and i
am 99.9 sure
that i had my microphone on mute
right when we started so anyhow let me
announce that again
um how do you take advantage of
potentially event related
implied volatility with a defined risk
trade
we've talked about ways to do that
vertically you know with iron condors
and such
but have you ever thought about ways to
do that horizontally and what i mean by
that
is uh not that you get run over and
you're laying on your back
i mean with a trade where you're going
with different expirations
that's one thing i want to talk about
today in our probability based option
strategies class
uh plus other things for example another
way to potentially adjust iron condors
uh i know that we've had some irons
running in this account on the index
that are getting positively hammer
smashed
and i want to take a look at those and
and talk about their logic
and a couple of other things along the
way so hope you enjoy the session
let me go ahead and hit some disclosures
oh wait before i do that let me mention
this before i forget
we've got barb armstrong out there in
the chats if you haven't noticed and
she's
out there doing an awesome job helping
out with the chats along the way
and we definitely appreciate everything
that she's doing out there
um hey if you if you enjoy interacting
or having a coach out there
you could hear the music that's good um
well
just to let you know we have opened up
the uh
the commentary or the comments on these
archive sessions
you know how at the bottom of the page
of youtube when you're looking at the
recorded session there
you can leave comments um hey those are
open so you can go ahead and leave those
comments and uh by the way big shout out
to barb for helping us out
with the questions as we go through our
session today today
and follow her on twitter by the way
she's got a terrific
twitter account that's definitely worth
checking out she's got a lot of
great examples and uh thought-provoking
thought-provoking tweets
all right so remember though as we go
through this information
that options are not suitable for all
investors they could expose an investor
to potentially
some substantial losses so just be aware
there
spread straddles and other multi-leg
option strategies can entail
additional transaction costs and
along with uh complexity which could
expose the investor to more risk
transaction fees might be listed on your
screen right there on the
left hand side of the page i also
in order to demonstrate the
functionality of the platform we need to
use actual symbols but
uh remember we're not making
recommendations to buy or
sell and any investment decision you
make in your self-directed account is
solely your responsibility probability
analysis such as the probability of an
option being in the money on expiration
that's uh theoretical and not guaranteed
also futures and futures options is
speculative and not suitable for all
investors
when you're dealing with dividends if
you're a stock investor they may be
discontinued
also looking at historical data like
back testing
uh that's no guarantee of what's going
to happen in the future uh
all investing involves risk including
the risk of loss and paper money is for
educational purposes
and remember if you are a wizard with
with the paper money trading
when you invest the real money at a
later time market conditions could
change
no soliciting no recording and no taking
pictures and i appreciate the
friendliness and the
awesomeness that happens there in the
chats uh delta gamma theta and vega
those are
all greeks and what they are is they are
measurements
of an option sensitivity to price time
and implied volatility and when you're
rolling strategies
that doesn't avoid transaction costs
just be aware
uh there still will be those contract
fees
all right so wanted to talk about those
horizontal uh
trades uh like for example calendar
spreads and volatility
sku i referenced those uh last time we
were here but didn't really get into an
example
and so i want to do that this week in
addition to that i was
teaching my advanced options workshop
and
you know alluded to the fact that this
kind of a strategy might be
uh applied um it's not certainly
you know a strategy that's uh
necessarily for everybody
but you might see some interesting
things as we learn together about
calendars and volatility or event
related skus
uh now i wanted to get into those iron
condors as i mentioned before
and go through an example of an
adjustment uh iron condors have been
absolutely brutal
in these markets um and that's it makes
an argument really for strategy
diversification
i've used this analogy before but if
you've ever golfed
or heck how about this one if you've
ever opened up your kitchen cabinets and
you've looked inside and you've noticed
hey i got a whole lot of different
cooking things in here
some are great for omelets others are
great for waffles uh
others are great for boiling hot water
that's about all i know how to do
right those three things so that's what
just came to mind
you probably have a diversified array of
golf clubs or
items in your in your cabinets for
cooking with
and why do we do that well for strategy
diversification or for diversification
of the approach
iron condors at this point if you think
of those as like a particular type of
pot
or a particular type of uh cooking you
know
whatever cooking tool you know
they just haven't been great it makes an
argument to have diversified strategies
because
a lot of other things have worked quite
well
so the one thing about it though is with
markets as opposed to cooking
is we're very reactionary to market
conditions right you can choose what you
want
and kind of uh you know manipulate the
outcomes there
you know the work kind of at the mercy
of the market that creates risk
so it doesn't necessarily for a lot of
traders mean the iron condors aren't
worth it it means that
hey if the market changes in a way that
