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Trading The Wheel Options Strategy — 3 Reasons Why You’d Lose MoI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. So, as you know, I love trading the wheel options trading strategy, and this past week was a roller coaster for this strategy. Friday morning I woke up and my account was down $25,000. Now I’ve been trading a larger account. It’s two hundred fifty thousand dollars in cash, five hundred thousand dollars in margin, so $25,000 is not that much, but still. So in this article, we are going to talk about the Wheel Options Strategy. We will talk about the three reasons why you would possibly lose money with this strategy and also how to avoid these mistakes. So here we'll talk about my account. As you know, this show is about real money and real trades, and at the time of this writing, I am still down about eighteen thousand dollars. So it has gotten a little bit better since this morning, but down eighteen thousand dollars. So we’ll take a look at these trades in detail. But first of all, let’s talk about the three reasons why you would lose money with this strategy and then also how to avoid them. 3 Reasons You Would Lose Money So there are three big mistakes that you can make when trading The Wheel strategy. So the first is panicking. If you are somehow trapped in a position and you say, what the heck do I do now? I often see traders who say, “What do I do now?” So solution number one is don’t panic. Easier said than done, right? But not panicking is so important. This is what one of our members posted in our community. “It’s not a loss if you don’t sell.” so the worst thing that you can do going back to this is panicking and closing your positions at a loss. Don’t do this. Don’t close your positions, & evaluate what’s happening. The second mistake is not having a plan. Mistake number three is not having the right trading tools. So, now I will go through my positions that I had and then I will show you how I handled them with my plan. Then we will also talk about the third mistake in more detail, and then some more solutions. My Positions So five positions that I had in my account were (On February 26, 2021): AAPL AMD DBX GDXJ RIDE So let’s start with AMD first. If AMD were to stay above 83.50 until the remainder of the trading session (at the close that day), I’d make money. Everything that happens with my positions, I write this down, and I recommend you do the same thing so that you know of what’s happening to your positions. You will know which ones are actually in trouble and which ones are good to go. So if AMD closed above 83.50 nothing would happen, and I would keep the whole premium. For this trade, this was $576 in premium for the week. Not bad at all. The second position is DBX which is Dropbox. So Dropbox needs to stay above 21.50 and it was trading at 22.85. So it seemed that we were pretty good there. You might be wondering why I am talking about the positions that are OK? You see, in order to stay calm and to make sure that you’re not panicking, focus on the positive first. I know if you’re taking a hammer and you smack one of your fingers, what do you focus on? The finger that hurts. Right? But you have four other fingers that are absolutely fine. So it’s important to focus on what’s going right for us. So if DBX stays above 21.50, which is very likely. So I sold 47 of these options for $13 totaling $611 in premium, so not bad at all. So what’s happening with GDXJ? So the week prior I got assigned because it expired below my strike price. So I got assigned 2,100 shares at $48. Now, here’s what I did with this. So let’s forget these shares for just a moment and let’s again focus on the positive of what’s working well for it. I sold covered calls at the 49 strike price, and I collected premium. So how much premium did I collect for these calls? I sold 21 contracts for $75 each. So I collected for this trade, $1,575 in premium. So we are OK there, and I still have the shares, because they expired worthless. So the next position is RIDE. So if it stays above 21.50 I just collect the premium and nothing else happened, but the price stayed below. I got assigned 4,700 shares at $21.50 so this position is in trouble, we will deal with that at some point, but here’s the good news. I still collected $1,974 in premium. So the last position here is AAPL, and I did get assigned these shares a week prior. So I have 800 shares and I’ve not been able to sell any calls against it. So here I have 800 shares at 133, and also these shares are in trouble because Apple right now is trading at $124. So I got assigned and now AAPL is down. Not good. I still collected all this premium and it all added up. So because overall, it was a pretty darn good week, collecting $4,736 overall. I don’t know about you, but this is not bad at all. And I know you might be saying, “oh my gosh, you’re talking about making some money here, but what about all of these red positions?” Why You Shouldn’t Worry About Being Assigned We’ll take a look at these starting with RIDE This is where it goes back to what is the worst thing that you can do? Panicking. Like if I were to sell for example. If I would sell these shares instead of collecting the premium that I have here, I wouldn’t have made any money on RIDE, I would have lost $8,272 instead. I don’t know about you, but I would rather keep the premium of $1,974 instead of losing $8,272. For me personally, I will not worry about it. So here is where it goes back to. What do we do? Follow your plan. So you got to follow your plan, and this point I’m about to make is very important. I’m actually excited to get assigned, and in a moment you will see why. Your reaction should be, “Yes! I am assigned because I want to own the stock.” I’m really, really happy about this. I’m happy about having stocks. Or your reaction might be this where you say, “oh my gosh, what have I done?” If this is your reaction, then you violated the number one rule of “The Wheel Club,” and here’s the number one rule of the wheel club: "Don’t sell puts on stocks that you don’t want to own". OK, wrong movie, but you get the idea right? So let’s take another look at my positions. Am I happy to own AAPL stocks? Yes, I am. Am I happy to own GDXJ and RIDE? Yes! Would I have been happy to own AMD stocks if I was assigned? Of course! Absolutely! OK, so let’s take a look here at the stocks that I’ve traded thus far year to date. And as you can see, my profits year to date, around $43,000. Take a look at all the stocks. These are the stocks that I would not mind owning at all, and this is really the number one rule of The Whale Club. So Apple, AMD, DBX, GDXJ, HAS, IBM, LL, WYNN, ect. All of these are good, solid stocks that I wouldn’t mind owning. So let’s talk about what do we do with RIDE. Why am I so excited to own it? This is where it goes back to having a plan. So my plan is just to follow The Wheel strategy, and this means that after assignment, I will sell covered calls and collect premium. Very, very easy. This is where we go back to mistake number three, not having the right tools. I use the PowerX Optimizer and I will show you right now how to use it and why it is so important. So PowerX Optimizer supports two separate strategies. The PowerX strategy as well as The Wheel strategy and part of the PowerX Optimizer is the real income calculator. I set my buying power to $500,000 because that is the buying power that I have in the account. So the stock I want to use as an example is RIDE. Let’s plug in some numbers and see what our premium is on this one for if I get assigned these shares, and start selling calls. So getting assigned 4,700 shares at 21.50. Now, the option strike price that I’d try to sell would have to be at the price that I bought at or above. The last traded price was $0.43, so let’s assume we’re selling the shares at that same price. So I’m using the strike price here of 21.50 and I’m selling calls for $0.43. If I did this I would get $2,021 in premium! Wholly Cannoli, are you getting excited about this? I’m excited about this. Now you see why I’m excited to get assigned. If you add this with the premium I’ve already collected on RIDE from selling puts, which was $1,974, that’s almost $4,000. You get the idea right? So I would not make any money on the stock but that is OK. So is this stock really in trouble