option price 235 so let’s how the calculator
just take 235 times well if investor tries to make 65% you
try to leave 35% left what would that be what would be 82 cents now let me kind
of tell you it’s a very important especially when the VIX is low are you
remaining disciplined okay sometimes what happens is when you’re making money
what happens is you kind of just you’re not as disciplined anymore because you
feel good you want to still be thinking what’s my target are my targets there
there’s nothing worse than know that you could have had those potential profits
but you forgot to set your target in other words you get to pay for being
undisciplined okay that’s not fun now let’s do this let’s make sure that this
paper trade account is not doing that we’re gonna right-click on that line
create a closing order buy plus 1 and we’re gonna make sure that that option
price goes down to about 82 cents and where’d we get that well the option was
sold for 235 ok then we took that number times 0.35 and that means that this
account could keep potentially about 65% and only leave 35% left and that 35%
would just be 82 cents gonna change that day to GTC because we don’t know if it
could do it tomorrow and what you’re gonna notice is when we type in a price
there what you’re gonna see is if we type in 82 cents the expected Nike price
is it only have to go up 82 cents in the stock price
to get to the option value so what’s my point the point is they don’t want to
take a whole lot so if your targets are not set you could be missing those
potential exits okay to take those gains be careful there make
sure that you have those orders now going to go ahead and go confirm and
send there’s the the the debit transaction fee there’s the total now if
we come back and say okay send that order let’s take just one or two more so
if we look at that right there let’s kind of make the assumption that we get
125 on that one if it were to get filled 440 on one if it were to get filled
to guys see if they get filled so these would be almost about $900 of premium
okay on those and just kind of harvesting those let’s take one more so
I’m going to go down and let’s see now we know an area that’s been quite strong
has been technology wouldn’t need to let me just look at the S&P right the S&P is
going up pretty good example that probably semiconductors Nvidia Klack
micron right among others those stocks are probably been doing pretty good now
if we take a look at the trade price for 25 mark value 64 cents so again when you
look at those two prices and you think if the investors sold us with a delta of
30 to 40 and now that trade price and the mark price
that much we know that Delta must be getting lower what does that mean less
probability of the stock closing below the strike price the key words are as of
right now okay the theta right there is about 983
so when we when investor does Delta positive trades bullish trades with
theta positive theta their bullish and they trying to make some money as time
is going by and now what you’re going to notice on that one is that’s about 84%
okay so that’s past the target now if we go back and take a look at this if we
right click on that line create closing order and just say look we’re going to
buy it back there we go we’re going to say buy it back and if we take a look at
this position and I’ll bring that I’m going to I got a question right there
I’m gonna bring up if we go confirm and send okay the question from Francisco
was what’s the margin margin requirement on those short puts it’s an easy answer
first off if you are in an IRA whatever the strike you’re selling okay whatever
strike you’re selling the reason why they call them cash secured puts so if
the strike price was 190 and you sold one contract that would be 19,000
dollars of margin requirement maybe – the premium but I’m gonna say it’s still
around 18,000 or so for the buying power or the margin requirement okay if we’re
doing it in a margin account it’s probably about a third maybe a quarter
of whatever the value of the stock is so if we sold the 190 one contract that’s about
$19,000 with the stock so if we did that and said look what would be maybe a
third of that tying up it’s about six thousand dollars okay
tying up or the buying power of the margin requirement really being about
it’s about six thousand dollars so again the reason why we call it cash secured
puts if you do in an IRA they’re gonna actually whatever strike you sell that’s
one contract or – they’re gonna reserve and make sure you you set aside the
money on the side when I say a margin account I want you to think about
post-tax now what I’m gonna do right there is send that order I want to bring
up one example of a cover call okay so we talked about the short puts you’re
gonna see that on that one right there if it can get filled 360 let’s say in
this example on Nike about 125 440 on the clack and on that Costco example
that’s about 316 so that’s going to be about nine hundred and ninety one
dollars that’s really being trying to be realized and what that will do is it
will start to decline the inventory of selling puts now let me tell you the
risk when a new investor does selling strategies they think well I’m just
gonna always do selling strategies there’s time to where you could put
selling strategies on especially when the VIX is low and their concern about
that is you didn’t get a whole lot of premium to sell them okay that’s the
concern and that means your breakeven is closer to the current price which means
your probabilities are not as great okay if we take a look at this I’m gonna
bring up an example one of the examples I’m gonna bring up is and I’m gonna
bring up some NASDAQ stocks here and on the NASDAQ stocks if we take a look at
them we’re gonna kind of do a little a little run here of different stocks I’m
gonna kind of show you a couple some of you might have been looking at stock
like lamb research in lamb Research LRC X really did a show to break out example
that has spent a couple weeks kind of bouncing on this old level of that new
potential support and then just well strong candles to the upside well let me
say strong candles I’m just saying candles that are really tall okay LRC X
now that’s actually one I’m gonna fast fire through a couple one that I am
gonna bring up is Q calm the reason why we talk about Q calm is Q come was
