we are live uh
hello everybody and welcome to the
session
hey my name is mike fallet and if you
are wondering
where's my man cameron cameron may
well he uh he left town so i
i think he was uh heading up to idaho to
visit some family
anyhow he asked me to step in so
that's why i'm here and i'm happy to
take over because i really enjoy
uh options um in fact i'm one of those
weirdos that really enjoys talk about
men talking about managing options
as well so anyhow my name's mike
fellette and i'm happy to be here
uh i look for cameron to return to his
regularly scheduled class to
or not tomorrow but uh next week and by
the way i hope you all have a terrific
labor day weekend coming up and
just remember markets they should be
closed on monday
all right so uh by the way i'm on
twitter my twitter handle is at infolet
underscore tda
and i should have uh somebody out there
with me in the chats and i believe we
got brent
morris by the way an outstanding coach
and you might want to give him a follow
on twitter as well i really like what he
does on twitter
in terms of uh you know just his tweets
they're very
motivational number one and number two
there's some really good
uh insights that come through and i've
seen some great insights
related to managing positions so uh
follow brent moore's
it's gonna be uh b moore's underscore
tda
all right let's go ahead and hit some
disclosures and then we'll hit our
agenda
and we'll check out these markets as we
get open today
all right this class is for educational
purposes uh the following presentation
should not be considered a
recommendation to buy or sell
options as well they're not suitable for
all investors so double check your risk
tolerances because options can
definitely expose an investor to risk
spread straddles and other multi-leg
strategies can entail
multiple transaction costs and futures
and futures options
just be aware that those do carry risks
and double check your suitability before
you get started on those
in order to demonstrate the
functionality of the platform we need to
use symbols
however we're not making recommendations
to buy or
sell also the paper money application is
for
educational purposes only and if you
experience tremendous success
trading a paper money account right now
just be aware that market conditions
they do
change so that could change with the
transition over to live
also um let's hit another slide here
remember those transaction costs and how
they are going to apply
uh also probability analysis such as the
probability of an option being in the
money on expiration
that's not a guarantee of an outcome and
all investing involves risk including
the risk of loss no soliciting no
recording and no taking pictures and no
part of this presentation should be
copied recorded or rebroadcast in any
form without the prior written consent
of td ameritrade
and there's the greeks from delta all
the way down to
theta and just remember that stop losses
no or no guarantee
of an execution at or near that
stop-loss price
because stops are triggers basically
they trigger market orders unless
they're stop limits
and then there's no guarantee of the
limit getting filled
all right so here's the agenda the
number one thing that cameron asked me
to do
is to follow up on the split discussion
because uh
wow boy did we see some price movement
related to apple
and tesla around that split announcement
and uh the split now is in the rear view
mirror remember the split took place on
monday
but cameron wanted me to follow up he
did that awesome webcast on
explaining splits uh that you can find
there on the
uh trader talks from td ameritrade
webcast page
but anyhow uh he wanted me to follow up
on those split outcomes just so that
everybody can see clearly how those
splits
actually work out so we'll do that and
then
i'm going to talk about a term that
maybe you've heard a lot
uh lately at least i have in the news
and it's something that i
never used to hear in the news and it's
i'm hearing a lot of uh
different folks talk about this could be
part of the reason why there's so much
volatility that suddenly hit the market
yesterday and that has to do with
something called put call ratios
and i would say not really put call
ratios because
put call ratios are something different
than open interest but
nevertheless i'm going to explain a put
call ratio to you and
also explain what some of these uh
individuals are talking about when you
hear the term like
gamma acceleration and things like that
i'll try to make it as simple as i
possibly can
but um that's those are some terms that
you're hearing
uh related to markets over the last
couple of days and with this volatility
and they're really options related terms
so we'll discuss that
and then i've gone through uh cameron
kind of gave me the keys to the car
i don't know if you remember uh you know
when you were a kid learning to drive
and used to ask for to the keys for the
car
and the parents were probably worried
that you were going to crash the car
anyhow i've got the keys to
cameron's paper money account so anyhow
i'm in his paper money account we're
going to do some position management
and um and we'll see what happens so
anyhow
welcome to the session everybody all
right so i'm going to switch over
to a paper money account and you know um
yeah let's do this i'm going to jump
over to the s
p uh i'm already there on the s p and
look at all those fibonaccis that
cameron's got drawn on here
um i don't want to delete those because
he's probably got them on there for a
good reason but
you know a pretty big down day yesterday
in markets
a lot of anxiety i think that traders
have had this morning on the open
and for a big part of the overnight
trading actually there was
down price action that was taking place