if I make 4000 dollars in two weeks? I don’t think so. So one trade that I had last week that wasn’t doing so well was AAPL. I got a signed AAPL at 133, so I need to see if I would get enough premium to sell calls. This is why it is so important & I can’t even stress this enough, how important it is to have the right tools. Having the right tools help you make the best decisions instead of panicking. Back to AAPL, I was assigned 800 shares at $133. How much premium could we get for selling calls? So right now, if we sell calls with expiration for the end of this week, at the 133 strike price, we would only get about $0.13, and I would only make about $104 which is nothing. So out of all these positions, Apple is the only one that right now is kind of in trouble because I not yet able to get enough premium when trying to sell calls, but that is OK. All I need to do is just be patient and wait until AAPL goes up. Summary In the meantime, I do believe that Apple is a solid company, and I don’t mind owning the shares. This is where we go back to rule number one of The Wheel Club. “Don’t sell puts on stocks you don’t want to own” because if you do this, then you probably sitting there today, like, what have I done? But I hope this helps you see how to deal with being assigned and that you also see, how to handle things when a trade is in “trouble.” Just sell covered calls, and collect premium. If there isn’t enough premium available to sell calls, just wait until it bounces back, it’s really not a big deal. I am absolutely OK making $4,736 last week with the potential to make another $3,000 this week. Not bad at all, as you know. My goal is to make $15,000 per month. If I can make $7,000-$8,000 in two weeks. I’m well on my way.
NASDAQ:AAPLEducation
by rockwelltrading
1
Granolabar's Gap Down Guide (my own style)Introduction Within the past week, AMEX:SPY has become increasingly volatile, with massive gap ups and downs followed by all day runs extending more than 3% in either direction. This is apparent with a cursory glance at the following chart. With this volatility comes uncertainty, especially for those who are swing trading on the timeframe of a few days to a few months. However, we can use this increased volatility to our advantage. i am going to introduce my way of trading these days, particularly the ones involving gap downs. Identifying the Setup Identifying the setup is relatively simple, but there are a variety of factors that can improve your chances of success. Firstly, the stock needs to have gapped down overnight. This one is quite obvious and easy to identify; look for a literal gap in the prices going from after hours to premarket, like those identified in the following chart of SPY. Secondly, there are a few things that can improve the chances of this strategy playing out. For example, if the stock recently hit a supply zone and rejected, the gap down is more likely to be followed by more downside as the stock is already in "pullback mode." Additionally, trendlines are another great thing to keep in mind. For example, SPY recently hit a nearly 4 month long strong trendline and rejected. Generally speaking, the larger the timeframe that the trendline is identified on and the more "touches" it has, the stronger it will be. I often find it useful to work my way down from the 1 month or 1 week chart down to the hourly to identify trendiness that I need to keep in mind. Trading the setup To trade this setup, I like to primarily stick to the 5 minute chart. The one minute chart has too much noise, while the 15 minute takes too long for confirmation that you would miss a sizable amount of the move. Once you are on the 5 minute chart, draw a horizontal line at the bottom of the premarket low, as shown below. This will be the critical value to watch. Theoretically, you want to enter when that line breaks , BUT there are often fakeouts around these critical levels. To know when to enter the trade, I watch the candle sticks. First, there must be a 5 minute candle that closes below the premarket low. Then there are two possible scenarios from here. Scenario 1, the next candle immediately pushes below the low of the first candle. In this case, you would take puts or sell short as soon as the second candle breaks the low. My reasoning for this is that if the movement is strong, the second candle would not hesitate to make a new low. It is better to enter on the break than to wait for the candle to close and miss out on potential profits, which are often pretty sizable when things are moving quickly. Notice in the below example that had you waited for that candle to close, you basically would have missed half of the entire fall, which lasted 4 5 minute candles. Scenario 2, the next candle does not immediately push below the low of the first candle. In this case, you would wait until there is a candle that closes below the low of the first, instead of merely making a new low. My reasoning is that if the momentum is not strong enough for the second candle to immediately make a new low, the confirmation candle to enter needs to be more definitive. The play is not invalidated because the first candle closing below the premarket lows indicates that there is downwards pressure. In this way you minimize the likelihood of shorting a bear trap while also capitalizing on the fall. Let's Talk Take Profit and Stop Losses Now that you have successfully entered the position at an optimal place, the next thing to consider is where you want to exit, whether that is to secure the tendies you just made or protect yourself from further losses. Note, this part is completely up to you and your risk or reward tolerance. Assuming that it all goes to plan the the stock starts to fall: I typically trade weekly options for this kind of play, as it is a short term play. Because options premiums move quickly in both directions, I will take profit at 25% with about half the position if the candles are getting smaller, indicating that the trend may be weakening. Then I will set a stop at open, meaning that I will sell the remaining portion of the position if the contract goes back down to my purchase price; this guarantees that ultimately the play is profitable. However, if the candles stay rather large, I will hold the position until the candles do start to get smaller, and sell half the position there, often around the 50%, 75%, or 100% profit mark. If the option does hit 100% profit, I will almost always sell half, with very very few exceptions. This ensures that even if the other half of my position expires worthless(worst case scenario), I come out of the play completely unscathed. If the play does not go according to plan: Let's assuming that right after you enter based on the conditions above, the stock reverse to the upside. Now the question becomes, when do you sell to prevent yourself from taking major losses. For this I use my EMA clouds, or simply just EMAs with the region between the lines shaded in. I typically have a 5/12 EMA cloud (green) and a 34/50 EMA cloud (blue). As soon as one candle closes above the 5/12 green EMA cloud on the 5 minute chart , and the next candle closes above the first candle, that Is when I take the loss and move on. Often times, when playing this strategy, the price will come back up and retest the break line; do not panic if the position is immediately red, but also stick to the stop loss rules mentioned above. This cloud strategy also applies to closing the last half of the profitable position mentioned above. When you are left with half a position at 100% profits or more, I will wait for reversal to sell. The reversal tends to happen when one candle closes above the 34/50 EMA cloud on the 1 minute, and the next candle pushes past the first high. There are also many other ways to market the bottom, such as bullish divergence, engulfing candle, abandoned baby, etc. TLDR This is my way of trading gap downs that utilizes candle sticks and the EMA clouds to determine Stop loss or Take Profit places. Simply put, buy puts when the price cleanly breaks the premarket low, ride with the clouds until they suggest a reversal or hit a stop loss point. if you have any questions or comments, please feel free to let me know. I would love to hear other perspectives or criticisms. Also, the "clouds" are just EMAs filled in with crayons, but if you want the script, it's in my profile.