becomes more beneficial to iron condors
will
quite possibly if the trader already has
iron condors
other things might stop working and
those iron condors could come back and
work again
so it kind of makes a case for diverse
fight strategies
although it can be very frustrating but
we'll address those frustrations
and then we'll follow up on our example
from last week all right so let's get
into
the material here and uh you know in my
previous session i just did the
multi-leg strategies class
uh in that multi-like strategies class
we actually talked about um
docusign and in my brain uh
docusign was reporting earnings tonight
but um
i knew better d-o-c-u ocu or docusign
does not report earnings till tomorrow
afternoon and so i even mentioned that
we'll look at docusign as an example
in our class today just be aware as we
do that
market conditions could change a whole
lot between now
and tomorrow afternoon so some traders
as we talk about this they'll focus on
doing this pretty close to where
the market might close before the
earnings announcement
that way they've got all the pricing
information they can get
before that you know if they're going to
trade earnings before an earnings
release
doesn't always have to be earnings
related but in this case
you know the strategy uh logic kind of
does have to do with earnings
um anyhow so we will go through with an
example on docusign but just be aware
uh you know some traders following this
logic would hold off
until maybe tomorrow uh earnings are
going to be tomorrow after the close
until tomorrow
afternoon before they applied something
like this okay but we'll still use it
anyway
so i'm going to jump over to the trade
screen and just so you know
docusign does have earnings coming out
and so
you know when you're thinking about
trading things over earnings you know
risk
zilla you know we've done earnings
examples in this class before
and they've actually you know worked out
in this paper money account
so with that risk it means there is
potential reward
but controlling our risk choosing
something is an example here where
you know we don't get real beaten up or
overly beaten up
in case the trade doesn't work for many
traders that's going to be a huge
requirement okay so just as a heads up
in terms of mindset before we
go through an example but have you ever
noticed
before earnings gets released on
something and again this doesn't always
have to be earnings but
typically it's related to some sort of
near-term uncertainty
which earnings definitely is a near-term
uncertainty
but what can happen uh is you uh if
you're just taking a look at these
option chains i don't know how many of
you
stare at these option chains i'm i don't
have very many friends nobody likes to
be around me all that much
because one of the things i do in my
spare time
is i stare at these option chains and i
just kind of try to get a feel for
option pricing
not all traders are like that you can
still have a social life but
if you ever have you know just kind of
evaluated these option chains you'll
notice
you got these volatility levels over
here for the different expirations
we've talked about that a bunch of times
in this class
but in case you've never noticed before
there are times when
the the different expirations will take
on
a very different look in terms of
levels of implied volatility this
implied volatility is a reflection of
what's going on with the price of these
options
and so if we look at for example options
expiring in i don't know december
107 days out volatility is high out
there
but it's 91 on average
if we compare that to volatility
that's expire on options expiring this
week
that's 278
so in other words these multi expiration
you know multi-month out options
are a lot less in terms of their
relative option prices
you know relative uh extrinsic value
inflation than these
near-term options are you can see that
all the way
up to this uh expiration that volatility
is just climbing climbing climbing like
that
this is called a volatility sku this
is a positive volatility sku now some
traders
if they're looking at that positive
volatility sku like this especially if
they know
what the event is that's causing that
usually it's an event risk you know
earnings
uh sometimes um product announcements
also you know if you take a look at for
example zoom zoom has had
just a giant move and many traders
uh with that giant move that this stock
has had in the near term they're still
quite uncertain about what the stock
might do for the next couple of days
so even though earnings is out of the
way on zoom there's still kind of one of
these
volatility skus in there as well it's
not quite as pronounced
and when we get out here we're actually
dealing with higher volatility
generally speaking with kind of a flat
spot in between
but if you think of the psychology here
of what's going on
traders are still very uncertain uh even
though the events out of the way
they're quite uncertain about the near
term and they expect things maybe a
little bit
more certain for the next few weeks and
then we get into more
you know the fall hey what's going to
happen with covid
is the weather gets colder and the
election out there
so there's um some interesting
psychology that you can actually start
thinking about
when you look at those volatility skus
but you know traders that kind of
evaluate that kind of thing
let me go back to docusign for a second
they might start to think about
the way strategies you know diverse
strategy diversification
the way different strategies might be
applied now knowing that for example in
a calendar spread
in a calendar spread somebody is going
to be
i'm going to bring up a notepad here for
just a second i
imagine these are different expirations
but with the calendar spread if somebody
is
selling a near-term option right let's
just say these are calls expiring in
august i know august is out of the way
but september and october here