but
the labor number came through the
non-farm payrolls and off the top of my
head i'm forgetting what they were but
i tweeted out surprise i remember that
it seemed like those numbers were kind
of a positive surprise coming through
is these quotes delayed
that doesn't look like it's moving
anyhow um
they might be delayed either that or
cameron's uh quote feed doesn't move
that fast
but anyhow um after the labor numbers
came out you know the monthly
non-farm payrolls and that's the big one
it gets released
the first friday of every month unless
there's some sort of an exception that
takes place
but the numbers came in and they were
actually pretty strong i want to say the
unemployment number
uh kind of the headline number there
that a lot of people are watching
it was expected to be around nine and a
half and i think it came in
in the upper eights uh unemployment
so anyhow that could be a positive
surprise people feeling better about
markets
are about people getting back to work
and the stimulus and everything coming
through
but also maybe a number that's not so
hot in terms of low unemployment that
it defers the need for stimulus and
there's kind of this weird balance
that investors might be toiling with
right now between
uh you know the uh you know health and
the
health and the economy returning
although the economy is still
you know brutalized there's no doubt
about that
but also the fact that the market still
loves the idea of stimulus and so
you know a strong number but not so
strong that it keeps stimulus out of the
way that could be the
the fit but um who knows we'll have to
see how uh traders react to that
and right now anyway and again i'm not
sure if this is pre-market or not
i'm not sure if these are delayed quotes
or not but uh
the markets are up just a little bit but
there has been a lot of volatility
and there's a reason i want to mention
that volatility because
that volatility certainly is sent to a
shock wave through
traders systems and they might factor
that in when they're managing positions
you know based on maybe changing
assumptions
that an investor has due to the price
action that took place yesterday
some investors might have a slightly
different point of view in terms of the
way they might manage their positions
and you know for for some traders it's
okay to make adjustments i mean this
makes sense to be mechanical but also to
a degree
there's a reactive process based on
market conditions and what they're
presenting themselves and some traders
might make adjustments based on that
so we'll keep that in mind as we get
into some position management here a
little bit later on
but now now that we're kind of looking
at these markets and they are a little
bit stronger
although kind of fading a little bit
although when markets open stronger it's
not
unusual for them to fade a bit but let's
switch over
to the monitor page and let's take a
look at this uh
apple position because uh so much
uh time and attention has been paid to
what apple was doing over their split
that we want to talk about uh over all
the outcomes here now
cameron had built a position in apple
before the split took place
and if you recall the split in
apple uh was announced as a four to one
uh so for every you know one share that
somebody has
uh the result of the split is that
they're going to have four shares
uh at that point now the thing about
this there's weird psychology that
sometimes takes place where investors
will think okay if i've got
one share and it's going to turn into
four that there's some sort of a benefit
from that
the benefit really for the most part is
purely psychological because there's no
capitalization increase from the company
based on the split
now people buy because they like the
idea of having more shares after the
split
or that creates positive enthusiasm well
then that psychology
can send the market higher but in terms
of
um you know just in in terms of the
straight idea of just
this should give the company value it
does not do anything to give the company
value
but cameron uh actually bought 10 shares
and if you notice the splits actually
taken place and now we have
40 shares so for every one now there's
four four for one split
now another thing that you need to
factor in though when that split takes
place
is that the they divide the uh
final price of the stock pre-split right
when the stock opens the next day that
opening price is going to be divided by
four so if the stock we're trading at uh
you know 500
take that number divide it by four and
that's going to be your post
split price and so that's what you're
seeing here i want to say cameron bought
um
well cameron bought these 10 shares at a
much higher price it would have been 4
times the amount
of 115 and anyhow what we're seeing post
split
is uh excuse me 1
4 the amount at four times the amount of
that trade price
and what we're seeing right now are just
all split adjusted numbers
okay so you know you know some people
might look at a chart
on apple and say well um you know took
place
and they didn't even know the split
happened they they wouldn't
notice anything different anything
different about the price of that stock
i mean basically there's no you know gap
down of 300
or something like this basically
everything gets factored into that
chart and the reason that takes place
that way is to keep people from
panicking basically
uh but this uh this chart has been
adjusted
based on that dividend um and basically
that's what a split is
it's a stock dividend so anyhow there
you go
apple and that's where we are now
turning our attention to the
options market if you notice here uh
that
cameron's got four uh call options and a
couple of different batches here he's
got a september 110 and a september 115.