really getting into what we call that symmetrical trying or a pennant think
about when those two lines when I say the two lines I’m talking really about
oops I’m really talking about this line and
I’m talking about that line when those two lines actually start to converge on
each other overlap this is where that stock could actually make a decision
break out break down now if you take a look at this what you’re gonna notice is
that and we saw an inverted hammer on that far right edge okay think about
that those candlesticks we go forward to the next
week okay then all of a sudden after the inverted hammer right there on the week
of ten fourteen then all of a sudden we saw the interweek low bounce right on
that ten day moving average this case the ten week moving average showing
momentum and trend and then what you’re actually going to see is this is this
week gapping up just a little bit and then obviously closing at the high so
far but again it’s only been a day now when we go back to the one-year daily
what you’re gonna see is this has earnings upcoming and this is we’re
gonna make a discussion on this so first off we got our it’s coming up on the six
it’s next week ish maybe I think it is or maybe the Monday or Tuesday after
that now what I’m going to do is I’m gonna go back to for example let’s take
a look at the the option let’s take a look at the volatility we have Q comp
and what you’re going to notice is when we look at the option Greeks excuse me
the implied volatility then the Greeks we’re going to go out about thirty to
forty days and where we see that thirty to forty days it’s pretty much gonna be
about right there and when we do that I’m just gonna say that we have a number
let’s say easily somewhere right around 30 okay we think in baskets of low
medium high fifteen to twenty four low okay twenty-five to thirty four medium
thirty-five plus probably high okay you might have different baskets but that’s
the range we typically look at this is kind of more in that medium basket now
when we actually come back to this and I’m going to bring this up and we’re
gonna look at the today’s option statistics and it kind of say where are
we in the range well that 52-week IV high 46 26 low the IV percentile is
really 47 okay now broke out to the upside making a brand new high and we
look at the IV percentile it’s not in the twentieth percentile it’s not the ten
not a thirty that forty seven it’s not a bad number so what I’m going to do is
going to go back and say is a possible so remember the earnings were
the sixth if we go down to something like shorter-term and I’m kind of blown
away by this actually right now as I look at this you’re gonna see that if we
go let’s say sell if we sell something that has a delta between 30 to 40 the
strike if we chose the first one would be the Delta 37 or in other words the
$81 strike okay if we open this up to be two points wide again what’s the concern
well the idea is we talked about if the VIX is low and that volatility breaks
out being careful okay to just do selling strategies only where there’s no
protection underneath hence short Vega now if we were to sell the 81 in this
paper money account as our paper money example if we sell that 81 for a dollar
ninety eight ish right click on that we can open up the strikes let’s say two
dollars wide the purpose of that is again if we did the 81 and the 80 and a
half it’s just you’re doing a monster number of contracts okay so we’re trying
to spread it out just a little bit at least a dollar or two by having it where
there’s less transaction fee okay so if the investor sells the 81 buys the 79
the credit their per contract there is 58 cents that’s the reward the risk to
dollars of spread okay is really in this case a dollar 42 so taking a quick look
at this 58 cents divide that by a dollar 42 that is about 40% ROR okay not a
bad number the buying power effect a lot less that’s the advantage of the short
put vertical over let’s say selling a put okay now if the Ambassador said look
can risk or willing to risk 750 dollars in the portfolio that’s what they’re willing to risk you’re willing to risk
let’s say max loss well max loss let’s say that number was 750 per contract 142
that’s going to get in this example about five contracts edit now what
you’re going to see it’s going to change this to 5 and what we’re going to do
here is going to go single order and first triggers seq now the reason why
I’m doing this is when we last week we showed the example or had the example of
a short call vertical short call vertical on a small company called
Amazon tell me you saw that ok stock opened down maybe a hundred ish
if you didn’t have a buyback in there to buy that short call back like it wasn’t
in paperMoney you miss a huge gap down so the biggest thing is we want to be
careful on this is I’m going to right click on that line and now say create
opposite order let’s show the example that if the investor wanted to grab or
try to grab 80% now if you grab 80 you only have a hundred total that only
leave 20% left so now what I’m going to do is say look let’s say if we could
ever buy that back for let’s say 11 cents or less just on the calculator
take point five eight times point two in other words 20% and if we do that right
there the debt we have to debit there 11 cents we’re gonna change that day to GTC
the limit is saying that’s the most okay that’s the most now Paul is actually
saying isn’t the 47% IV high for a trade like this so here’s the deal does an
investor one a high IV percentile or not when they’re doing a short put want a
high or low they’re doing a selling strategy that are wanting a higher
implied volatility the higher the implied volatility the bigger the
premium the bigger the premium the lower the break-even that’s not necessary
bad for the strategy okay we go confirm and send there it is right there
and remember we’re selling a put buying a put and we’re doing it on five
contracts hence that’s why we’re seeing that number right there that’s what we
want to do we’re going to go ahead and actually send that order I’m gonna put
that in and say send that now let’s take also just real quick um Jason I see your
comment right there I’m gonna take a look at that and the other cop so let me
I can follow through on that Fred also says James would you consider
a collar when the VIX is low let’s kind of address that concept right when the
