well good morning everyone
good morning this is barb armstrong
coming to you live
from what is shaping up to be another
beautiful day here in salt lake city
i am filling in for cameron may this
morning and we are
talking about how to select an
option strategy so i want to applaud the
dozens and dozens of you that are here
joining me as the market is about to
open
and i'd also like to thank john mcnichol
for joining us
in the chat if you have questions
hopefully between john and i
we have answers so stick around lots of
great stuff coming your way
all right so i've got to say it's great
to see
so many familiar faces in the chat
um thank you all for starting your
morning with us uh
kanye and neal and sandeep and stefan
and charles and dom and
kathy and tony and yoko and michelle
hello michelle and many many others so
thank you all for joining us today let's
get right through
our important disclosures so we can get
out to the thinkorswim platform where
all the magic happens and just before we
go there i want to point out that
you know the bluebird of happiness is
lurking over my head in the form of a
twitter icon
all of the coaches are on twitter lots
of great content being posted each and
every day
you won't want to miss a thing i
sometimes get the comment hey
i don't want to be on one more social
media platform i don't have twitter
all i can tell you is john and i didn't
necessarily embrace twitter
in the beginning either but we got
dragged over there and it
if you can't set it up one of your kids
can um or your neighbor's kids as i
jokingly say
um you're missing out if you're not
there so my twitter handle at b
armstrong underscore tda and john's at
j mcnichol underscore tda
okay so let's know right off the get-go
that options are not suitable for all
investors there are special risks in hop
to options trading that may expose
investors to potentially rapid and
substantial losses
also know that you have to apply for
option trading privileges with td
ameritrade
so what is available in your paper money
account isn't necessarily going to be
the same
option capabilities in your live account
also in order to demonstrate the
functionality of the platform we need to
use actual symbols and we will today
we do in each and every class however
that isn't to be construed on the part
of either myself
or td ameritrade only you can know what
is suitable for you and your account so
any decision that you make in your live
account
that is on you my friends okay
so know of course that all investing
involves risk
including the risk of loss so what are
we going to talk about today i mean this
looks so deceptively
simple but we're going to review some of
the questions that you might want to ask
yourself
before picking an options strategy
we're going to then pick a strategy and
we're going to compare and contrast a
couple of strategies
the way that an investor or a trader
often would
before placing a trade so that's
the plan let me just grab my headset
my sound tends to carry very well in
this house but
what the heck maybe i should just dawn
this thing okay
now um hopefully that will make our
sound even clearer
okay so when we come over to think or
swim what i'm going to do
is make this a little bit longer so
which option strategy might we choose
well one of the first questions we want
to
ask ourselves is what is the trend
of the market in general and where might
we go for that
so feel free to type that into the chat
and i know this is really basic and that
a lot of you have a lot of experience
um but you know play along with me
anyway flex those fingers let's get
ready
we're going to ask you to do some typing
today so you know and i know that
there's a bit of
a delay but where we typically would
start
is looking at not apple music
the s p 500 so when we come and we look
at the spx this is a nine month daily
um you know we can see that you know we
had a great fall back in march and then
the market
has not only recovered but is
yesterday hit an all-time high so
exactly so mary and harold and maybe um
yes so up trending so this is the s p
500 a lot of people also like to look at
the nasdaq
so tech heavy index no financials
103 um stocks listed representing a
hundred
companies so you know we have a couple
of companies on both the s p
500 and the nasdaq that have two
listings
companies like google and and fox
so we can see that we have a pretty
significant
uptrend here and that you know if we
look at this on a five-year basis it's
obviously representative
of a longer term uptrend rate both the
nasdaq and the s p
500 so and both breaking out two
new highs this week now when we take a
look
at coming back to daily
if i come back to a six month chart we
can see the s
p 500 today it's looking like this might
be
setting up what in technical terms might
be called a bull flag
so then this is a brand new candle it's
you know only
five minutes old so who knows what it
will look like by the end
of the day um you know but
this might be considered to be a bearish
configuration on a short term so we
could be setting up
uh a bull flag
you know with a temporary pullback
because you know we have had
a day of pause here and a slight
pullback here
but since august 20th