now when he started with these option
positions there was only a quantity of
one of those
okay but when you're dealing with the
options market
if the stock has you know a fairly clean
split
like that four to one that's a fairly
logical multiplier there basically what
people will do or what the option market
does is it just takes if you have an
option that's either long or short
for every option you have now you're
gonna have four of them and they're
gonna take that strike price that you
that once was there and divide that
strike price by
four now something that i haven't seen
in a while at least kind of uh very you
know much in the public eye
is something that who knows in the
future if there's this new wave of like
split dynamic that enters the market
where people like the idea
of announcing splits in their board
meetings sometimes you'll get these
splits
that are called the you know like a
three for two so for every two shares
now you're gonna have
three so the multiplier in there is not
a
full share right it's uh i'm not a math
guy so uh
i could there's probably mathematical
terms you could
use to explain that but if you've got an
unusual split
where uh again again like a three for
two often times
what you'll see happen is uh you know
maybe not
the expected strike price adjustment
sometimes they'll adjust the
option multiplier you know every option
when you're looking at it it's supposed
to control 100 shares of stock
and i'm not saying it's you know what
i'm going to say right now is is not
applied to apple
but in the future if you run across this
you know one of those
more unusual splits sometimes the
the occ the clearing corp you know or
the sibo who
uh whoever is announcing this uh they'll
actually um
call for an adjustment of that
multiplier where each option actually
doesn't control 100 shares of stock it
controls 150 shares of stock
something like this so um that's not
what happened with apple
but just for your g whiz collection
sometimes that will will occur
um and here we are with apple where
there was once
one option now there is four and where
once the strike price here
was uh 110 uh it would it would have
been what 440
and once uh the strike price was uh
right now the strike price is 115
it would have been four times that
amount so anything anyhow every
everything just kind of gets taken care
of one thing to note in a paper money
account
those splits do not get adjusted usually
so if someone is in a paper money
account and they wanted to have their
position reflect the split
what they need to do is manually make an
adjustment to that position
and in order to make a manual adjustment
to that position in a paper money
account
you should be able to just hit right
click on the position
and then choose adjust position in the
menu
and then you can adjust your quantity um
you can adjust uh
the prices uh as well and that will be
tagged as a position adjustment and then
hit
okay and you're good to go these have
already been adjusted so
i'm just gonna leave it the way it is
all right so that's the outcome of the
apple
um and tesla was the same thing but that
was a five for one
but both of those and that's been that
was some big news basically this week
were those split adjustments that took
place in those two
stocks all right
so now markets are moving a little bit
here
let's uh shift gears and let's talk
about this idea of this put call ratio
i'm going gonna jump over to since we're
talking about apple
let's uh go to a put call ratio on apple
and again the reason i wanted to mention
this
uh i don't know if you've ever heard
this before
uh but put call ratio is
something that some traders will watch
is a way to kind of gauge sentiment
within the options market and um
it's it is kind of difficult to chart a
put call ratio some investors really
like the idea of charting those things
i do not know how to chart a put call
ratio on an individual stock
however some traders will you know try
to figure that out maybe i'll send a
message to ken rose he does a class on
think script
every week and i'll maybe i'll send a
message to him to see if he can put
together some sort of an algorithm
to try to uh maybe chart the put call
ratio
but let me explain to you what it is so
if you're trying to follow along at home
go to the trade tab and on the trade tab
just type in your ticker symbol and just
so you know a lot of people will track
this
on the indexes as well you can do what
i'm uh
talking about here on the indexes and
i'll take a look at that in just one
second
but type in apple or whatever symbol
you're looking at
and if you're looking at the option
chain you have to scroll
all the way down to the bottom of that
option chain and look for an area
labeled today's option statistics so
that's where i am right now
i'm under today's option statistics and
this just accounts for
well just like the name would imply
statistics related to option trading now
you've got volatility information which
is absolutely outstanding over here on
the left
you've actually got um order flow
uh information over here like the number
of options that have traded and whether
they traded
close to the bid or the ask and so forth
and also where
those options traded in terms of the
moneyness but if you turn your attention
over to the far
right here's where we're gonna find this
uh
put call ratio right here put call ratio
and simply put the the put call ratio is
is volume it's option volume
it's the puts divided by the calls
okay so puts divided by calls and what