Editors' picks
AMEX:SPYEducation
by granolabar_trades
30
How I’ve Improved Productivity in My Trading DayI’ve been trading for a long time, and over the years, I’ve learned different ways to make the most of my time. Today, I want to talk about three ways I boost productivity in my trading day: - Using my PowerX Optimizer to quickly scan for long and short trading ideas. - Using my Wheel Income Calculator to find attractive premium collecting ideas. - Having a trading plan and following that plan. In this article, I’m going to break down each one of these and explain what they are. I’ll also explain how they help me streamline my trading. This gives me more time to focus on other things I’m interested in, like my business and real estate. 3 Pillars To Trading I always say there are three pillars to trading: - You need to have a trading strategy. - You need to have the right tools. - You need to have the right mindset. For me, I trade two strategies: PowerX and the Options Wheel. And I developed my own software tools to help me trade these strategies quickly and efficiently. The PowerX Optimizer software shows me what I should trade, when I should enter, when I should exit based on my preferred criteria, and my Wheel Income Calculator tells me which option strike has the best risk/reward. If trading software doesn’t show me this, it’s not allowing me to make the best use of my time. Let’s take a closer look at these software programs, starting with the PowerX Optimizer. PowerX Optimizer With my PowerX strategy, I’m looking to buy calls on stocks trending higher or buy puts on stocks trending lower. The PowerX Optimizer is a software I programmed for myself, my head coach Mark, and my son. A few years ago, we made it available to everyone. This software answers the three questions I’m looking to have answered when I’m looking for stocks - What to trade. - When to enter. - When to exit. The PowerX Optimizer will answer all three of these questions for you. Now, I had the software programmed for myself because I wanted all my criteria in one place. With the PowerX Optimizer, I can scan for my basic criteria that I set within the software. For instance, I want to see a 60% return on investment over the past year, I also want to see stocks that are between $5 and $200, and I want a profit factor higher than 3 and a risk/reward higher than 2. This is the criteria I use for trading this strategy. Your criteria may be different. The scanner finds the best stocks and options for me based on my criteria. I certainly don’t want to just stumble across a stock or trade everyone on TV is talking about. Worst case scenario, if nothing meets my criteria, I simply move on. Every day this scanner produces a list of stocks that I potentially want to trade — in less time than it takes to make a cup of coffee! Talk about a time saver! In the beginning, I would just use charting software like TradingView, and I would go through a bunch of stocks every day to see if they met my criteria. It got to the point where I figured there had to be an easier way, which is why I had the PowerX Optimizer developed Instead of spending hours and hours sifting through charts and doing the math, I’m able to find a handful of stocks to look through every day in just minutes. This frees up my time to focus on other things. The Options Wheel Calculator With my Options Wheel strategy, the idea is to “get paid to wait until you buy the stock.” So I’m looking to sell a put and collect premium, and I want to pick a strike that coincides with the level I would feel comfortable buying the stock. Ultimately, I want to get assigned, and then I’ll look to potentially sell covered calls on the stock. The tool I use to identify stocks and options I want to trade with this strategy is the Wheel Income Calculator. The Wheel Calculator pulls up stocks and tells me the minimum option premium I need to collect to make this trade work for me, and the risk/reward setup for each strike. I have set aside $500,000 in buying power for this strategy. That’s what works for me. It does work with smaller accounts if that’s what you have to work with. That’s why I love these tools. They have made my life so much easier. I’m not just picking a trade based on a gut feeling. Instead, I’m trading with a systematic approach that’s based on data. Remember, I like to trade for SCR Profits. SRC stands for Systematic, Repeatable, and Consistent. Trading Plan And that leads me to the last thing I want to talk about today: having a trading plan. You see, having a trading plan is key to having the right mindset to trade. There are three key parts of a trading plan that I’ve already mentioned, but again, they are: - What you’re going to trade? - When you’re going to enter? - When you’re going to exit — both for a profit and a loss. This is also where those limit and stop-loss orders I mentioned earlier come in handy. Limit orders allow you to tell your broker the price you want to get filled, and if you get that price, you move on. Same with stop-loss orders. You tell your broker what point you want to get out of the trade, and if the stock hits that level, you’re out. This allows you to not be tied to your computer, watching every tick the stock makes and opens up your day to allow you to focus on other things. I cannot stress enough how important it is to be prepared when you’re trading — and to have a plan before you enter a position. So, as you can see, by defining my strategies, I developed tools like the PowerX Optimizer and Wheel Income Calculator to help me find trades quickly and efficiently that work with my rules and my plan. I hoped this helped and I’ll see you at the next one.
