In this post, I want to share with you a trade idea when it comes to trading an option set up.
Also, I want to share with you some insights on the option trading membership that I’d like to release very soon.
I want you to give me some feedback below in the comment section, thoughts, and ideas on what you think I’m doing right and what you think I’m doing wrong.
Tell me what I can improve on and what I could be more detailed on. All about these option trades and strategies: and what I want to do is just go in detail on a trade setup that I would put on.
Or think about putting on. Also, share with you when I would do it when I would take profits, and that’s really what my goal.
I want to open up your eyes to different strategies, ideas, and concepts that you could do when it comes to trading options.
Options Trade Ideas
Let’s get started here with some ideas. I’ll show you trade set up, an idea that I could put on here on Tesla. I’m going to do a bearish butterfly spread.
I’d like first to take a look at this concept or this diagram. That is because I want to break things down for people who are brand.
First off, the strategy that we’re going to look at is going to be a butterfly strategy. I’ll explain to you why. This strategy is going to look something like this.
This is what we’re looking to do.
Before we get there we want to evaluate:
- stock conditions and
- the VIX
We need to understand where it is that we are.
Are we looking at all-time highs, or are we pulling back?
What’s going on with the overall market?
First off, I’m going to check out the SPX.
You can see as we pull back a bit right here, this market was fairly at low points a little while ago in December. And then we’ve shot up, pulled back a little, shot up, pulled back a little, and continued to make higher highs.
You can see this market now continues to stretch and be stretched. It’s not that we’re at super-super all-time highs, but almost within a few points within ten or twelve points of all-time highs.
Because we’re right there, we were at all-time highs, and now we’re pulling back. With that in mind, I’m looking at Tesla as well.
Take a Look at Tesla
What’s been going on with Tesla?
This stock was selling off, came down here, found a little bit of a bottom. Then popped, pulled back, kind of isolated for a little bit. And then we got huge gaps, then popping and again popping. And I think by the looks of it, the stock continues to stretch because we have one gap, two gaps.
And it’s just like a rocket ship. The volume is still there. That looks good and healthy. But I think a small little pullback could happen. That’s what I want to explore a little or do a slight little trade on.
I want to show you an example. Here is the trade that I did just a day or so ago. I did it so you can get an idea. And this one is working out well as the trade pulls back I got a 5, 10, 5 spread on the butterfly.
Put on just a little bit higher, and it’s pulling back, and it’s doing quite well right now for me. We are up to $127 on about $725 of capital. If you do the math, that is a pretty good percentage. When we look at it, we’re up 20% on that trade in just a handful of days.
That’s the trade I want to show you here. And first off, let’s hide these positions. And we’ll go back onto our paper to get an idea of what we’re trying to do here.
Butterfly Strategy on Paper
Market conditions we are at highs. That’s the first big thing we need to understand. The second thing we need to understand is where is the VIX.
If I look at the VIX right now, the VIX is near low. I’m expecting a downward move as well.
I could play this from the volatility standpoint, saying that volatility may go up. And you could say why don’t you do a calendar or spread something like that?
Well, a butterfly is a little more cost-effective in that way. And decay happens pretty quick and wrap it.
That’s why I’m looking to do more of a butterfly. As we check this out, the VIX is at Lows. When we look at the VIX, it’s at low. That’s because I’m expecting a little pullback.
Where does this trade fit in?
Is it a speculative trade, an income trade, or is it a long portfolio?
From my standpoint, it’s a speculative trade. And the reason for that is I’m looking to put this trade on. The current price is somewhere right here.
I’m looking to put this trade on so that way that stock pulls back a bit. And with time profit picture or that line continues to grow. Hopefully, in the next two weeks, this will pull back.
And when that pullback, I capitalize on that movement. Which means I don’t have to spend a lot of money. I’m spending about $100 here to make $30-$40 potentially.
It doesn’t sound like a lot, but on a percentage-wise, that’s a 30% or so return on investment. Of course, I could multiply this times five contracts. All of a sudden, you get more, ten contracts, 20 contracts, you get the idea.
Anyways, what do we want the price to do?
When the Delta goes here, we want it to go down. We want prices to go down. Theta is going to be positive. Now it could be negative as we continue to go over here. And as we get very close to expiration if this thing doesn’t move.
But in reality, the majority of this trade should be a positive theta with the exception of if it starts going a little against us. And Vega, we want volatility to go down because this is going to be a short Vega trade.
But remember, when stocks sell-off, volatility usually goes up. It won’t help us that much. But we’re going to capitalize much more on the direction of the trade from the Delta and the theta.
So volatility as long as it doesn’t hurt us too bad, which I don’t think it will when we have these the Delta there, we should be okay.