but if we got calls expiring in august
at the 120 strike
and they've got more volatility we'll
call it
uh 200 percent implied volatility
and a trader decides to buy options in a
longer date
right farther away from expiration
they're only
you know it you know whatever uh 100
volatility that might be interesting for
some traders because
it allows them to potentially take
advantage of that volatility
skew and the goal here could be in terms
of an
outcome right why would somebody do that
well it could potentially make a
strategy like that
trade for less um and this is kind of a
complicated
concept but think about ice cubes with
me for just one second see option prices
option premiums
they're kind of like ice cubes they melt
right uh
also they're kind of like basketballs
they can be inflated
and deflated but that's the extrinsic
value
just as a little analogy here uh if
we've got near-term options that are
priced at
200 volatility the ice cube might be
that big
if we've got long-term options that are
pre
priced at 100 volatility the ice cube
might be that big it's always going to
be bigger
farther away which means if we if the
trader was selling this option for four
dollars
and maybe buying this option out here
for six dollars
there's still going to be a debit there
and the net debit in that case would be
like two bucks
right the difference between those two
things but especially if the trader is
assuming that
after an event takes place right
that the volatility on these both might
actually drop in fact there's a good
likelihood that volatility on both of
those is going to drop
but if volatility on the 200 percent
drops
and it goes all the way down to let's
say 50 percent
right this ice cube might go from four
bucks all the way down to 25 cents
depending upon how much time there is to
expiration
very quickly right now if this option
drops down to
like fifty percent volatility let's say
everything becomes kind of normalized
there
this option might drop from six dollars
down to
i don't know maybe four dollars or
something like that
but if you take a look at the price
differential between those two options
now
even though they both dropped in value
if the near term option dropped in value
more
what that actually does is it could
potentially send that calendar spread
from
initially maybe two bucks as an example
to maybe uh 3.75
now that's wild i know right but from
this volatility drop
if there's so much more volatility than
average
priced into those near-term options and
it comes out
those near-term options can get really
crushed if they're artificially inflated
while these long-term options can still
get crushed too
but if that volatility crush combined
with the fact that there's still time
remaining
um doesn't affect that one quite as much
the calendar
can still make some nice profit
okay but one thing that some traders
find attractive about this is that it's
a calendar spread
and so initially in terms of the money
going in
it's it's generally not you know it's a
defined amount of risk
and when you're dealing with stocks that
are trading at nearly 300 bucks
that are moving all over the place you
know buying shares of stock or something
like this
you know even different types of option
trades they can require a large capital
commitment and carry really a lot of
risk
with the calendar spread basically a
smaller amount
potentially could be applied and it's a
defined risk type of trade
okay so anyhow i just wanted to show you
sort of the premise there
before we get into this all right now
the the big question is this well if a
trader is going to do this
what expirations are they're going to
choose i mean there's a lot of different
expirations that a trader could work
with
and one answer is maybe try different
expirations as you practice this
to determine what seems to be best for
for you know you the individual trader
but if a trader really wants to kind of
see
seek out the volatility sku differential
they might look to sell these two
or these nine days right either the two
or the nine days why
because that's where the biggest amount
of volatility is
now in addition to that some trade well
traders got to figure out what they're
gonna sell they also have to figure out
what they're gonna buy
right some traders will buy anything
from just maybe
a one week beyond that to uh
to uh you know maybe even a month
depending upon the
personality of the individual but some
traders might start buying
maybe in here a couple of weeks out
out to maybe in here uh you know
more than a month away from expiration
but if you notice either way
the volatility numbers out here are a
lot less
than the volatility numbers that are in
the near term and some
traders when they're looking at just
these volatility differences
they might look for uh you know maybe
implied volatility at least 10 percent
higher
in these near near-term options than the
options that they're buying farther away
and some traders might actually look for
that near-term volatility
to be like double what these options are
farther away
uh either way i'll tell you what let's
try this let's look at options expiring
in maybe two days and we'll compare that
to a 16 day series right here
and also i'm going to show you how
somebody could estimate what could
happen to this calendar
if that volatility if volatility on both
of these
actually drops to more normal levels of
volatility which is probably going to be
around
90-ish percent somewhere in that
ballpark
okay but for now we got to cue up a
calendar spread
all right so let's do that i'm going to
go to these four day contracts
and when the traders queueing up the
calendar here's a big question mark
you know where should they select their
strikes who knows
right after an earnings announcement the
stock could go anywhere it could go up a
lot it could go down a lot it could go
straight
sideways it could go up a little it
could go down a little so about five