if we take our drawing tool
and we come out here you know the
market's up almost
seven percent in 10 trading days
and so to see a one-day pullback does
that mean a trend reversal
not necessary not necessarily
so harold you're getting a little ahead
of things so
harold has mentioned the vix before we
go to volatility
i think a second question that one might
ask
is which sectors
are leading the trend
because if you're saying okay this is a
market that's moving
bullishly um which sectors
are leading the charge and i had posted
something on twitter
last week where we looked at the
difference between the tech sector which
was leading the charge
and as of the middle of august was up or
in the neighborhood of 25
as compared and contrasted to the
energy sector which was down 35 percent
in the last year so it does matter which
horse you're riding from a sector
perspective
and if you're new to all of this so some
people will
create a a chart on thinkorswim that
just shows them
all of the indexes but a really easy way
to look at this is to come over
to the td ameritrade.com platform
and come to research and ideas and down
to sectors and industries
and when we do that and we come to the
market monitor tab
this will tell us how things are going
today
and right now it's a little gray because
we aren't very far
into the day but if we change the time
frame and say
show me the last 30 days
well it's consumer discretionary up 13
in the last 30 days and tech up almost
13
followed by communications and
industrials and then again
tech consumer discretionary leading the
charge over the last three months
communications materials
and so if we see a bit of a pullback
happening some might start to say okay
either if i see this continuing maybe i
want to look at a tech stock
um and we can look at a couple of tech
stocks or
maybe i want to look at something in
another
sector if i have a sense that this could
be changing
and again we haven't got anything um
showing up yet for today but you know as
many will say
one day does not a trend make now on
this chart we can see
financial staples and real estate and
utilities all of a sudden are leading
the charge and what does that
tell us go ahead and type that in
if you have an opinion on that so you
know when we
look at this it might be saying and we
saw
these um leading the charge yesterday as
well
that there might be some people taking
some of their profits from the
communique
or the consumer discretionary and the
tax sector
is starting to move them into more
conservative perhaps dividend-paying
stocks like those offered in
real estate um with reits uh
financials and um
consumers consumer staples and utilities
stocks that are
a little less volatile okay
so that's our second was our second
question you know which sectors are
leading the trend
and on the sector front
you know um
might we see some rotation coming
so that's another question one might ask
oops
sorry i just want to bring these down a
little bit
okay so third question and harold got
this
ahead of the time was let's take a look
at volatility
and why would we care about volatility
um
which whoops volatility
by looking at the vix and one of the
reasons
one might consider looking at volatility
and i'm going to bring this out to
a one year time frame or even a two year
time frame
because we can see that volatility when
you know as compared to where it was
back in
march at 85 we hadn't seen that
in that kind of volatility in a decade
but you know it's come back down and
it's now in the mid-20s
but for a long long time you know
we were seeing you know volatility at
you know 12 10 12 13.
um and we saw you know a long long
period of time of that so
in comparison to you know the last say
five years volatility is at
still the high end of that range so
why do we care about that well because
sellers love volatility
so when we have high volatility we might
want to look at a selling strategy
when we have lower volatility we might
want to look at a buying strategy
because
options tend to be more expensive when
the market is high
so if we're doing a selling strategy
you know where we are selling something
and we want it to expire worthless
we'd rather sell when volatility is high
and then hope that
you know with the idea that volatility
will come down or
time will come and chip away at the
value of our option and it will expire
worthless
when volatility is higher it's a little
more expensive to be out there shopping
or buying right
can i share the script of the moving
average with the signal
aero script that i have on my screen
actually i it's not a script miro
um so let's come back to another stock
so let me just bring up coke here which
is
up on the week
so if you come to studies
and then come to edit studies
and then if we look at my simple moving
average so this one here
with breakout signals oh this one
actually is a script but you know what
you can easily just come to any like
here's one that's
just click on this icon and then where
it says show breakout signals
click yes and it'll show up
yep so that's how you manage that
okay okay
so um so there's the vix so we might
want to look at a selling strategy
the next question we want to might we
might want to ask ourselves is what