When to Take Profits?
Where we want to take profits, and where do we want to get out as far as losses?
We’re going to take a look at that here in a second after we do the trade set up. Let’s take a look at this trade right here. I’m going to set up a Tesla. I want to do this trade because, as you look at Tesla, it’s really at all-time highs.
I don’t know if it’s going to pull back in a week, two weeks, three weeks. But I think within two to three weeks it should pull back a little bit. And that means I’m looking for probably 14 to 21 or 28 days. Let’s just say about 24 days would be nice. If I go too short, I might not have enough time.
If I go too long, that I’m paying more, and the time decay doesn’t kick in a little bit. In this case, if I go 24 days out, that might be nice. And the strikes I’m looking at is somewhere between I’d say between 35 and the 25 range.
And the reason for that is because if I go 47% probability in the money, then it could just blow past my strike. If I go way further out something like a probability of 15%, it may never reach there.
Between 35 and 25 may have a chance of at least moving back or pulling back without spending too much money. And these are just the probabilities of going in the money. If I go somewhere around 325 or 330, that could be an interesting place.
What I’m going to do is buy a butterfly at 325 on December 6th. And I want to protect myself about one to two strikes out. And I like nice even numbers most of the time.
You can see this setup right here.
We’re risking $28, but I might want to go a little bit further. Let’s say 335 and 315 on the protection side.
When I look at this trade and I look at analyzing it, I’m at the 325 strikes. That’s 28%, which means it’s kind of pulled back quite a bit. All we needed to do is go down about ten points, and we should be okay.
With time that theta decay will creep in and notice this profit line right here.
A profit line is way outside of this expiration line, and that’s the whole power behind this butterfly trade. And I’m risking a $103 on this trade. $103 only for a speculative directional trade. Of course, you could do more contracts, or you could widen things.
But $103 to potentially let’s say maybe this will happen in four or five days or so. And if we pull back, you’re risking about $103, and you’re looking to make about $50. When you look at that, $50 divided by $103, you’re looking at 48%.
That’s a massive return on investment. But of course, if it goes against us and if it goes to 360 and pops, I might lose out $40-$50. It’s a shot. It’s not a guaranteed shot. It’s not a ton of money. It’s a little shot, make $60, but if you start multiplying this (to five contracts), you’re risking about $515 to make about $200-$300.
I’m looking for 48%. It seems a little greedy, so let’s shoot for 30%. I’m looking for about $200 bucks. That would be nice. And that means even if it pulls back a little bit, that should be just good.
But if it continues to sell off, you’re not risking too much. And that’s the excellent percent on the return.
Making a Trading Plan on Paper
Let’s make a quick little plan here for this.
I would take profits, so let’s say we’re going to put on a $500 trade. Call it 515, 525. I probably would want to do profits anywhere between let’s say $150 to $200. Let’s just aim for something like that.
Where do we get out of the loss?
Because this is a speculative trade, it could be a full loss in a way. But usually what you would do is look at this and say: will I need probabilities to work in my favor? I don’t want to lose the full $500, but $375 $400 is where I want to go.
At minus $400, I’d still keeping about $100 there. And that’s double of this. If I did 200, it wouldn’t let the probabilities work in my favor. That’s because I’m just trying to let those things work in my favor. Even after let’s just say 1-2 days going to a negative to $400 loss, this stock is at 360.
If I start seeing it’s moving against me or it’s $300-$400 loss, I’m out. Otherwise, you’re looking for this thing to come back into it a little bit slowly with time, risking $510 to make money potentially.
Let’s just say it happened in a few weeks, and if it gets 510 comes back and even overshoots for 60, you could almost make a 1 to 1 return on your investment.
That’s what I’m looking at as a trade setup. I don’t know if it’s going to happen as I’ve been talking this stocks continue to be going down. It could have been in an even better position.
I’m going to put it in right now just to get things going. And we’ll see. And that’s the basic trade setup.
I’ll put that in the account right there. And we’ll see here how this plays out. Cancel, replace, and we’ll bump it up a couple of bucks. Put it in there and see how that trade works out.
Well, I’ve got a couple of positions here now. The trade we just put on was December 6th. It’s this one right here.
It starts off a little bit of a negative right away.
Here is the other one I put on a few days back.
Now you can see it’s coming in and it’s doing its thing. And now you can just let it sit and allow that time decay that theta to work for you.
And if you look at the Greeks, you have a negative 9 Delta.
You make a little bit from the Delta. The theta is about $28 a day, and the Vega is negative.
Of course, we want volatility to go down, but as it sells off it’s volatile is going to pop a little bit.
In either case, the Delta and the theta is really what’s doing most of the heavy lifting.
I hope you found this post helpful.
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