different directions based on that right
if a trader has no idea where it's going
to go and they're trading for
kind of uh a moderate move not too far
up not too far down
some traders will just put these right
at the money so in other words if the
market's at 260
they might just focus on a 260 uh set of
options
if a trader is looking for a bit of an
up move
boom or a bit of a down move boom down
here like this
they might look at the options on their
short strike
being a delta of maybe around 30
okay on the short strike and the reason
some traders look at it that way
is because a 30 delta is out of the
money aways which means the stock's
probably going to have to move to get to
that
so that might match kind of a forecast
in terms of directional assumption
either up or down
but also there's a a chance those
options that
the traders selling expire worthless but
there's also a reasonable chance the
market could get down
close to or up close to those strike
prices so something that's out of the
money but not so far away that the
market could never get there because
remember on a calendar um you know
ultimately the best outcome is if the
market goes to that strike
you know the short strike that's getting
selected okay now that being said let's
just
go flat you know because i have no idea
where this is going
none um so let's just start with the
idea that it just stays
within a range kind of close-ish
to where the stock currently is okay and
if that were the assumption
let's go with these 260 options and uh
i'll choose the calls either calls or
puts could be reasonable with these
right at the monies
uh if a trader is looking for a down
move they might go with the puts
uh if a trader is looking for an up move
they might go with the calls
and that's purely based on liquidity
just out of the money options
tend to have smaller spreads between the
bid and the ask okay but i'm gonna go
ahead and click the bid
on this 260 call and then
let's go out 16 days and i'll uh
hold my control key down on the keyboard
and i'll click the ask
on these 260 calls that are expiring uh
farther away you know a couple of weeks
out so basically the way this uh
you know shakes out is sell the four day
and buy the 18 day
now the net difference in the price
between the value of those two options
since they're both identical strikes
being in the money doesn't matter right
being
just right to buy the stock at 260
obligation to sell the stock at 260.
basically
intrinsic value doesn't matter what
matters here
is the extrinsic value difference and
that's what you're looking at here
on this debit that is the extrinsic
value difference
between these two options okay
now what i'm gonna do because we don't
know anything about this
right how do you formulate whether or
not this is even reasonable
well one thing a trader could do from
here is right click
on that trade and analyze it take it to
the analyze page it looks like i've
already analyzed
uh one of these maybe a slightly
different set of expirations there
let me go with this guy right here
okay so this is the calendar spread that
we just simulated
and okay right there
when you look at this this is going to
show us a risk profile
of the outcomes of this trade if you
just sucked all the time value out of it
not including changes in volatility but
just if you just took the time value
out of all the options that are expiring
in the near term right or i should just
say
of the option expiring in the near term
so if
the time value were gone on this option
expiring uh this week basically in two
days
okay um this theoretically is showing us
what the outcome would be not including
any volatility changes
in the option that we own i know that
that's kind of weird to think about
but not including volatility changes and
with the time value gone
on the near term option this risk
profile shows us kind of outcomes and
here's some that's sort of interesting
if you take your pointer i think i've
showed you this before
but some traders will do this just to
kind of judge the price of a calendar
they'll take their pointer and stick it
right at the profit peak and
remember the profit peak that's the best
outcome for the calendar
it's going to be the strike prices that
we select here but if we stick that
pointer right on that profit peak and
then look in this lower left hand corner
right it's going to tell us
theoretically and this is a big time
theoretically right because volatility
can change
uh and it's going to change plan on it
right um but this will show us
what theoretically this calendar would
be worth without a volatility change
and purely the reason some traders look
at this is just a gauge pricing
so in other words if we just took the
time value out of that near term option
and that's it
what potentially type of reward risk is
being looked at here so pointer on that
profit peak
that says two thousand two hundred
basically in that lower left hand corner
right i'll just round it to two thousand
two hundred that's profit
what's the price of this calendar six
hundred
eighty three dollars so now that again
this is not
factoring in the time decay situation or
excuse me the
volatility change situation but this is
telling us if the market for one reason
or another
we're right at that profit peak in two
days
uh basically at expiration this trade
could profit about 2
000 divided by you know 683
invested and so that's almost a three to
one return
some traders who are looking at these
calendars in order to judge
pricing they'll set it like a minimum
benchmark uh for that return on
investment not including
all changes and you'll see traders go
anywhere from like
one per or uh 100 return
to maybe 200 return uh depending upon
the
individual either way this is uh nearly
a 300 percent
return okay now again i can't
stress this point enough the likelihood
of that happening
is super duper duper small and this is a
probability based options class