about risk
in other words how much risk
are we willing to take you know is an
investor willing to take
so for example when we look at coke and
this is a stock that is considered a
consumer staple
so if you've been looking at trends over
the last several months
you might be very heavily weighted in
tech stocks and consumer discretionary
stocks
like netflix and lows and home depot
and crocs and you know who knows what
else and you might say you know i really
don't have much in my portfolio
in the this realm so
one could say well you know i wouldn't
mind owning
um coca-cola um if it's good enough for
warren buffett
you know it it might work for me and if
we come up to the trade tab
we can see that it pays a yield of 3.16
percent
so it pays a dividend also but
um you might not
be willing to buy the stock
you know so if you're just starting out
and you have a five thousand dollar
account if you sell a put
at 50 that would chew up your whole
account
if the stock were put to you and you
always have to be prepared
you know for you know what might happen
in your account so then you also have to
look at
your goal as an investor
are you looking to generate income are
you looking for growth
would you be willing
to buy the stock
and why do i ask that because if we're
selling a put
it means that the stock could be put to
us there
even if we're just selling the put
because we want to generate the income
what if there's a general pullback in
the entire
market it could be put to us so we have
to understand that and then
you've got to look at your account size
and then the last thing is
you know what is already happening in
your account
so you might look at you know these
strategies and say
wow this sounds great but i already have
a large account and i have short puts on
a dozen stocks
and i'm a little nervous because i use
margin
if these were all put to me i could be
in trouble it's more
exposure than
than you know i'm i'm willing to take so
if we come here and we look at coca-cola
and all i have up here is volume and
an average true range um on this one
often investors you know they might
choose
to have the macd up so if we come to
load
study set this is one i've called my
barbs basic study set with you know
three green arrows
and so this would have the map d so why
might i choose to have the map d
well because i want to see if there's a
divergence and on coke there isn't which
means
is the stock going up but
the indicators on the macd if they're
going down
um that would create something called a
divergence now if any of this
is new to you um you know these
technical things that i'm discussing you
might want to check out cameron may's
class on monday called getting started
with stock investing
also if you're newer to this
and some of these strategies that we
talk about
are strategies you haven't traded an
option strategy you haven't traded you
might want to check out getting started
with options which is friday mornings
at the same time at 11 o'clock eastern
and we just pick one strategy a week
and then we tie it all up with a bow at
the end of about 11 weeks and then we
start again with the basics on what to
put what's a call
you know his time our friend or enemy
and and all of that
so if we look at this if you're saying
you know what i have a large account
how did she know i was you know i have a
lot in technology i have a lot in the
consumer discretionary sector
very little in
staples so this could be interesting you
know
coke has been trading in this range
since the middle of april
and yesterday it broke to the upside
we have a dividend coming up soon um
but we could come out to the trade tab
and if we're saying okay we're looking
at
a sector where we might see some
rotation coming
we're going to look for a selling
strategy
and we can look at so if we're looking
at a
selling strategy we might look at
selling a put and what kind of time
frame might we look at if we're selling
a put
well we might come out and say you know
what um
i might just want to do something in the
short term because i'm a little
concerned about the market so you might
look at october which is 43 days out
some people might want to go out a
little further
and say you know it's trading at almost
52
right now and so you could say well you
know what if i get paid
a dollar a dollar five to a dollar ten
to buy a stock that i
really wouldn't mind buying anyway i'm
okay with that
if you're willing to go out a little
further and you know we're always
looking do we have
volume and do we have open interest so
open interest is how many contracts were
on the books
when the market opened today
excuse me let's get rid of this
oh you believe it i now have to close
this
to get rid of that okay so how many
contracts were on the books when the
market opened today
at the 50 strike well for
october which is 43 days out there were
already 8
000 contracts on the books and we have a
few that have been
traded today 12 000 so you know
this this we've been open less than half
an hour we've already had almost 3 000
shares traded and this is something that
we look at for
everything that we do
and you know somebody had just typed
into the chat i'd like an expiration
before