TVC:SPXEducation
by rockwelltrading
1
What’s The Best Vertical Spread Option Strategy?I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. What’s The Best Vertical Spread Option Strategy? You may have previously heard someone say, “ Vertical spreads are the same as getting weekly paychecks! “ Is that even true? We’re going to go in-depth on each strategy to discuss each of the pros and cons. I’m also going to discuss how each strategy should be used in any given market condition. Since we’ve previously discussed credit spreads and debit spreads, you’re probably wondering… what’s the BEST vertical spread option strategy? Let’s break down each of the vertical spread option strategies in detail and look at examples in Tasty Trade. Call Debit Spread What is a Call Debit Spread? A call debit spread is a position in which you buy a call option and sell a call option at different strike prices using the same expiration date. When should this strategy be used? This strategy is used when you believe the stock is increasing in price, but not a dramatic movement. What are the benefits of this strategy? Trading this position can potentially reduce the overall cost associated with taking on the trade. This type of strategy also reduces the break-even price of the trade. When does this trade lose money? When the underlying stock moves sideways or downward. What is the max risk for this trade? The max risk associated with this strategy is the cost of the premium paid to take on the trade. What is the max reward for this trade? The max reward for this strategy is the difference between the strike price of the two calls, multiplied by 100. Minus the premium paid to take on the trade. Call Debit Spread Example - Reduced Margin Requirement: $910 - Max Risk Reduced: $910 - Max Reward: $4090 Put Debit Spread What is a Put Debit Spread? A put debit spread is a position in which you buy a put option and sell a put option at different strike prices with the same expiration date. When should this strategy be used? This strategy is used when you believe the stock is decreasing in price. What are the benefits of this strategy? Trading this position can potentially reduce the overall cost associated with taking on the trade. This type of strategy also lowers the break-even price of the trade. When does this trade lose money? The underlying stock moves sideways or downward. What is the max risk for this trade? The max risk associated with this strategy is the cost of the premium paid to take on the trade. What is the max reward for this trade? The max reward for this strategy is the difference between the strike price of two calls, multiplied by 100. Minus the premium paid to take on the trade. Put Debit Spread Example - Reduced Margin Requirement: $910 - Max Risk Reduced: $910 - Max Reward: $2090 Call Credit Spread What is a Call Credit Spread? A call credit spread is a position in which you sell a call option and buy a call option as protection. These option contracts have different strike prices but have the same expiration date. When should this strategy be used? This strategy is used when you believe the stock is decreasing in price or trading sideways. What are the benefits of this strategy? Trading this position produces a credit from the premium received for selling the put option. Buying the additional call option provides protection, limiting the risk of the trade. When does this trade lose money? This trade loses money when the underlying stock moves up quickly past your strike price. What is the max risk for this trade? The max risk associated with this strategy is the difference between the strike prices, multiplied by 100. What is the max reward for this trade? The max reward for this strategy is the premium received for selling the call option, minus the premium paid for protection. Call Credit Spread Example - Margin Requirement: $965 - Max Risk: $965 - Max Reward $35 - Premium Received: $35 Put Credit Spread What is a Put Credit Spread? A put spread is a position in which you sell a put option and buy a put option as protection. These option contracts have different strike prices but have the same expiration date. When should this strategy be used? This strategy is used when you believe the stock is increasing in price or trading sideways. What are the benefits of this strategy? Trading this position produces a credit in the form of the premium received for selling the put option. Buying the additional put option provides protection, limiting the risk of the trade. When does this trade lose money? The underlying stock moves downward sharply. What is the max risk for this trade? The max risk associated with this strategy is the difference between strike prices, multiplied by 100. What is the max reward for this trade? The max reward for this position is the premium received for selling the put option, minus the premium paid for protection. Put Credit Spread Example - Margin Requirement: $837 - Max Risk: $837 - Premium Received: $163 - Max Reward: $163 How Do I Choose The Best Vertical Spread Option Strategy? I personally only select options that match my trading plan. You’ve probably heard me say it a million times if you’ve heard it once… There are 3 things you need to know to be successful at trading. 1.) You need to know which options to trade 2.) You need to know when to enter 3.) You need to know when to exit I use the PowerX Optimizer to help me execute these trades successfully.
TVC:NDQEducation
by rockwelltrading
Trading Stocks vs Options: Which Is Better? I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Stock Trading vs Options Trading Stock trading vs options trading, what should you trade? What is better? Is it better to trade stocks or is it better to trade options? That’s what we’re going to talk about today. I will also show you practical examples from trades that occurred today, so let me jump onto the desktop. Now, I want to use an account size of $20,000 as an example here where I’m comparing whether it is better to trade stocks versus options. Depending on your account size, just multiply the numbers that I’m showing you by whatever your account size is and you’ll get the idea. So the idea is, on a $20,000 account, we want to risk 2% of the account. This would be $400, nothing more. Comparing Stock Trading vs Option Trading Now, as we are comparing stocks and options, here are the things that I want to compare. First of all, I want to write down how much we are risking stock trading vs options trading. I also want to write down the reward, how much are we planning to make on the stock or the option. Based on this, I want to write down the risk/reward ratio, and also very, very important, the buying power. What is the buying power? The buying power is the amount of your account that you need to reserve for this trade. It is not the risk and you’ll see this in just a moment. Let’s take a look at some very specific trades that happened this morning. INSW Stock Trading vs Option Trading The first trade that I want to discuss is INSW . So this morning (at the time of this writing) on the PowerX Optimizer, INSW came up as a trade, as a buy to open. And the idea here is that we are buying 239 shares based on a $20,000 account at $22.84. Our stop loss was at $1.67 and I was trading 239 shares. I want to keep it a little bit easier for all of us with the math so let’s round up and call it 240 shares. What is our risk? Per one share, we are risking $1.67 and we are trading 240 shares, meaning that our risk is exactly $400.80. So here let’s just round it to $401. Now, what is the potential reward that we are looking for? Here we are looking for a reward of $8.62 per share. $8.62 times 240 shares, so we’re looking to make $2,069. So we’re putting this into our table, $2,069. So the risk/reward ratio here, PowerX Optimizer is calculating it, it’s 1:5.16 so let’s just say 1:5.2. Now for the buying power. Again, we are buying 240 shares, and the cost per one share is $22.84, so we need $5,482 in buying power. So this is how much our buying power will be reduced when we enter the trade. Now, let me ask you, is this making sense thus far? Just so that you know what happens when you’re trading the stock? And again, we are trying to risk around 2% of the account here, $401. Now, let’s take a look at the option here. So I prefer to trade the in the money, I’ll do another article on the difference between ITM and ATM. But here we are talking about the $22.50 call, and the risk was $172 per one option. So if we want to risk $400 overall, we’re dividing this by 172 and we can trade 2 options risking $344. We’re risking a little bit less and this is