the likelihood of that happening is
super duper small okay
but if that worked out perfectly that is
a possibility
now if a trader wants to take this a
step further though
um and by the way before i do this let
me go ahead and set my slices to the
break-even point on 9-5
that would be after the expiration this
is going to show
us a probability number it says 98
chance of some sort of profit
you know a penny at least 98 percent
chance
does that sound good i mean think about
this
this says a 98 chance of
profit and up to a
through you know 292 percent return
that's possible
you know i'm i don't gamble right i'm
not a gambler but you know i imagine if
you know a poker player looked at that
they'd say yeah that's
that's a nice hand but here's the thing
that's not
the whole story okay but this is a way
to at least get into the ballpark of
determining whether or not it's a
reasonable thing to do
and when you compare different examples
you'll see
different outcomes here in terms of the
probabilities
and the uh the payouts there and
that way you can learn better i'd say go
through a few example of these
examples of these to kind of gauge these
numbers to learn better about what
a reasonable prospect might be uh for
in this class uh in the past we've done
minimum
of like uh uh two to one or two hundred
percent return
and uh you know ninety percent
probabilities
so this one kind of is is better than
ones we've done even in the past in
terms of probabilities and reward risk
okay so now i want to take this one step
further and as i do this i'm going to
give a big old shout out to thinkorswim
because what think or swim is going to
help us to do is maybe estimate what
could happen to this calendar
if we include implied volatility changes
okay now how do you include volatility
changes
one quick way to estimate volatility
changes by the way is i'm going to jump
over to the trade screen
and on the trade screen i'm just going
to look at volatility
a few months out you know more
normalized volatility and it's still
high out here
let's just say 90 percent you know
december
to uh you know out out there into leaps
is even lower than that
but let's say after this earnings
announcement maybe the trader expects
all these near-term options to go to
maybe around 90 percent of all so these
options that are going to be less
impacted by that earnings announcement
theoretically
now if that were to happen that means
volatility in these near-term options
is going to drop uh theoretically about
a
180 percent something like that
and these options right here would be
dropping you know about 50 percent
if if not more um we'll call these 60
percent drop
in these 180 drop even though i'm not
directly on the money there but now
remember that
um and this is just an estimate 60
percent down
we'll call this 180 down what a trader
could do
at this point is kind of plug in some of
those assumptions onto the analyze page
and i've never seen another tool that
would allow you to do this
but down here on the analyze tab at the
very bottom part
you see where the gear icon is down here
uh
next to more parameters i'm going to
click that gear
and if we click now more parameters
you've actually got this idea here where
you can change
volatility in the different expirations
and kind of make a guess so to speak to
see how this trade might be impacted
if these volatility assumptions play out
now on that near term contract i'm going
to go to this volatility point here
and and i'm going to put a big old
negative in there so negative
and we'll call that what was it 180 down
something like that now volatility only
came out of that near term option
you you can see that not even including
time
going by that this trade boom
automatically
almost lifts up to maximum gain that
blue line
just shot right up to where it almost
matches the black
okay now that's the that's the what's
coming out of the near term option
okay but there's going to be something
coming out of the long term option as
well
let's say on the long term option that
volatility drops
60 percent something like that boom so
that volatility on the long term option
drops
now this is not counting
time decay when you're looking at the
blue line
okay but if the volatility just shifted
like that would say that that type of
volatility
shift could you know benefit this thing
to the tune
of about four hundred dollars uh and i'm
just putting my pointer on that profit
peak if the market's at 260 that shift
could benefit to the tune of about four
hundred 400 now that's gonna be a bit
more realistic
right but 400 bucks if that were to
happen just from the volatility shift
um that would send that trade not quite
to 100
return but you know getting close
to 100 return and if we this was held to
expiration
and so all the time value were taken out
this if you put your pointer on that
profit peak
shows you know a thousand dollars just
over a thousand bucks
which makes this more like a hundred you
know not quite but like a hundred and
thirty percent
return something like this so those are
some things that a trader could
estimate with right which would adjust
this based on those volatility sku
changes if volatility kind of flattened
out that's what a trader
might be looking at tell you what just
for educational purposes here
let's go ahead and put one of these in
now this is going to have risk
right there's going to be a you know
we're making a lot of assumptions here
on this outcome ultimately we don't know
for sure
but this still has some profitability
embedded in there
um but with that in mind knowing that
there's so much uncertainty we're going
to keep this position small
we'll just do maybe two of these we'll
do two of these that way
if everything completely blows up you
can see that the
cost of the trade or the total
investment here is 1366
now compared to you know buying the
stock or trading stock over earnings
or even some sort of a diagonal spread