you get
is a number that's uh as a result here
and the put call ratio right now
from the put called volume today is 0.54
now you know what the put call ratio is
um
so we're done now the reason why people
will watch that sometimes
is it's a way to kind of get a gauge
potentially for
market sentiment see the closer this
number is to zero
uh the more calls are getting traded
related
or compared to the puts and as you can
see here
the put call ratio is 0.54 now
does what does that really mean anything
well yes and no
for some traders that could mean bullish
sentiment
if there is a very low put call ratio
there's a lot of
call options that have been trading
relatively speaking
now the big question is well what's this
relative to
and that's why some traders will chart
this is they'll want to see where that
put call ratio is now
compared to where maybe it's been in the
past all right but anyhow right now it's
.55.54 right in there so for about uh
every two calls there's one put trading
okay now
there is an assumption that is getting
made in markets right now and that's
based on the fact that
well you've seen stocks lately these
stocks have gone through the moon right
stocks have just been going straight up
basically so
traders are making assumptions that part
of the reason stocks have been going up
so much
has to do with what's going on with this
order flow in the options market
see these put call ratios in general
have been quite low especially over the
last
couple of months as this market has
really accelerated
in its rally which means kind of across
the board
on individual equities especially the
high flyers
the sentiment has been lots of calls
traded relative to the puts now with the
market
going higher with these stocks going
higher all that
call option trading what people start to
assume is that that's been
initiated on the call buy side right
call buyers now you got to think of it
this way
if the put call ratio is low and that is
a bunch of call buyers
related to you know compared to puts
they're buying calls because they're
bullish now what does that have to do
with the price of the stock
well it's this effectively if uh
if you went to the market if everybody
listening to this webcast approached the
market and said i want to buy a hundred
calls on apple
right a counterparty a market maker is
going to
have to take the other side or some
other option trader but they'll take the
other side of that trade
and is that going to be a fair price
right if you are going to buy those
calls you'd like to pay
less but hey there might not be all that
much interest in selling them so that
means you're probably going to have to
pay more to encourage an
option seller but anyhow that can drive
up
option prices by the way if there's more
option buyers then there are option
sellers at any given moment
in order to get a trade filled there has
to be an equal offset there
but what raises price is the demand to
buy calls
right and so if that happens the the
sellers of options get to sell for
higher prices
okay but now imagine that other side if
we're the option buyers and you've got
the option sellers out there
the option sellers are you know if the
buyer is very bullish
what's the option seller the option
seller is taking on a
bearish position if the buyer is taking
on a positive delta position the seller
is taking on a
negative delta position now if i'm a
market maker
on the other side of all those call
options that are getting purchased
i'm worried about that i'm worried about
the fact that there's so many calls that
are getting purchased because when i
sell those even though i'm getting
better prices potentially
if there's been a lot of demand to buy
those options and maybe i'm selling
those for more
well the problem is that i'm still
building up a whole bunch of negative
delta i'm becoming very very bearish and
as a market maker that's not the
business i'm in
the business i'm in is basically to um
you know have transactions going in and
out without a whole lot of directional
risk so
here's the idea they need to hedge
okay so i want you to think about this
if a short call
has negative delta okay
uh this is the counterparty this is the
other side
how can a trader flatten out that delta
to neutralize that risk right negative
delta means they're becoming very
bearish if the market continues to go
higher they're going to get hurt
how can i potentially hedge you know a
market maker
that negative delta it can buy
stock so buy apple just buy the stock
shares
right for example if i'm negative 300
delta
okay that means i'm bearish to the tune
of 300 for the next stock
point higher well if i buy 300 shares of
stock
i just took the delta and i took that
delta to what
took that delta to zero so now if the
stock continues to move higher
well i am actually long stock to offset
those losses in those calls now here's
what's interesting
if someone is short these calls and
let's say they have a delta of 50
if the market goes higher the negative
delta is actually going to grow and i
know that this is weird but this is what
they call
positive gamma so someone short calls
the market goes against them remember
options when they go in the money their
delta increases
so somebody's short delta 300 in the
beginning
as the market goes higher they might
become short 400 delta
as apple or whatever stock continues to
go higher
and so what does the trader need to do
to hedge that newly minted higher
negative delta right
they might have gotten that down to zero
