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>> Options Mastery #4 - Calendars <<
January 15th, 2019
January 8th, 2019
January 3rd, 2019
November 22nd, 2018
November 8th, 2018
October 9th, 2018
Hey, this is Sasha. Welcome to another episode of "Hungry for Returns" where I answer your trading and investing questions on video because sometimes the written word is not enough and video is much more detailed.
Today, we have another question regarding Iron Condor.
"Hi, Sasha. This is Jim. My question for today is regarding how to manage iron condors while I'm working a nine-to-five job. This is what I've been doing, and I would like to know if I'm making any mistakes. I will be using $200 and $150 as the wings of this Iron Condor. What I do is I calculate 5% below the call price, in this example $200 times 5 percent is 10 dollars. So, I set alerts $10 away from each side which would be $190 on the call side and 160 on the put side. I would then make any adjustments if these alerts were reached. Is this a good strategy? Also, when I set up these alerts, I also write a good to cancel cell order to capture 50% of the original premium received. If I received $250, my position would be closed out at $125. Is this a good strategy for me? Thank you so much."
This one's a little more difficult of a question even to answer think about the numbers here.
Looking at the overall question, I have an Iron Condor setup basically what Jim was saying was that he's looking at a $200 strike and then he goes 5% below that which is $10 putting it at 190.
I think the better approach for me to answer this question is to look at where to set the alerts. You're looking at where to set the alerts, how to set those alerts, and if that's an excellent approach to making adjustments.
The problem with putting an alert in with options -- you have to take into account as the software is not set up to handle option alerts as well as it could most software is not.
The issue here is it doesn't take into account the volatility issue. For example, if a stock is moving especially with Iron Condors, you are a negative Vega. So, with a negative Vega, you have a volatility problem as stock heads lower.
What you would probably want to do is let's say you usually set a 5% alert on the downside. You might want to set it three percent alert on the downside because you want that alert sooner because you have the volatility that's in play.
To the upside, you might want to set that alert even beyond 5%. You could say 6% or 7%. If you're going to use 5%, that's fine too. That's because the volatility will help you a bit.
This is how these works take a look if I pop out the volatility here and let's say I pop up 5% volatility going higher -- which means stock prices are going lower. You can see, I'm down $592 on this position, which is on Apple about a $200 stock here now.
If I have a negative 5%, you can see if volatility contracts, I'm up $400. Now, granted the price would be at higher levels but I'm up way up there because volatility has contracted.
You can see that you need an alert that takes volatility into account which means on Iron Condors, with negative Vega, you want that alert a little bit sooner on the downside and you can make it a little later as if the stock is climbing up.
Going back to the alert system and when to look at setting an alert or a mental trigger, the mental trigger that I see at typically is not necessarily a pricing trigger. Instead, what I would prefer to look at is probabilities, and that's how most options traders look at.
When they look at putting on or selling contracts is they look at not this open interest but this column -- is the probability of in the money okay?
When you look at the probability of in the money, at this 190 right here, what happens is that 190 -- that's a nine percent probability that if you buy this option, you're going to have a 9% chance it'll work out for you in the money.
Which means, if you're a seller, you have an about a 90% chance of success.
You could switch this to the probability of out of the money if you like seeing this and as you can see right here, the closer you are to the strike price, at 210 let's say, well 65% chance of success if you're a seller.
Whereas, all the way down here, if you're buying a put while chances are a $90 puts going to expire worthlessly. You only have a less than 0.3% chance of success, if you're a buyer. But if your seller, you got a 99.78% chance of success. But the premium is you only make three cents because you have a 99.78% chance of success.
Anyways, typically when we look at triggers and alerts, probabilities is what we use in the options world — looking at it that way, with Iron Condors because they're a probability spread.
But if you want to do pricing, that's easier. You could do it that way. Just understand that for the downside move, you have to take Vega or volatility into account because it's going to create a more significant loss. It's going to generate a loss for you quicker than it will on the upside.
September 6th, 2018
We're going to go back to some basics of some technical analysis. I'm going to take a look at the double bottom which is a reversal stock chart pattern.
Typically, it starts with upper left, and we're moving lower. It's a bearish-like pattern, initially. But then what happens is because it's a double bottom, it's going to turn into a bullish trend.