or even a lot of vertical spreads
that's some very much defined risk
right um and uh if we just keep our
position
small that we can have even if it's a
loser
you know not have this completely ruin
our account but if it's a winner
get some nice progress in terms of uh
the reward on investment
now one of the things that's bound to
come up is well how do i handle this on
the exits
a lot of traders just quickly after the
earnings announcement
if the stock is anywhere close to that
middle strike
and if volatility makes an adjustment
and they find themselves profitable
you know within maybe half a day you
know you'll see a lot of traders just
start taking profits on this
right selling at least half some traders
will just sell out of all of it
to take profits if it's profitable you
know fairly quickly after that earnings
announcement
one time traders might decide to let
this work
longer is if a they've already locked in
a bunch of profits because
um you know maybe they've got two and
they sold one that was very profitable
so with the rest maybe they'll let that
continue to work
or if the market's very far away and
they've got something that's already
basically maximum loss
right then some traders will maybe hold
this thing looking for a move
if we go down a lot a move back toward
the middle to see if they could get some
recovery out of it
or if the market goes up a lot maybe
move back down to get some recovery out
of it so think about those exits
and practicing the exits through
examples is a great way to learn here
uh and some traders again they'll look
to scale out of this
um especially if they've got multiple
contracts as we get closer to
uh the expiration date sometimes you'll
even see traders roll
a roll means that they buy back the near
term option
at 260 and then sell maybe the next week
out
right because the four day contract
expires in two days a trader could
buy back that four day option and then
sell the uh
nine day or excuse me the two day option
expiring september 4th
and then sell the september 11th which
has nine days out
and potentially bring in some additional
income but
usually in listen up here usually
traders are going to do that
if they feel like the stock is going to
stay around
260. so if they feel the stock is going
to be in the ballpark of 260
a roll could be possible okay but
oftentimes since this is
uh quite binary looking for that
volatility to adjust
you'll see traders just look to get out
of this so one roll exit the trade
but the role possibility is potentially
there
okay um now that's one set of strikes
that a trader could deal with
you know and just to give you a heads up
i know we went through quite in depth on
that example
but another thing that a trader might do
is actually
take a look at different expiration
combinations and kind of estimate
valuation differences right so uh in
this trade really it's got um
a week uh more than what am i saying
a week it's got 16 days before these
long options expire
potentially there's a role in there but
a trader could think for
you know for uh maybe a roll opportunity
which means they could potentially roll
it and then get out so maybe for
two sell opportunities
they're paying 683 so for both of those
maybe about three dollars and 40 cents a
piece right
now some traders might do this they
might say well what would it look like
if i sold the uh nine day contract
so rather than the four day what if we
sold the nine day
and so that's the one that's expiring on
september 11th
boom and take a look at that right so
then
the uh nine day contract to the 18
if you notice the value of this goes
down to a dollar eighty
and so this is interesting um i hope i
know i've shared a lot with you
but we're just looking at this one
example but hopefully we're switching it
up
enough to where you're uh at least
maintaining your interest here
this trade only carries one roll value
opportunity associated with it but
for that it's a dollar eighty debit for
this
now a trader could do this they could
buy the opportunity to have two
roll values or two roll opportunities
but they're going to be paying well now
over seven dollars for that
so one way a trader could approach this
if they're just thinking okay
per the amount of time in that calendar
spread
right i got one roll opportunity if i go
to the 9 to the 16
and that would be uh so september 11th
to september 18th a dollar eight a
dollar 58 for that
or i could have two role opportunities
and i might not ever use that second one
anyway
um you know i'm paying seven dollars and
35 cents for this
so some traders might say okay if you're
just boiling it down to the amount of
time these are not going to act exactly
the same way
but the trader might decide you know
what i'm going to go with these
do the 11s to the 18s and keep my risk
per contract even a lot lower and in
fact in this particular example that's
what we're going to do
we're going to scale up the position
size a little bit here
let's say we do maybe five of those
at this point but just be aware
these are still going to have risk tell
you what let's
take that up to six and keep this at
about a thousand
hit confirm and send and uh actually
those just bumped up to two bucks so
this is gonna be right around it's gonna
be pretty close about
1200 uh maybe less i know the price is
moving around a little bit there
but i just made a last minute adjustment
here rather than going the 2 to the 16
thinking we'll per the amount of time in
there
but maybe it's a better deal to just do
the 9 to the 16
right and have a lot less at least per
contract risk up front
the 9 to the 16 is not going to move
exactly the same way
but nevertheless that um you know
it could be an interesting example and
some traders if they're learning
they might decide to do one of each and
i'll tell you what let's do that i just
call it an audible here
i'm going to do 3 of the 9 to the 16 and
we'll do one of the 2 to the 16.