just based on the price of the option. In terms of the reward, we’re looking to make $6.80, it’s $680 per one option and we are trading 2 options, meaning that if this trade works out, we would make at least $1,360. Now, according to The PowerX Optimizer, we were making a little bit less. So let’s take a look at the risk/reward, the PowerX Optimizer calculated for us. So the risk/reward was slightly lower at 1:3.95. Now we’re rounding it up so it’s 1:4.0. So as you can see, the risk/reward ratio when trading the option is slightly worse but here’s the deal. What is the buying power that we need for this? The buying power that the broker will deduct from the overall buying power in the account is our entry price. So here we were trying to enter at $2.16, we can round it up to $2.20, and since we are trading 2 options this means that our buying power is $440. Can you already see what the difference is between stock trading vs options trading here? Your buying power is less than 10%. Now, keep in mind, the buying power is not what you’re risking. The buying power is just how much of your $20,000 is being held in reserve for this particular trade. So you can’t use this money anymore. If you trade the stock, you would still have around $14,500 left. However, if you’re trading the option, you would still have $19,500 left. Is this making sense thus far? TVTY Stock Trading vs Option Trading The other trade that I want to show you is TVTY . Here we wanted to trade 392 shares, so let’s just round it up to 400. Now let’s discuss the risk first. So the risk is $1.02 per one share. We’re taking $1.02 times 400 shares, meaning that we would risk $408, which is still within our parameters. We were planning to risk around $400 so here it would be a little bit more, it would be $408. Now, if this trade works out, here is what the reward would be. So the reward is $5.61, that’s how much we are trying to make on this trade. And if we take the $5.62 times 400 shares, we are trying to make $2,248. So the risk/reward, if we look at this, is 1:5.5. Now, here is the buying power that we would need. TVTY is trading at $11.30, so this is where again, $11.30 times 400 shares, we need $4,520 in buying power. Again, not a big deal if you’re trading a $20,000 account, it will be reduced and you’ll have less money to trade right now, around $15,500. Very, very, very important, this is not the risk. This here is the buying power that is needed. Our risk is $408. Our risk here per one option is $141. So if we want to risk $400 overall, we’re dividing it by $141, it’s 2.83. Now, in order to make it all a bit easier to compare apples with apples here, I am actually saying that we would trade 3 options, and $141 is what we are risking per one option, so $141 times 3. It’s a little bit more than our $400, but I think we are still OK here. So we would risk $423. Now the potential reward per one option is $444. So this is where we take $444 times 3, and again, this is where we are looking at $1,333. As you can see, the risk/reward ratio here is worse than if we would trade the stock. It is 1:3.15 so we are rounding it again to 1:3.2. Again, it would be better to trade the stock, but you’re using quite a lot of your buying power. For the option, all you need, all that is reduced, is your entry price, and the entry price it’s $2.47. So let’s say $2.50 times 3 is $750. As you can see you need less buying power, but you also have a smaller reward. But this is why I say usually on a smaller account, it makes sense to trade options instead of stocks. Now the other important thing, especially when you trade a retirement account, is that you don’t get a margin account. This means that you cannot leverage the money that you have in the account and you cannot short stocks. So in the US, in a retirement account, you cannot short stocks. However, what you can do in a retirement account is that you can trade put options, and with put options, you can bet on a falling market. So this brings me back to the question… What is better, stock trading vs options trading? Well, this is why I wanted to show you a direct comparison using a real-life example. This way you see exactly when it is more advantageous to trade stocks, and when it is more advantageous to trade options. Long story short, often for smaller accounts, since you use less buying power, it makes more sense to trade options. And now you have a direct comparison between stock trading vs options trading that will hopefully help you decide what is best for you.
TVC:NDQEducation
by rockwelltrading
The Poor Man’s Covered Call ExplainedWhat Is The Poor Man’s Covered Call? Questions we’ll answer in this discussion: - What is it? - Who is it for? - When to use it? The Poor Man’s Covered Call is a very specific type of spread. As you know, we’ve been covering option spreads for several Coffee With Markus Sessions. We’ve also covered the Covered Call’s strategy in-depth on our YouTube Channel. In this article, we’re discussing the difference between trading stocks, covered calls, and the Poor Man’s Covered Call. Trading Stocks Let’s take a look at trading stocks first. Let’s say that you’re bullish on a stock like Boeing BA . If you were bullish on this stock, you might purchase a decent amount of stock, let’s say 100 shares. At the time of the original writing of this article, this stock’s strike price was $180. If you purchased 100 shares of BA , at $180 dollars each, this would require $18,000 in purchasing power. If the stock increases by $10, to $190, you stand to earn $1,000 in net profit. So you’ve risked $18,000 to earn $1,000. If the stock price increases to $200, you’ll earn $2,000 and so on. This is pretty basic and you probably understand this concept. A profit picture is a sliding scale that moves to the right as the stock price increased. It is a visual representation of your profits. or losses depending on the movement of the stock. In this example, the price of the stock is increasing so the scale is moving to the right. Selling Covered Calls In this example, let’s say that you’re still bullish on BA . And in the short term, you expect an upward movement in price. Since you already own the 100 shares of BA stock, you can sell a $200 Call Option against these shares (again, this is based on the price of BA at the time of writing this article). If the stock price increases to $190 like you expect, you’ll earn an additional $450 on top of the $1,000 you’ve already earned. If we see a decrease in stock price, the covered call acts as a hedge. In this example, if we saw a downward movement to $170 you would lose $1,000. But because you sold a $200 Call option contract and received a premium of $450, your net loss would only be $550. Covered Calls VS Poor Man’s Covered Call Poor Man’s Covered Call When would you trade a Poor Man’s Covered Call? That’s easy! When you don’t have the $18,000 to buy 100 BA shares! And When do you trade a covered call? When you expect the stock to stay above the current price and move slightly higher. Instead of buying a stock, you would purchase a deep in the money call option at a later expiration. When looking for a call option deeper in the money, we’re trying to find one with a Delta of 0.95. his means for every dollar the stock moves, the call option is gaining .95 cents in value. Deep “In The Money” Calls For this example, We’re buying a deep ITM call at $71 which means the capital required to take this position is only $7,100. As you can see this is a fraction of the price to purchase the stock outright. At the same time, we will sell the $200 Call option. Similar to the covered call. But instead of owning the stock at a price of $18,000, we purchased the ITM call option and sold a $200 call option. if the underlying stock price moves from $180 to $190 you would make $1335 because the Delta is 0.95, which means it’s only increasing 95% of the value. The profit on this type of position isn’t as high as a covered call, but it’s much more than owning the stock outright, with much less risk and less capital. This sounds too good to be true right? The perfect strategy! BUT… there’s a downside associated with this strategy. Your profit is limited. If you see a huge movement in the underlying stock, you’ll only benefit from a portion of the total gains. In this example, if the underlying strike price gained $40, the stockholder would earn $4,000. The covered call would earn $2450, and the Poor Man’s Covered Call would earn $2,320. Many traders use this strategy because of the limited capital involved with taking on a position, and the limited risk associated with a potential downward movement of this stock.