We first create this swing point where it changes directions, and the stock will initially generate a bounce.
We also create a resistance level that the stock starts to get into. It comes and retries to go into higher prices.
But often, it can't because there's just so much negativity from this previous movement where the stock is moving lower and lower and lower. Then you got value buyers that step in, so this creates our support level.
Those value buyers, as they step in, they try and buy the stock, but there are so many short sellers. People are still afraid of the stock going lower. They're just trying to get in or get out early enough. So this is our resistance level up here.
The stock then continues to move lower and then it creates another bottom. This is how you get your first bottom. Then you'll get your second bottom, and then eventually that stock will go ahead and try and break out into higher prices.
That's what the double bottom looks like.
Typically, as far as volume goes, which you want to see if you're going to look at this volume slowly start to dry out. As we begin to continue into that double bottom, the volume would be good if it starts to dry out because that means the trend is slowly changing. There are fewer sellers taking place. That would be nice.
As we move into higher prices, as we get that bounce, it would be good if we had a little more bullish volume starting to come in right there. Then what would also be nice is that as we decline right here because again, we're changing direction. It'd be good if that also started to weaken since remembering. In the end, we want more volume on the breakout right here.
For that to happen, we want very strong or an increase in volume there towards the end as we breakout.
Ideally, that would be nice, but typically just for the pattern itself, you're looking from the support level to that resistance level as the amount of movement or the projection that you're looking at.
That's the conservative approach but of course, it could with time as it continues to move higher with inflation and all those things. It could get back into those previous all-time highs and even make further higher prices way into the future.
At times you get this stock that actually will pull back and retest these levels and then bounce. In that case, if you missed that entry opportunity, you could get a second entry opportunity, after that bounce right there.
That's another entry point that you could take a look at if you missed the first one.
That's the double bottom pattern. Of course, this could turn into a triple bottom, quadruple bottom. It could be a lot of things that change in this pattern.
If it's been going down for quite a long time, maybe it's time for things to reverse.
That could be one clue. It could be a double bottom triple bottom whatever the case may be.
Is volume starting to pick up? As we start doing these bounces and if that's starting to happen, it's going to be very subtle, but that could also mean that you could be breaking out or you could be finding a bottom.
This consolidation could be six to eight weeks. It could be four weeks. You got to give it a little bit of time.
It's not going to be one or two days. It takes a little bit of time to create this.
What you're looking for is just the overall volume and trend and the behavior of the stock to be able to see is that the bottom is created. Otherwise, you could be creating a double top, a triple top. It could be rolling over. This could also turn into a triangle pattern sometimes.
Just be careful with that as well and then again you could roll over. That's why the entry points are usually above that resistance level. Give it a little bit of room to break back out and confirm it with some volume.
August 30th, 2018
Hey, this is Sasha and welcome to another episode of "Let's talk stocks."
In this episode, we're going to take a look at option Greeks and going to look at Delta, Gamma, Theta and Vega.
We're going to make it easy that way if you're learning to trade options and you're confused a little bit about the Greeks -- what they're for, how they're used. That's what this video is going to explain. I want to simplify it to the basics and the big picture behind it.
As you take a look at this and look at option Greeks, you got to understand the whole big picture behind them.
They're technically an indicator for you.
If you look at this indicator here that we have on screen, this is a volume indicator. What it does right if you move the volume bar up, it's going to be louder. If you move it down, it's going to be softer.
If you look at a car gauge -- this is the same concept of what Delta, Gamma, Theta and Vega do for you.
Looking at this car gauge, you can see we have our speedometer there that tells us how fast we're going. If you look over here at the fuel gauge, it tells us how much fuel we have left in the car.
It gives us an indication of if we're getting close to when we need to refill our car's gas tank.
This is really what Delta, Gamma, Theta and Vega do is their indicators.
If you're sitting on your trading platform and panel, it's going to tell you what's going on with this issue, what's going on with that issue, where are the risks here in a car because a car uses speed and it needs gas.
These are the things that you need to know when you're in a car and driving forward.
When it comes to option trading, you need to know and understand Delta, Gamma, Theta and Vega.
These are your indicators.
Delta is a change for every one dollar move in the stock.