and we'll hit confirm and send on that
and that way
this will just be for academic purposes
here but next week when we circle back
around and look at this we can kind of
look at the outcome
of uh these two different examples and
see what's going on there
okay but let's go ahead and control key
down on the keyboard
like that one right there and boy that
one's going up in value it's getting
more and more expensive
uh but i'm still gonna hit confirm and
send and send that one off
okay now if you want to practice this
right this idea
and again this is like one of those
unique golf clubs that a trader might be
pulling out of their golf bag
you might want to take a look at
different examples that have these
volatility skus in the near term right
these inflated near-term
uh options now just to give you a heads
up we looked at an earnings
example today and earnings aren't going
to happen until after
tomorrow night's close but there are
other stocks that will have earnings for
example if we go over to the market
watch page
and click the calendar you can see what
stocks will have earnings after the
market closes tonight
to practice this so for example five
that's a fairly liquid stock that's
after the market closes
and depending upon um how the trader
looks at liquidity
amba you know that's after the market
closes as well
and then tomorrow we've got docu
and we've got avgo and uh
that those are kind of some of the big
ones that are going to be happening
throughout the
the rest of the week but there's still a
couple of earnings situations
now in addition to that though some
traders might even consider doing this
when there's not
earnings happening and these are not
recommendations i'm just trying to show
you some different
uh situations here uh if you notice on
zoom
right these near term options 83
volatility although it drops off pretty
quick into the next week out right but
83 in the near term so that means those
options in the near term are quite
inflated
i'm just trying to think of other stocks
that have been fairly volatile lately
how about roku
roku uh yeah this actually has that as
well
volat positive volatility here from the
front week to
all the way out uh for about a month
here
so anyhow some different examples of
stocks that have just been volatile in
the near term
that can they can actually provide
opportunities where a trader doesn't
even have to
focus so much on that event risk it's
more like just selling those options
that are a little bit uh higher priced
in the near term
okay but we'll circle back around and
we'll take a look at that docusign
uh next week we'll take a look at the
outcome there and hopefully we'll learn
from that outcome speaking of outcomes
uh quickly let me go to our high
probability section
if you recall last week we did an
example where we looked at
what they call a risk reversal on
microsoft
microsoft has been pretty friendly here
microsoft has had a pretty big move
higher
msft uh msft
so that's been kind of nice for this
given trade
since last week the stocks gone up what
about 10 points or so maybe more than
that
but uh if you notice our combination of
verticals here
is uh is doing all right we got this
short put spread
sold for a dollar fifty right now it's
worth a buck and we've got this long
call vertical spread here that was
bought for 89
cents and right now it's worth a dollar
77.
so that's an interesting example of how
uh on these risk reversals you know
these still have a lot of time before
expiration
but they're already starting to realize
a pretty big chunk of profitability
we'll let those continue to work for
another week and on this
spx i mentioned iron condors just to
give you a heads up we've got some iron
condors
that have been you know pretty well
smacked around and just to give you a
heads up here's an example of one right
here
it expires in 28 days
um and also there's some individual
verticals in there as well but i'll tell
you what let's take a look at
that particular iron condor in just one
second i'm going to talk to you
for one second i'm going to talk to you
about different types of adjustments
that could get made on that
and i've done lots of sessions talking
about adjustments so if this feels like
i'm going
fast just be aware you can take a look
at some of the previous classes
but i did mention that i wanted to uh
circle back around
and uh take a look at an iron condor
adjustment example here
and uh you know i think oops that's not
what i meant uh
cancel that
and for some reason that doesn't want to
go back into big mode
uh anyhow iron condors a lot of traders
i would kind of break this down into the
fact that an iron condor is nothing more
than just
two individual vertical spreads i'm
actually going to go to the analyze page
here
on spx
and take a look at that existing
position
uh i'm going to not look at all those
series
look at what expires what on september
25th
no september 30th is when that expires
so analyze
now september 30th quarterly's okay
so this is that iron condor that was on
that previous page
notice this the market is right here and
the iron condor is down here
this iron condor is getting smashed
right it's just losing money
uh and that's because the market's just
gone too far against it
one thing about it though is that this
iron condor if we look at the blue line
relative to the black it's already
closer to max loss
than it is to max gain so really if
you're thinking about
reward risk from now it there's not a
strong argument especially since there's
still 28 days
not a strong argument necessarily to buy
this back
uh unless the traders absolutely
convinced that the mark is just going to
go
continue to go higher here right and i
know that that's kind of hard to see
what i'm looking at there
but i'm just looking at the difference
between the blue and uh
the black down there and what it's doing
is it's giving us an
estimation of how much remaining risk
there is in that existing iron condor
the blue is a lot closer to the black
now than it is going back to uh
maximum gain so it's already close er to
max loss
now one way a trader could adjust
something like that
if they wanted to reduce the risk but
still