NYSE:BAEducation
by rockwelltrading
2
Pattern Day Trader RuleI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Now I want to talk to you about the pattern day trader rule because this rule requires that you have at least $25,000 in your trading account if you are day trading. Here’s the tricky part. The tricky part is that you could trigger this rule even if you’re only swing trading, and not day trading, which is why it’s important that you are aware of what the pattern day trader rule is. I will give you examples of what can trigger it, even if it’s accidentally, and I’ll break down what then happens if you trigger it. Most importantly, I want you to be aware of how you can avoid it. What Is The Pattern Day Trader Rule? So what is the pattern day trader rule? According to FINRA, who set the rule, a pattern day trader is a trader if you execute 4 or more day trades in 5 trading days. So if you execute 4 or more day trades in 5 trading days, then you’re being flagged as a pattern day trader. This is not a good thing. So what actually is a day trade? A day trade is a trade that you open and close, during a trading day. So as an example, if you buy a stock at the open, at 9:30 Eastern Time, and then sell it before 4:00 pm Eastern Time, you are placing a day trade. Now, very, very important: this whole rule only applies to stocks and options. It does not apply to futures, forex, or binary options. It only applies to stocks and options. How To Trigger The Pattern Day Trader Rule How can you actually trigger this rule even if you’re swing trading? Well, it actually happened to me very recently. My head coach, Mark Hodge, and I, we were trading with our Mastermind members. I asked Mark to place a trade in my account, but he accidentally placed it in the wrong account. When something like this happens, I have a rule. “When you make a mistake, liquidate.” So I asked Mark to close the position, and when he did that counted as a day trade. So we opened the trade, realized we made a mistake and closed it right away. This lead to me having one strike in this account. And again, if we would get 4 strikes within 5 business days, then we are flagged as pattern day traders. Now, here’s another scenario. Let’s say that we enter a trade tomorrow and it hits the profit target or stop loss on the same day. So this would be another strike because now we are also entering and exiting during a trading day. So as you can see with this, even if you’re not day trading, it is possible that this could happen a few times. If this happens 4 times within 5 trading days, then you’re flagged as a pattern day trader. What Happens When You Trigger The PDT Rule? What happens when you trigger this rule? Well, first of all, if you have more than $25,000 in your account, nothing happens. This is because the pattern day trader rule says, if you are a pattern day trader, then you need to have $25,000 in your account. Now if you don’t have $25,000 in your account, then you will be restricted to trade on a cash basis only for 90 days. What does this mean? Well, see, as a day trader, you actually do need a margin account, and when you trigger the pattern day trader rule and cannot put $25,000 in there, this means that now you are restricted to trading with cash only. So let me give you an example. Let’s say you are trading the Wheel trading strategy, and you put $20,000 in an account. This means if you put it into a margin account, that you get $40,000 in buying power. So when you trigger the day trading pattern rule, you no longer get this buying power here, the 2:1 leverage. You are now basically going back to whatever cash you put in there when you trigger this rule. How To Avoid Triggering The PDT Rule? Now the question is, how can you avoid this? Well, and I want to give you three tips for how to avoid it. Number one, have $25,000 in your account because if you have $25,000 in the account, then triggering the rule won’t matter. What about if you don’t. Number two, you want to make sure that you count the number of day trades. Leave the date you placed a day trade on a sticky note, and count the number of day trades that you do even if it is accidental, so you can keep track of how many strikes you have. Number three, you can avoid it here by trading a cash account. So if you’re not trading a margin account, you don’t have to worry about it. Then, of course, if you are trading futures, forex, bitcoins, so cryptocurrencies, or if you are trading binary options, this is also when the day trading pattern rule does not really matter. Summary Now you know what the pattern day trader rule is, how you can trigger it, even if it is accidentally, what happens when you trigger it, and how you can avoid this. So let me ask you this, at this point, was this helpful at all? If so, feel free to share this video on Facebook, on Twitter, and I’ll see you for the next article.
NASDAQ:NDXEducation
by rockwelltrading
1
Covered Calls For BeginnersI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Covered Call For Beginners For good reason, the covered call strategy is one of the first option strategies that new traders start trading. This is an effective strategy that options traders often use to provide income on stocks they already own. Questions to be considered in this article: - What Is A Covered Call? - Should You Trade It? - Specific Example Can You Do It In A Retirement Account, EG, IRA? What Is A Covered Call? A covered call is an options strategy used traders to produce income on stocks on long stocks held in their portfolio. This strategy is used by traders who believe that stock prices are unlikely to rise in the short term. A covered call strategy is defined as holding a long position in stock while simultaneously selling a call option on that same asset. This strategy can provide income to a trader who is long term bullish on stocks but doesn’t believe there will be a significant increase in price immediately. A covered call will limit a trader’s potential upside profit if there is a significant move in the price of the stock upwards. This strategy provides little to no protection if the asset price moves downwards. Covered Call Example For the specific example that we’re going to cover today, we’ll take a look at JP Morgan JPM . The price information reflects the price of JPM back in July at the original time of writing for this guide but is just being used as an example If you were holding JPM stock in your portfolio before the pandemic, chances are that you are currently underwater. DISCLAIMER ***For the purpose of full transparency, I do not own or hold any JPM stocks*** I typically only hold stocks between 5 and 25 days. Stock Price Movement Recap For this example, we’re going to assume that I own 100 shares of JPM . If I were to purchase 100 shares for $96 it would mean that the capital requirement for this position is $9600. You’re probably familiar with the way profits move in relation to stock prices… but just to be safe: - If the stock increased to $106, or $10, I would earn $1000. - If the stock increased to $116, or $20, I would earn $2000. - If the stock decreased to $86, or -$10, I would lose $-1000. How Does A Covered Call Work? Sell one call option contract for every 100 shares of the underlying stock in your portfolio. The contract selected would ideally have a short expiration date of 7 days. You would choose an “out of the money” call at a higher strike than the current price of the stock. When choosing this strike price, you would typically choose a price at least one standard deviation away from the current strike price. In other words, choosing a strike price that you do not believe the current strike price will exceed before the date of expiration. If you’d like to learn more about this options strategy, or options in general, I have an awesome Options 101 Course. What’s the benefit of having a Covered Call for the stocks in my portfolio? It’s simple really. When you sell a call option contract, you will receive a premium. This strategy generates income when you don’t expect to profit from the movement of the underlying stock price. In this example with JPM , I received a premium of $55 for selling a call option contract at