but if we go up again
that's going to be negative you know 100
so they need to do what they need to buy
more stock
so buy a hundred more shares of stock
and what that does
is that neutralizes that delta again but
the fact that these
options right um and let me let me show
you this because that can be confusing
uh just kind of talking about this up
outright um but
let me just open up options expiring in
42 days here
we'll bring up i don't know 20 of them
something like that and we'll bring up
the column for delta
all right but um you know if a trader is
is selling these
right the market makers having to sell
these that have a
50 delta in the beginning if the market
winds up going higher it goes above
those strike prices
and moves up which is what the market
has been doing the deltas wind up
getting
bigger and bigger more negative and more
negative
so what happens is that you have an
initial position that carries so much
risk if somebody's short an option the
market goes against it the risk actually
increases so what that means is that
these market makers these hedgers
they need to actually buy more stock as
that
stock goes higher does that make sense
and so you get this weird compounding
effect i know that's a lot to think
about but it's a hedging thing
you get this weird compounding effect
where if the put call ratio
has been very very low and there's been
a whole lot of calls
they're getting purchased and those
calls have been initiated by the buy
side option sellers you know and whether
or not they're
initiated on the buy side or not it's
just that as these calls get created
option sellers in order to neutralize or
mitigate that risk they've got to buy
stock which naturally sends the market
where
higher so if you get unusually large
activity on the calls
right bunch of option call buyers you
get this double effect
right buyers of calls thinking the
market's going higher positive sentiment
and then hedgers needing to buy stock
sending the market higher
because of the hedge at some point
that's got to become
unwound and that's what everybody's
talking about right now
okay uh the unwinding is the reverse of
everything that i just said
okay and so if it's true that there is
an unusually large amount of calls that
have been purchased here
at some point those positions need to
become unwound and that accelerated
effect to the upside
can become an accelerated effect to the
downside
and that's what many traders are talking
about right now it's uh it's basically
an unwind of the
of the gamma effect which can accelerate
a downside move
now how can a trader make money from
that well one thing about it
is that as markets drop and this occurs
right um that could imply
that there's another wave of higher
volatility that could be
on deck here so if traders believe that
that unwind is going to continue
they might make the assumption that
volatility could continue to go
higher okay now is that going to
continue to happen
you know we don't know but that could be
causing some of the acceleration and the
natural assumption is
someone expects that continue to
continue
they would probably expect volatility to
continue to go
higher and when i'm saying volatility
i'm talking about implied volatility
all right one more comment on this i'm
going to take a look for a second at the
spx
if the spx will show up there we go
on the spx
you usually see a much different look on
that put call ratio
okay um and this is why some traders
actually
kind of feel like maybe this gamma
effect idea is potentially a little bit
exaggerated because when you're looking
at these indexes
okay the spx for example the kind of the
mother of all indexes here
you know it's very very typical that
you're going to see
more puts traded than calls now one
thing that i don't have a frame of
reference for
is the history recently on the put call
ratio on the spx it's not something that
i'm watching necessarily every day
and again i don't know how to chart that
but what you're usually going to see
on the put call ratio on the indexes is
something
often you'll see that a little bit below
a 2
right in there right now the put call
ratio
on the index is 2.47
so what that means if we take the calls
and divide that by the puts
when the put activity is higher than the
calls that sends the number into a
positive number right like positive
you know one or more i should say and as
more puts get traded on the index than
calls
that actually creates a bigger put call
ratio
uh a more you know a higher number on
the put call ratio for the index
now that's it's almost always you know
above one and a half the put call ratio
on the index and that's
just a reflection that oftentimes
traders will use the index
buying puts on the index actually to
hedge their risk
um in individual equities so you so a
lot of traders could say that this is
a natural offset to what we're seeing in
stocks i know that's kind of confusing
but it is kind of interesting here i
would say just kind of back the envelope
that that does seem like a pretty high
put call ratio
in terms of a lot of puts are trading
relative to the calls on the index but
you know if you're looking for something
fun to do on a daily basis if you find
this interesting at all this is
basically order flow
uh analysis which is hugely important
you tend to lock into different aspects
that you
you know some traders look at some
things closer than others but maybe
for the next week keep your eye on that
put call ratio on the index
okay and if that starts to drift lower