give this trade an opportunity where the
market can work
maybe the market could come back down is
they could consider
managing the winner now remember iron
condors are nothing more than just
vertical spreads there's a short put
vertical and a short call vertical in
there
right here from the analyze page i could
actually price out the value of these
two different verticals
and so for example on this short put
vertical right here
if i right click on that and choose
create a closing order
we could buy back this put vertical for
60 cents so in other words it's really
easy to think about the loser here
but this is a winner this is a 25 wide
spread here as well that we could buy
back for 60 cents
you know a lot of traders when they're
managing these iron condors
they look to manage the winners
especially if there's still a bunch of
time remaining
because by the time expiration rolls
around who knows maybe the market comes
back down again
since this trade you know on the calls
is close to maximum loss anyway
now as a next step if a trader buys back
a winner
what they might decide to do is in that
same
expiration they might decide to
reallocate or resell that put spread
and so i've got to find the expiration
there which in this case we were talking
about september 30th
which has 28 days uh a trader at this
point
might decide to do something like this
and this is an adjustment
i need to take a look at more strikes
but the trader could
right if they're buying back that call
that set of put spreads it's way out of
the money you can't even see them on the
screen right now
and i've got that trade kind of uh
simulated at the bottom of the page
uh remember that was one that was 25
dollars wide
they could resell another put spread at
a higher set of strikes
up to the same width of that existing
spread
and and just continue on with the iron
condor
and in all likelihood not actually have
to pay any additional money
outside of transaction costs so in other
words potentially do this without any
additional margin
but just bring in new credits to reduce
their risk let me show you what that
would look like i'm going to go up to
this 30 delta put
with the control key down on the
keyboard i'm going to click the bid on
that 30 delta put which is the 2450
and we'll just turn this into a 20 wide
spread
so control key is still down i'm going
to click the ask on the 3440
and with those two things together
um well no
i was hoping it would combine that and
put it into the same
create the same spread and maybe it's
because did i already buy that back
um i thought i just created an order to
do that let me do try this again
let me just simulate it analyze closing
trade rather than placing it that's
probably what
it was i created an order and then i was
simulating one so my bad
now control key down on the keyboard i'm
going to click the uh
try this again we'll do the 3450 so sell
that
and then i think i accidentally did the
40 i meant to do the 3430.
we'll go ahead and buy that okay so now
okay so here we go
buy back that put spread super far out
of the money down here at the 3000
strike
and resell another put spread at a
higher strike at 320
and here's what it would do to the iron
condor right it actually
pushes everything up right so here's our
previous iron condor
if we did that it would actually narrow
our wind space a lot
but also would bring in 310 bucks which
would actually reduce the risk on the
remaining
bit of this and still give us a chance
if the market came back down
uh still have a chance to win on
everything okay that's really going to
narrow the wind space
but that's one type of adjustment that
could be made and this reduces risk
rather than increases it all right i
just looked at the clock so i've got to
wrap this up
but i'm going to go ahead and place that
adjustment and again all this
is try try not to be too confusing here
it's just managing the winning part of
the iron condor and if there's still
time remaining
if the trader would like to reduce the
risk on the side that's getting run over
but still leave the side that's getting
run over on there because it could come
back and become a winner
uh they could make an adjustment like
this buy back that winner and
potentially reallocate it
i'm gonna go ahead and hit confirm and
send and send that
uh off okay but at least that helps us
avoid
a situation where even if we did nothing
with this all the way to expiration
it helps us avoid taking maximum loss
but it still gives us a chance to win
and uh actually it's got a chance to win
even more profitably because
uh now there's more credits in addition
to the previous credit from the iron
we're just generating more credits and
adding that sort of into the po
hopper here the downside is it just
narrows that one space
okay that's not going to leave us with a
high probability remainder there
but it lowers the risk all right now um
here's what we've done today and the
time just
super duper flies by let me maximize
that but we've talked about calendars
and the volatility sku uh we've talked
about um
a way to adjust those iron condors and
also without spending a bunch of time we
just did a quick
follow-up on that example we did last
week on microsoft
and that seems to be working out pretty
well but there's still quite a bit of
meat left on that bone so we'll let that
thing continue
to work all right now hopefully you're
learning some things
this probability based class we like to
go into
some of the depths right we like to
explore the nuances of
basically what kind of clubs or what
types of strategies
are in the golf bag there so to speak
for trading options
and i would say as you're uh kind of
letting this sink in
try practicing some of the things that
we talked about today
all right um thanks for time everybody
remember the chats uh
or the uh commentary box is now open so
when this session gets archived if you
want to make comments or
uh you know check in that way in the
comment box at the bottom of the session
feel free to do that all right thanks
everybody
have a terrific day
and i appreciate barb as well i know
she's been super helpful
in terms of uh answering questions along
the way
okay guys have a great day bye now
you