the price of $116. Provided that the underlying strike price does not move above $116, the contract will expire worthlessly and I will keep the premium I collected by selling the options contract. Let’s take a look at how a covered call will affect your portfolio with the same stock movements. - If the stock increased to $106, or moves $10, I would earn $1000 plus the $55 - If the stock increased to $116, or moves $20, I would earn $2000 plus the 55 - If the stock decreased to $86, or moves -$10, I would lose $-1000 but keep the $55 for a total loss of -$945 Why does this work? If you take the entire amount of premium you received and divide it by the number of days between no and contract expiration, you come up with a number like this: $55 dollars in 7 = $8(ish) per day. This covered call contract is paying us $8 dollars per day. If you take the $8 dollars, divide that by your total capital investment of $9,600 it equals 0.08%. This may not sound too incredible, but… If we do some basic arithmetic and take 0.08% and multiply that by 360 trading days per year, you end up with a return of over 30%. This is in addition to what you earned from the growth of the stock. On some stocks, it’s possible to earn upwards of $20 per day. This could increase annual returns in excess of 40% to 50% Does this sound a little more exciting? YES! Should you trade it? ABSOLUTELY! BUT…. There is a risk associated with this strategy. If there is a large movement of the underlying stock price that surpasses the strike price of your call option contract, you will be forced to sell your shares at this price. This would limit your upside potential to the difference between the current stock price and the price of the call option contract. Example: If the price of the stock went up to $117 (past the $116 call option) and the options contract expires, your stocks will be sold $117. This means you would earn $1,100 + $55, or $1,155. In other words, you would lose $100 for every $1 the strike priced moved above your call option contract. The silver lining is that you can probably buy your stock back the next day if you wanted to hold them long term. This type of trade can be taken inside of your retirement account such as an IRA, which provides you with another way to grow your account conservatively.
NYSE:JPMEducation
by rockwelltrading
Short Selling Put OptionsI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Short Selling Put Options When short selling put options, a question people ask me is, “Okay, Markus, how do you decide what strike price do you want to sell and whether there’s enough premium in there?” I made a put options calculator called “The Wheel Calculator” that I gave away as part of my recent class on selling put options (Theta Kings) that helps me determine just that. This calculator is now also integrated within The PowerX Optimizer Software as well. Using my put options calculator, I can enter a few different figures and it quickly lets me know if this stock makes sense to sell put options on. I started a small account with $25,380, and have continued to grow it substantially. This was all done by selling put premium using my handy put options calculator! So let’s take a look at a few examples using the airlines. Here’s how you can quickly compare if an option makes sense to sell. So United Airlines UAL , at the time of this is trading at $31.08/share. So I’m going to take a look at the April 24th expiration and the $20 strike price. I’m thinking maybe it would be a good idea to sell the $20 United Airlines UAL put option. So now that I have the strike selected that I would like to sell put options on, let’s take a look at the premium these options have. This will let us know if this trade actually makes sense. Right now, the Bid/Ask is $0.74 over $0.87. So I probably can get $0.80 for selling this option. This is all I need to enter in my spreadsheet, along with the expiration. With the needed inputs entered into my handy dandy put options calculator it tells me, “United Airlines can drop 36% and you’ll still be okay.” It has to drop 36% before we get in trouble. I think that’s pretty good odds in my opinion. The cool thing is that it also says that based on my account size, I should buy 17 options, and I would collect $1,320 in premium. So this means that per day I would get $110 in premium. That’s not bad at all if I can make $100 on just one position. And I like to have 4 to 5 positions in my account at any given time. So based on the number of positions I like to have, this means that you can make $400 to $500 per day collecting premium. I like this a lot because it means annualized I would make 87%! 87% is nothing to sneeze at, right? Short Selling Put Options — American Airlines So now let’s do this same thing with another airline, American Airlines AAL , and see how the numbers look. So like we did with UAL , I’m looking at what strike price in relation to where AAL is trading would it make sense to sell. For American Airlines AAL it looks like probably the $8 strike price would make sense right here. You always want to do it below the previously established low. So let’s take a look at American Airlines AAL . The price right now is $12.26. the options strike price, we said we’d probably have to look at is $8. Here we’re able to collect $0.35 per contract at the $8 strike price. And you see, I could actually, since American Airlines is so cheap, buy 41 options based on my account size. So 41 options and I would collect $1,444 in premium. This means I would get $120. That’s not bad at all. And you see, American Airlines AAL also can drop 35% and we would still be OK. We only get in trouble if American Airlines over the next 15 days drops more than 35%. Possible? Yes. This is why you should always be willing to own the stock. And this is why you want to make sure that you’re not getting in trouble. You need to adjust your position size based on your account. Here obviously, I don’t want to trade two airlines because if airlines are crashing, they probably all do. With that said, let’s take a look at Boeing AAL . Boeing Example I like trading Boeing. I'm looking at a Boeing AAL chart to see where might be a good level here to sell Boeing. Based on where AAL is trading at right now, it looks like $100 would be a good level to take a look at. Let’s first try a strike price of $100, shall we? For $100 we get probably a $1.55 right here, with Boeing AAL trading right now at $150. So if we were to sell the $100 put option on AAL , we are looking to make $1.55/contract. And you see, this means that Boeing AAL could drop 33%, so we’re good here. However, we can only buy three options. Why? Because Boeing AAL is really expensive. So if we would have to buy Boeing at $100, this is when it gets expensive, right? So you see, the strike prices here are much, much, much lower. This is where you see I would only trade three not to overextend myself. And that’s very important when you’re selling puts. You want to make sure that you’re not overextending yourself because otherwise, you’ll get margin calls. Margin calls are ugly. A margin call means that your broker tells you, “I want more money.” You want to avoid that at all costs! Because if you don’t have the money, you would have to sell the stock at a price that you don’t want. Usually, this is how you can wipe out an account. Anyhow, you see this is how we would only make $43 a day. Let me ask you, what would you rather make? $110 to $120 per day? Or $43 per day? I don’t know about you, but for me, these are better. So it’s very easy to quickly compare which options you should be trading when you’re selling puts. One of my favorite trading strategies right now is selling puts. This is what you have seen in the past few examples. My goal is to make $400 to $500 per day by doing so. The best days to sell puts is on a down day. On a down day, the VIX is usually shooting up and options premiums are higher. This is exactly what you’re looking for as a premium seller. For experienced options traders, selling put option premium in an environment like this can be a great way to consistently generate income, even if the stock doesn’t do exactly what you want. I hope this helps!