How much money are you going to make or lose? That's what Delta tells you.
For every one dollar move, it's always one dollar move, how much money are you going to make or lose?
It's how fast the Delta changes.
Gamma is related to your Delta -- how fast is that Delta going to change?
You Theta is your loss or gain regarding your time.
How much are you losing or gaining on a day-to-day basis? Which is your time problem that you have with options?
Vega is your loss or gains due to volatility.
They are based on volatility because options are priced in volatility.
Think of this as how full or low your battery is. It's a whole different indicator. It could be your rpms.
It's just another indicator, that's all it does. And because options are priced within volatility, that's what Vega tells you.
Delta tells you your price risk.
Gamma is the change of your price risk.
Theta is your time risk.
Vega is your volatility risk.
If we look at Apple here's a single contract the October 2018 --220 calls and I've just chosen this because it's kind of close to the strike price.
But let's look at our overall Delta, Gamma, Theta and Vega --- these are our risks.
Delta is your price risk gamma is related to that price risk. Theta is your time risk. Vega is your volatility risk.
Let's look at what this tells us.
Delta -- starting this is the most basic one that most people know.
Delta is 45.63 that means for every one dollar move in that stock. I make or lose 45.63.
So, look at it right now. We are starting with a loss of 250. If I move this, this price slice, so, if this price slice moves, you can see the profit and loss also moves and adjust.
Let's say we move this to a positive one dollar. You can see I'm up about $42, which is our Delta now. That Delta continues to increase due to the Gamma, but we'll get to that in a second.
Again, if I go ahead and let's say add another dollar, let's say we go up to $2 -- my Delta is now 48 so take $45/$48 and add another 48 so right around you know $96/$98, depending on the rate of change.
But it's going to add another $48 to my current profit loss.
You can see we're right around $92/$93, as the stock price continues to wiggle.
Let's add another dollar.
If we go to plus $3, we're going to add 50 Delta, 51 Delta. 146 is what we get.
We're up about a 146.
Now, if we go the other way, remember, we're positive Delta here. So let's reset this back to zero if we go the other way. We lose $45 because we have a positive Delta.
If we go negative one, you can see we're down about $47 if we go down to well subtract another $43 from this. You should be right around, let's see here you're going to get about $90 of a loss so you can see how Delta works.
Now with Delta, keep in mind, you notice it wasn't perfect that's because of this Gamma. The Gamma is the rate of change to the Delta.
All that means is that curvature -- how fast accelerated that curve is right.
That's all that does, and the issue here is that once you get a very steep Gamma while Delta switch on you very quickly.
For now, with a $2 here and there it doesn't make that much of a difference, even as you start continuing to accelerate, you could see your Gamma is only at about a 2.
It's more of an issue when it comes closer to expiration, but as you can see here with a 2, it's not as big of a deal.
If I bumped up, let's say to 20 contracts, now all of a sudden you can see if I move this up a dollar. My Delta is 968 but the next time that Delta is going to be about a thousand.
Take a look there you go about a thousand dollar Delta because the Gamma is 51.
As you start trading larger, you can see the numbers become much more significant and a little bit more violent.
Theta risk is the time risk.
All that does is tell us how much fuel we have left in the gas tank right with time.
Every day we lose about $5.60 so as we move the time forward. Let's reset it back.
You can see right now we're starting with a $5 loss right away, bid-ask spread.
If I go one day, you can see we're down about $8.13 because of the $5.63 loss.
Again, if I go another day, we'll add $5 to what we have right now. You can see down $13/$14 add another day. We're down about $22 add another day you're down about $27.
You can see that every day. You're losing $5.70, and this continues to accelerate with time. As you can see, as they continue to increase the date or move it forward, that Theta continues to climb to about seven then 8 and so on. They'll continue to accelerate, and your losses will continue to add up with time.
That's what Theta tells you.
Vega is the volatility risk because options are based on pricing or the pricing of options is based on also volatility risk.
If you look at the volatility which is a little difficult to get, you got to hit a gear icon. Some trading platforms are a bit more challenging to find these things. Let's say I move one percentage point in volatility right there.
You can see if I go one well we go up about 30 because this position is a positive volatility position. It's positive 33.