you know some traders would take that as
a bullish sign
if that put call index continues to move
higher
some traders would call that a bearish
sign so in other words more hedging out
of potentially
uh large institutional traders buying
puts you know
that's just the assumption uh buying
puts
on the index but right now you know just
again back of uh
back of the envelope i'm going to say
that put call ratio does seem pretty
high right there
which would be a reflection if i'm
correct of uh
of the market doing a fair amount of
hedging which is a reflection of
bearishness
and it might be interesting to see what
happens to that so maybe you know just
for fun keep your eye on that
uh all right so there you go put call
ratio and gamma acceleration
all right now let's move forward and
take a look at some of these uh
positions that cameron has now when it
comes this is an option
you know inventory management class and
we've been talking about split situation
we've been talking about um
you know kind of the the gamma effect
and the uh
the you know the meaning of these put
call ratios
but now really the the meat and potatoes
of a class like this
is managing individual positions now
an option inventory manager really
something that's hugely helpful for them
is these are these greeks
now if you don't have the greeks on your
screen right now
you you might want to get them there if
you want to apply what i'm teaching you
right now
and the way to get those greeks on your
screen and i'm not looking at all the
greeks
there's not a gamma in there some
traders will have gamma on their screen
as well which could be a very smart
thing to do
to save space and because oftentimes
price time and volatility are the keys
um you know i've got delta theta and
vega here and the way to bring those on
your screen if you do not have those
uh so if i didn't mention it i'm on the
monitor page
and this is the position statement under
unallocated
but anyhow look under available items
uh and just you know start with the
first letter of the word start typing it
out
and it's going to give you a result in
you know that underlying so for example
if i wanted to bring delta on there d e
l
t a there you're going to find it in the
menu then just
left click on it and hit add items all
right but anyhow
i've got delta theta and vega on the
screen now this is hugely important
especially when you run into markets
like this and you start to realize oh
wow markets do have some risk
well that's going to be an important
thing for a trader to think about is how
much risk
do i actually have and that's what the
greeks show you
are the risks associated the delta risk
the time decay risk
and the volatility risk and so for
example
you know just going back to apple the
delta risk on this
is 557 now what that means is that for
and that's a positive number if you
notice some of these are actually
negative numbers
what that means is for the next point
moving apple this position could make or
lose
557 dollars in theory and we want that
move to go
up if that move is down that's
loss right so either way for the next
point move in theory this position could
either make or lose
560 bucks you know 570 bucks
now that could be important to watch if
someone wanted to hedge that or bring
down that delta risk
well number one they could start exiting
positions right for example if
somebody's got this long call right here
and this is going to be important i want
everybody to maybe practice
doing this take a look at your own
option positions
and then ask yourself some questions is
that really what i want
in light of current market conditions
now if i take a look at just
single call i'm going to isolate that
out of the group
that individual call right there at the
110 strike is responsible for 270 of
these
positive deltas here and so that long
call
and you can see it reflected today the
market
is going down on apple it's getting
absolutely trashed
that is responsible for a bunch of the
risk
if a trader were thinking you know what
i want to reduce my risk i'm not as
bullish anymore i'm worried there's more
downside that could be a logical step to
take a trader could just
you know and this would bring down the
overall delta they just sell out of that
call
or they could sell part of the position
now these only have 14 days to
expiration
which means by the way the time decay is
getting really high on these
so a lot of delta risk close to
expiration a lot of time decay
and by the way they start to lose their
volatility exposure when they get this
close to expiration
some traders might say you know what i
don't want this decay
i don't want that volatility risk i
don't want that delta risk i want to
bring this down
and these only have 14 days remaining
anyway and by the way these were
purchased for five and right now they're
worth ten
you know couldn't the trader just sell
these lock in some gains and reduce that
risk
watch what happens if i just sell i'm
gonna create a closing order and false
now take a look at what just happened to
the directional risk
the delta just dropped so now right
what's the directional impact from a one
point move
it's smaller here the risk of the
position is coming down
if that is an anxiety reliever well
then that could be the first step for
traders is
evaluate the risk that they do have and
think about what could potentially be
removed from the position
uh in order to bring that down now we
still do have some delta risk here
we've got delta risk that's still 273.