november for sure so let's just go with
this
so you know but what is the caveat
well the caveat is that if we do this
that you know we have to be
willing and able to buy the shares and
if
this gets put to us and we don't have
enough in the account
then we have to do one of two things we
have to either liquidate the position
we have to deposit money to the account
or if we're saying
you know what i'd be okay i'd actually
wouldn't mind
owning coca-cola then you might be
looking at this as
hey here's a way for me to buy a stock
that i
i was interested in buying anyway and
they're paying me to do so
so let's go ahead and put this in
um and so we want to sell
now if typically your you would take in
your account about a ten thousand dollar
position
you might want to do two contracts
now if you're doing this and you're
saying i would be okay if it were put to
me
but i'd really i'm more interested in
generating this for
income you might want to put an exit in
and say hey you know what when i've got
eighty percent of my max gain i'd like
to buy this back
and so you know there's different
schools of thought so you could come up
here
first triggers scq right click
create an opposite order and say hey
when this is worth about 20 cents
i'd like to take my risk off the table
and we'll make that good till cancelled
confirm and send
and if you have your monitor tab
organized by type of trade
you might want to come down here and put
this in your
short put bucket
is how i think of it so we're going to
sell
two puts on coke now if you're looking
at that and saying well that's
great for somebody who has an account
size that could accommodate
a 5 000 position or a 10 000 position
you know what i'd like to get in for a
shorter period of time
is there another selling strategy well
how about we look at
coming out maybe 22 to
30 days so somewhere in that 20 to 50
day range
we could do something called a short put
vertical
so because what's the risk on the short
put that we just sold
well the risk is that it could be
assigned to us and technically it could
go
all the way to zero now is coca-cola
likely to go to zero by the middle of
october
it is not you know in fact there's
only a seven percent chance that by
october 7th if we look at delta
that it would go down to 45.50 but
technically that's
that's the risk so i have somebody who's
asked
how you create these account buckets and
what i'm going to do
is post that on twitter and so you can
come to
my twitter and you'll see that i'll post
it after this class
the other thing there's a short tutorial
on how to create
um those buckets and i will
add that at the end of this class so
that you can just click on it it's about
five minutes long
okay so if we were interested we could
come here and say
could we come to october 2nd
and look again at that 50 strike
we have a 29 chance that it could be
in the money on october 2nd which means
we've got over a 70
chance that this would expire worthless
could we come and sell a vertical
and get enough premium for it to be
worth our while
so if we come here we say okay
if we did this and we got 36 cents
is that a little skinny so if we look at
36 how much can we lose
so if you haven't you know you're just
starting out you're saying
i don't want to risk more than 200 on a
on a trade we'd be risking
the difference between the strikes two
dollars
less 38 cents we'd be risking a dollar
sixty
a dollar sixty one so let me come up
here
let's call this 40 divided by 160
so that's a 25 return on our risk
and so if we come up here and we say
well we're getting a 25
return but we'd have to be in this for
30 days
so some investors might say you know
what
it's just not enough bang for my buck i
want to if i'm going out
29 days i want to be able to get at
least a
29 return on my risk so
then you have two choices you could say
well i'd be willing to go it's trading
at fifty two dollars
i'd be willing to go up to fifty dollars
and fifty cents
now we don't have nearly as many
contracts
and this is a weekly but when we look at
this there's only five
cents um you know because the market
maker
is expecting
i think more volume and and sees this as
lower risk so if we look at
48.50 and 50 50 we now get
50 cents so if we look at this and we
say okay
50 divided by a dollar 50
that would be a 33 return on our
risk we'd be in this for you know 29
days
and so if you're okay with that you can
go ahead now
am i saying that you would make one
percent a day
no you're hoping to be in this for 29
days
and come out of it with it expiring
worthless
or does that mean you're going to wait
until it expires worthless
no so some might say as part of their
routine
when they buy or sorry sell us a short
put vertical they're going to put an
exit in at 80 percent or at 90 percent
and you know if if coke goes way up in
the next three days and at the end of
the week
you know where by monday you've got 70
percent of your max gain
in five days you might say you know what
that's good enough for me
i know i put an accident at 90 but i'm
going to take my 70 percent
take my risk off the table and i'm done
so we're going to come here to single
order first trigger sequence right click
anywhere on these two lines create an