VIX is low okay so let’s just kind of hit this topic when the volatility is
low remember what does that mean stocks up
near highs okay could also mean maybe stocks up near resistance now if the
stock if someone thinks that maybe their stock is up near highs in or resistance
that means that the putts that could be purchased could be at near all-time lows
okay so let’s imagine that the investor has $700 on my own realized profits 700
and you could buy those puts let’s say a protected put for a hundred bucks you
have somehow $700 unrealized profits would you be willing to give back a
dollar of that to try to lease lock in some of the profits okay what if you had
a thousand dollars and you get by the put for a dollar okay trying to lock in
the profits when you buy that protected put it doesn’t cap the upside but it
gives you a contractual right of where you can sell the stock where you could
try to lock in some of those gains if you said I don’t want to pay for the put
that’s why the investor when the VIX is low tries to look for stocks that might
be extended okay in other words stocks that are inflated off their moving
average levels stocks that might he’ll also have high RSI levels probably greater than 70 75 80 ish they’re looking for stocks that are overextended they also might be
looking for stocks that are also at the same point may be going into the
earnings etc okay so the investor is trying to actually put collars or
protective puts on when the volatility is low if you wait to actually put
protective puts on or collars when the VIX gets to 20 your timing was off okay
those puts that were inexpensive have now probably doubled in value doubled
okay think about it simply if you’re gonna buy winter coat the greatest time
to buy the winter coat is in July when it’s a hundred out and the coat store
can’t sell those winter coats to save their lives because it’s a hundred out I
mean who goes to the store to buy winter coat in July okay but they’re the
discount of the most okay at that time you wait until it’s winter out to go buy
that coat that protection you ain’t getting a good deal you’re paying full
retail that makes sense you can even be paying above the retail
okay so I that’s a picture that I want to
kind of painting your mind okay now let’s go to bring up so I’m gonna fast
fire through a couple other stocks here okay so first off when we actually also
take a look at a stock like AMD AMD is a stock that is kind of swinging back up
to about a quad top that might be a stock maybe trying to go and maybe in
what we would call continuation meaning the brakes resistance it’s kind
of had like a prior top around 434 pull back down to about 28 27 and if that
stock gets through the earnings and can get above 34 it could be in a trend
continuation after that consolidation now if we take a look at for example
like a stock like clack-clack has been a stock that’s been discussed a number of
times still continues to actually hold that support level but
we talk about stocks that might be considered in terms of protection or
collaring when the Ambassador goes in just uses classic technical analysis
they might be going to say geez do you own any stocks that if you kind of look
and checked we’re horizontal resistance was or diagonal resistance was are you
at those levels and if you are at those levels you might say geeze an investor
when they buy a protective put our collar they might be trying to put those
on up near resistance so I think when the VIX is low there needs to be extra
attention not less not less more attention to where your stocks in terms
of support or resistance your stocks are up near resistance you could practice
actually applying if you wanted to protection strategies like protective
puts and collars we talked about those number two if you’ve done selling
strategies like cover calls are selling the puts I want you to go in and
evaluate what percent do you have relative to the maximum gain do you have
an opportunity to take those gains here now I’m out of my time here but our goal
here tonight was to talk about option Greeks in relationship to the strategies
we talked about selling puts and cover calls recap when you sell puts you want
the Delta that should decline when you actually sell cover calls you actually
want the call value or the call Delta value to increase saying that the stock
has gotten further and further above the strike and you’ve made more and more
okay of that maximum game think when you see it over and over again becomes
easier and easier it’s just what it is okay I want you to go out now the
comment was Jason what is collaring collaring is where you own the stock you
sell a call if you have those two that’s a cover call you take that premium that
you got from the call and you buy a put okay that’s a caller you own the stock
you sell a call that’s a cover call but if you just take one more
step yeah buy a put that’s a collar okay all right I’m out of my time here if we
take a quick look kind of some things I want you to do I want you to go out and
look in your portfolio I like you to evaluate where your stocks are in terms
of resistance practice considering protection number two I’d like you to go
out and evaluate on your short puts you cover calls evaluate looking at current
gain or loss relative to the maximum gain making sure that you pay attention
to the details okay I’d like you to practice that now again
I want to thank you so much for your comments your participation try to
answer as many questions as I possibly could I also want to give you a quick
reminder with what we discuss in order to demonstrate the function of the
platform like we did we use actual symbols we use past examples we talk
about new examples etc in order to demonstrate those you need to realize
that TD Ameritrade does not recommend securities or strategies as an investor
they get to pick what type of stock or strategy for them so with that said
thank you so much for comments and participation tomorrow morning will be
John McNichol will be teaching on swing training tomorrow morning so if
you’d like to hear more about this in the shorter term cents check out his
class as well also on trader Talks subscribe to the channel
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with that said thank you so much have a great evening take care and John McNichol
we’ll see you in the morning bye-bye

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