40 of that is coming from the stock and
231 of that
is still coming from this 115 out of the
money call here
that was bought for 523 and right now
it's worth
690. now at this point the trader
could ask themselves do i really want
that risk
well if the answer to that question is
yes right i'm okay with the position
that's now behaving like another way to
think of this is it's behaving like
260 shares of stock you know
and so you'll probably find that i'm not
the biggest chartist in the world
um it might make sense for a trader to
come back to a chart and evaluate their
assumptions here if a trader's thinking
hey i believe apple will bounce at this
point
you know they may not want to get rid of
all their deltas
that they've got here right so take that
into consideration
but um you know for an example if if a
trader's thinking
um i still want to remain positive delta
but just not quite
that many a trader could jump in here
and right click
on that long call and maybe sell a
couple of them right so how about we
sell
two of the four i'll hit confirm and
send
and now we've sold two of those four
calls and if this is again
another anxiety reliever all we're doing
is making adjustments to that
directional
risk now there's another way that a
trader could adjust their directional
risk here
rather than closing out of this these
long call positions
a trader could well if they wanted to
add to it if they were getting more
bullish
they could buy more stock stocks have
positive delta
they could buy another call stock calls
will have positive delta as well
or if they're wanting to bring that
delta down
they could bring in some negative delta
now just for fun
if a trader wanted to bring in some
negative delta against this
apple position but not eliminate their
long calls
what they could do is in the option
market
they could potentially sell a call now
in reality they want to make sure
they're selling a call
that expires uh sooner than the options
that they currently own
right looks like cameron's got an option
that expires in 14 days
at the 115 strike price here if a trader
were thinking okay
for the next uh week or anyway the next
seven days
they'd like to reduce some of that
directional impact they could
potentially
sell an option a call option in one of
these
near terms right so i'm going to do that
actually i'm going to sell
a 116 we'll really throw cameron for a
loop i'm not going to do two of the or
10 of these though
the maximum i could do is 2 but that
would actually turn this into a spread
this would bring in some premium here of
4.55
cents and effectively if i do this hit
confirm and send
i'm gonna cancel okay it did get filled
but if i did that now i just brought
down that
overall delta even more right i just
reduced the delta now by bringing in
some negative delta from that short call
okay so uh that's another way that a
trader could reduce or manage their
overall directional risk
is by selling options against the
options that they own
but in order for that to be covered what
they got to make sure
they have is an option that they own
that's uh longer term
longer to expiration than the option
that they're selling but that actually
turns that into a
time spread kind of like a diagonal for
the next week
but notice this and some traders might
like this as well but
just with what we've done with apple
here we have uh
reduced the directional impact of a one
point move that may or may not be a good
thing
but also we've taken the negative theta
that this had
means time decay was working against it
and we flipped that into a positive
and the reason that's become a positive
here is from that short option that
option that's got closer to expiration
it decays faster and so the the theta
actually flips over into a positive
now what that means is that this
position could still profit
if the market goes up but it's got a lot
less
directional impact and now it's got the
benefit of time decay working for it
is this the right move only you can
decide
but i would say the more you practice
this and the more market conditions
you're exposed to
the better off you're going to be as a
position manager but right now if we can
just
unlock the ideas about delta
theta and ultimately vega as well
although i'm not talking as much about
that one right now it really
concentrated on delta because that was
the biggest risk in this position
but um you know practice that if you can
learn
how what those mean and how they can be
a reflection of how you want to approach
the market they can be
super useful okay because we've taken
this from a hugely directional
losing money from time decay position to
something that's a lot less directional
and it's got time decay working for it
now okay now is that what the trader
wants
only the trader in question can decide
let me take a look at another couple of
positions here
here's one how about this guy right here
this is facebook
now again i think these quotes are 20
minutes delayed if i'm not mistaken but
anyhow so who knows where facebook is
now but
interesting this position uh
is actually positive delta but not
nearly as positive as those long call
calls were this has positive theta and
the positive theta is actually
quite strong in fact when you look at
this position the delta compared to the
theta
this position is really a lot more about
time decay than it is
a directional movement but it is a
little bit bullish
so depending upon the trader's
assumption about facebook
they could go take a look at a chart on
facebook and ask themselves
am i bullish um and only the individual
trader can answer that question
right but they might look at a chart to
make that decision
and if they are thinking that maybe
facebook could bounce here
well then that could be a terrific
position for them because even if it
doesn't balance
at least it's got time decay that's
working for it
now next thing here is this position
has a lot of positive vega
and in fact if we look at all these
greeks
the vega is actually the biggest one
that's here
uh in fact so this position uh really if
you're thinking price time and
volatility this is all about implied
volatility
by the way that's a dead giveaway for a
calendar spread
and that's what this position actually
is it's kind of interesting too because
uh this was really a
a brilliant trade because this calendar
was originally purchased for two dollars
and seventy five cents
and right now it's worth eight dollars
and forty seven
cents that is a nice win on a calendar
um so anyhow nice nice job on that one
but when you're looking at these
calendars right um
outside of just looking at the greeks
the trader needs the market to be
at the strike price which in this case
is 290
the closer we get to expiration now if
you notice the stock is actually moving
uh right now we're down at 279. so even
though
you know this does have positive delta
and this trade is quite profitable
if the trader were thinking that there
is less of a chance
that the stock is going to go back up to
290.