opposite order and if we use the example
of getting out when we've got about
ninety percent of our profit when this
is worth six
cents we would like to buy it back
so confirm and send
now we've got a transaction cost here
of a dollar 30 because even though we're
doing one contract
two legs what's our risk
let me just bring this up what are we
risking
we are risking a hundred and forty three
dollars
so that's our max risk and what's the
most we can make
57. now if you have a larger account you
might say okay i'm willing to take
you know a thousand dollars worth of
risk you know or i'm willing to take
fifteen hundred dollars worth of risk
so um so there's a question why not keep
rolling it out typically with a short
put
vertical people might layer them if the
stock keeps coming
going up they might put one on
you know a week from now that expires
you know october 9th
um you know rather than rolling it
they're
they're layering it so if you're
interested in more on that
you may want to come to trading a
smaller account
on friday afternoons it actually we're
at a new time we're no longer the last
class of the week for the second to last
class
so we are now at 1 30 mountain 3
30 eastern instead of 4 30 or if this
strategy is really
intriguing to you there's a class taught
every wednesday by john mcnichol
short verticals half an hour every week
just on this strategy
so and not just how to place trades but
you know how to manage them so
i had said you know if we were willing
to only risk 200
we could only do one contract and you
know a lot of people will look at a
strategy like this
and then they'll say you know wow um why
would i
take any risk if i'm you know i'm
risking three to get one
well um that's one of those questions
where you know this is how this strategy
works but it's
higher probability you have a seventy
percent chance
that this stock will stay above fifty
dollars and fifty cents
now um ricardo had a nice
suggestion and and he had something with
a target to go
back and check but one of the things you
can do is use an alert
so if we're looking at this and we say
hey if this comes back
you know below today's candle around
that 51
mark i would like to be alerted
and so just so that you're aware of
what's going on so you could come down
here and say
hey if this comes come down to create an
alert
and say hey if this hits at
or below that 50
and 50 cents which is our top strike let
us know because we may consider
closing our trade
so short put vertical
is it being pressured
do i stay or do i go you can put
whatever you want in here this is
and it'll you know you can come down
here it can be notified with a ping
you can be texted you can be emailed
all of the above you can do it however
you like
and if you want to see your alerts on
the chart this is showing up
why is it showing up it's showing up
because we have show alerts if you don't
want them to show on the chart just say
do not show
and it'll go and the other thing what
some people will do is they like to see
their trades on the chart
depending on how active they are but you
might want to say
okay i have a short put
vertical at 50
50 and 48.50
expiring october 2nd
and then we can come up here to that
50 50 point
and say show this on the right and then
when you come in and you look at this
you can see where your strike is and
what's the goal you want this to stay
above
this point on the chart and as long as
it's above there
you know it's like bob's your uncle
you're in good shape okay
so guys we're at a time
our half an hour goes really quickly
so i hope you found this helpful and did
we do what we said we were
to do and with our little simplistic
list we came up with yes
many questions to ask we picked a
strategy and in fact
we picked two strategies and we looked
at when might
one might want to use one and one might
want to use
when one might want to use the other
okay i can say that
so we looked at both a short put and a
short put
vertical so that's a wrap on today
my friends i want to thank john mcnichol
for being so
active in the chat i want to thank each
and every one of you
for your contributions to the chat and
to this community as well if you're
brand new
to td ameritrade and these incredible
webcasts
keep coming back and if it felt a little
bit like you were drinking out of a fire
hose
in the beginning or today like don't
worry about it like it feels like that
for all of us so if you like this
webcast smash the like button
um subscribe to this channel if you
haven't done so
already and please do yourself a favor
and make sure you're following
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missing out if you don't
know that options aren't suitable for
all investors as there are special risks
inherent
options trading know that we looked at
coca-cola as our example today but it
was just an
example not a recommendation anything
you decide to do
in your own account is on you if you
um want to come back if you're with us
live
um just hang in at the end
and i will put in a link to the things i
promised that i would
and i will post them on twitter as well
so guys
take care have an awesome awesome day
and i will look forward to seeing you
in a webcast coming up soon bye for now
everyone