Think about it, one percentage point adds 33 to our negative $2/$3/$ five loss, and you get about a $28 positive on that position.
Keep in mind, when volatility increases usually price goes down. All of these things are working together right. You have price risk. You have Theta risk, and you have Vega risk.
It's like your car is overheating -- that's one problem you have, but you're also low on gas -- that's a different problem and going a little slow.
They're all different issues. They all work together, but they're separate components right.
You need to keep your car cool but you also need gas in the gas tank, and you need some speed to get to your destination.
If it increases, it will help you, but you're going to have a pricing problem because volatility usually rises when the price goes down.
They work hand-in-hand that overall these are your indicators. This is what you're watching.
Let's go into the volatility the other way.
Let's say you lose one volatility points here, and you'll be down about $30 for $35 because you're positive Vega which means you lose one think of it like a Delta. It works in a way similar to a Delta. You lose one, now all of a sudden, you go ahead, and you lose about that $34.
If you go down to volatility points, you should be down about $68 by then.
If price moves up with that, you could be breaking even or up to $30, but in general, this is how these things work.
I hope this makes a little more sense when it comes to the option Greeks. Think of them like indicators Delta and Gamma are your price risk; Theta is your time risk. Vega is your volatility risk.
It just depends, if you're positive or negative on these and that's how those gauges work.
July 12th, 2018
Today we're going to take a look at what profit potential you can expect from trading iron condors.
We will cover three main points:
February 9th, 2018
I would share with you how to set up a diagonal trade - meaning a diagonal options trade. That way you can tweak your risk on Amazon.
We'll take a look at Amazon - how to set up a diagonal and why you may want to choose to do a diagonal. I like the foundation of the diagonal from looking at a calendar spread. If you're familiar with calendars, diagonals are somewhat similar.
Keep in mind. It's all based on selling premium. When you sell premium, that's really what you're doing. You're the first premium of sale and then what you're doing is you're buying protection to hedge or reduce your risk. When it comes to diagonals, you're buying it later out in time, just like with the calendar, and that allows you to adjust your risk.
We're going to take a look at Amazon in our trading panel. Keep in mind this is just for educational purposes. This is not recommendations to set up this exact trade. You might be watching this video sometime in the future, but I want to show you how to construct it.
First, let's take a look at the market, and you can see we've had a massive down move here just even today on the SPX down a hundred points. I'm not saying you want to do this right away, what I'm saying is let's take a look at how to construct one and when the time is right, you can make tweaks and modifications.
With that in mind, you might want to allow things to digest if you're watching this video the minute it's out or available.
Anyway, when we look at Amazon, you can see we're starting to pull back and sell-off. So, let's say, I'm looking for this to go a little further. I could say this is going to go down to about 1200, that's my goal and thought process. Let's say it topped out. I want to be in the trade for maybe 15/20 days, it could be 10, depending on your time horizon.
But here's how you go ahead and set up and construct the diagonal.
I go into the March ones or the March 18, which is 36 days out. Usually, what you do is you construct about 50 of these different strikes. Let's do 1340. What I'll typically do is sell a single, we'll analyze the trade, and now you could see when you sell a single you have a pretty much-unlimited risk when the stock goes down.
Then what you need to do is if you go in and buy protection, go ahead and buy a single over here and now I'll analyze this because I want protection. You could see right here. It creates kind of a funky little graph that looks like this. This would be a calendar because it's the same strike price. It's the same strike that I've chosen, so it would be considered a calendar.
I could go ahead and enter this as a calendar trade together, or you could do it individually.
If we go to March, buy a calendar, analyze the trade and we have the March 16th and the April 20th. There's our calendar trade, and you can see it looks very similar. It's just a little bit closer to the white line, and that's because we're doing it as a spread. It makes it a little bit better actually.
If I'm bearish on the position, I could go ahead and change this to custom. So instead of a calendar, I could go ahead and shift one of these. Instead of going from 1370 and 1370 - selling one and selling the same one, I could switch this to 1360, and you can see how it starts to rotate it.
I could go ahead and go the other way, and this will go 1390. You could see it shifts the other direction. This is diagonal so that I could go to 1400. I could go ahead and tilt it a little bit more. I could go ahead and tweak this based on my risk of how bearish I want to be.
I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More