they might decide to start taking
profits even though these
greeks might look super good you know
since especially that short options
getting closer to expiration
and uh if the traders thinking yeah
we're maybe
losing the the hope of being back to 290
in the next
14 days a trader might decide to
start taking some gains on that i mean
after all this thing is up like 300
percent
um and that's what i'm going to do right
here so it's weird i know it's strange
these greeks looked really interesting
especially compared to or at least
different
compared to that long call okay but when
it comes down to managing the individual
position
still you know a trader might want to
start taking profits
especially if they don't believe the
market's going to get back toward 290.
and by the way
these are perfect ingredients for a
calendar spread is the the market
actually uh if you note facebook
last week or actually just a couple of
days ago it was over 305 dollars
so my guess is that calendar wasn't
performing nearly as well
or no it was 303 dollars almost a 305.
this week as the markets come down and
volatility has accelerated
i'm sure that this calendar spread has
just exploded in value
so what i'm going to do is not risk
giving back
all of those profits and all this
benefit but also
maybe leave a few of those on there
because what if
the stock does bounce what if the stock
does come back to 290
and what if volatility still holds
because there's still some uncertainty
in the market um you know that might be
a reason to leave on a portion of that
position so just
kind of thinking here with you out loud
is there anything wrong with selling
maybe a portion of this uh tell you what
let's start with uh there's 10 of those
in there
why don't we sell maybe um we'll sell 40
of those i'm gonna sell four of those
calendars and some traders when they're
scaling like this they'll do it like uh
in thirds or maybe in quarters right
exit
um you know maybe a third or a quarter
of the position and then
move on from there as we get closer to
expiration and more information evolves
uh so anyhow i'm going to sell four of
those a little bit more than a third
um we'll go with 40 part of the reason
for that is just
it's just a giant win so far and so
rather than risking those profits
we'll go ahead and hit confirm and send
and look to take some of those profits
okay
those were filled okay so there we go
now let's continue to look through this
uh list of uh
trades and you know i've got to wrap it
up in fact no i'm
done i'm over time but um one thing
just a heads up here one thing some
traders will do when they're looking at
these greeks and they're managing their
positions
is they may start with the underlying
that has the greatest amount
of directional risk right because
especially in volatile markets
it's the directional movement that poses
potentially the greatest threat
right and so some traders when they're
just looking for a place to start when
they're managing
they'll start by looking at the
positions that have the biggest deltas
and start there
so maybe it's something for you to work
on right something to do next if you
if this is appealing to you at all
managing positions using these greeks
you know take a look at your own paper
money positions and see what positions
have the biggest delta that's the
biggest directional
um risk see what the other greeks are as
well
remember that's time decay and
volatility risk and then maybe see if
you can work on
different adjustment ideas in a paper
money account
all right but again i got to wrap this
up so hopefully
you learned something there basically
what we've talked about today
is the idea of following up on those
splits and i think um
that was pretty clear pretty clean uh
four to one split there
uh we talked about these put call ratios
and the idea
of uh this gamma acceleration that a lot
of traders are talking about
and then we got into position management
we really looked at those greeks
and then we dug into individual
positions
and talked about different types of
adjustments that could be made
we certainly didn't explore all types of
adjustments there's lots of other
adjustments that could be made so
check out your other education in order
to learn more about that
but i have not been looking at
the chats i'm assuming brent is covering
those because he does
a terrific job so anyhow thank you brent
oh hey by the way there is a survey
there i didn't realize that before you
leave
um do me a favor uh
pop out this chat real quick before you
leave um just take a couple of minutes
to
click on that link and and go through
that survey it doesn't take long it's
like
i think it's five questions but your
feedback is appreciated as well you can
actually chat in there how much you want
cameron may to get back here
um uh but anyhow your feedback is very
well appreciated sorry
i'm just trying to scan those chats
right um here's your final disclosures
do me a favor all right um have a
terrific weekend will you
for some reason
my computer's locked up maybe it's this
let me try that
okay there we go there's your final
disclosures
and uh have a great weekend enjoy that
labor day monday
and we'll talk to you soon bye
you