NASDAQ:UALEducation
by rockwelltrading
1
How To Start A Successful Trading BusinessWhen you start trading, you need to go into it like you would if you were getting ready to start a business. Too often, I see new ‘traders’ who open their account and before ever mapping out any goals, a strategy, a trading plan, or anything, they’re already putting money into the markets… …and for me, this isn’t trading, this is gambling. So in this article, I’m going to walk you through how you can start your own successful trading business. So let’s dive in! Starting A Trading Business: Step 1 – Charting Software First, as a technical trader (like me) you MUST have good charting software. Charting software is your window into the world of stocks. As a technical trader, we rely on charts and indicators to find high-probability setups. Charting software with good indicators is an essential first step in your path to being a successful trader. I personally use (and highly recommend) TradingView. It is a paid service and for what I do, I use the Pro Version which currently costs $14.95 per month but it is well worth it. Remember, starting your own successful trading business requires a modest investment into the ‘infrastructure’ of your business. Step 2 – Finding The Right Broker Now on to step 2, finding the right broker for you! Finding the right broker can be a tricky process, especially if you live outside of the United States. If you’re trading stocks and options, I highly recommend tastyworks, or Interactive Brokers if you live outside the U.S. Starting A Trading Business: Step 3 – Trading Strategy Next, now that you have your charting software and broker, every trader needs a good trading strategy. Similar to the broker, one size does not fit all. Why? Well, there are a LOT of variables that can go into developing your trading strategy. For example, are you trading for Income or Growth or the amount you have to trade with? All of these things play a big factor in the type of strategy you want to, can, or should trade. Right now, I’m trading two strategies. My core strategies right now are, The PowerX Strategy and The Wheel. Step 4 – Trading Computer The next thing to consider when getting your trading business set up is you will need a computer. Almost all brokers and trading software are cloud-based, so you don’t need a seriously advanced computer anymore. Most computers that are less than 3 years old should be more than powerful enough to run even the most system-intensive trading platform. Step 5 – Additional Monitors. Now, for your home set up, I think at least one additional monitor is a must. The good news is that if you have a laptop, you already have one monitor! If you travel a lot (like me) I would highly recommend the ASUS MB169B+ 15.6″ Full HD 1920×1080 IPS USB Portable Monitor. They’re lightweight and work great on the road or at home. It fits easily in my backpack (because I HATE checking bags) and doesn’t add much weight. Step 6 – Trading Newsletters Next, over my morning coffee, I like to read a few different trading newsletters. I have three primary newsletters right now where I get most of my market-related news. Most of the talking heads on TV are absolutely terrible for getting non-biased information anymore. No matter what station, everything you hear is coming through some sort of filter. For this reason, I stick with these three newsletters that I’ve found to provide good info: - Morning Brew - Seeking Alpha’s Wall Street Breakfast - The Rockwell Trading Newsletter Summary Now that you have all of the pieces in place to start your trading business off on the right foot, in my next article I’m going to go through something that at first, I’m sure you will cringe: Trading Taxes. But I assure you if you’re proactive and take the time to get set up and structured properly, taxes aren’t actually as bad as you’d think for full-time traders. I hope this has helped and you’ve enjoyed it. Good trading!
DJ:DJIEducation
by rockwelltrading
My Personal Plan For 2021I’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. My Goals For 2021 In this article, I want to talk about my goals for 2021, and how exactly how I’m planning to achieve the goals, so I thought it would be fun to write them down and share them with you. Now, as you know, goals need to be specific, measurable, attainable, relevant, and time-bound. Now, I will show you my financial goals both for trading, because after all, this is what I love to do, but also for wealth building. After that, I will share with you the goals for my company, Rockwell Trading as well as my personal goals, and also my goals for this channel. FINANCIAL GOALS Trading For Income For my financial goals, let’s kick things off and start with trading. The plan here is to trade for income, and my target goal is to make $15,000 per month. This is meant to cover my living expenses. Now, here’s the deal. This is a rough estimate of how much I have in living expenses. So this means that I am looking to make $180,000 per year. For this trading plan, I opened a new account. I put in $250,000 into this new account, and it is a margin account. Since having a margin account doubles your buying power, this turns that $250,000 into $500,000 of buying power that I will use for trading to achieve this goal. To figure out how much buying power I needed, I needed to figure out my living expenses. So as far as I know, my living expenses are around $9,000 per month. You might be wondering, “If your living expenses are only $9,000 a month, why would I try to make $15,000 per month?” Well, very easy, there is this thing called taxes and I want to account for it. This cost is estimated. Quick side note. By now you may be wondering why I seem to be unsure of exactly how much my living expenses are. I will cover this later in this article. So, again, the goal here is to trade for income. My next goal is for wealth building. Wealth-Building Goals One of the avenues I like to use for building wealth and one I’ve very knowledgeable about is real estate. So the plan here is that this year, I plan to buy a 10 million dollar apartment complex. Now, I’ve already been investing in apartment complexes for the past few years, but the rough idea of the financials is: - 7 million dollars will be used through financing. So I will find a bank that is basically financing 30% of this. - I’m actually planning to raise 2 million dollars through investors. - The last one million dollars will be my own money that I’m putting into this deal. This is very typical for how investing in commercial real estate is done. Now, here is the plan. The goal is to sell this for 15 million dollars in three to five years. So we’re selling it for 15 million. Then, of course, we have to give back 7 million dollars to the bank, right? Because we’re borrowing 7 million dollars. 2 million go back to the investors because everybody needs their money back right? Then 1 million dollars will need to go back to me because I also want to make my money back. Now, this is only ten million dollars. That leaves five million dollars in profits that can be divided among the investors and me. So essentially, I’m planning on making two million dollars based on the one million dollars that I invested, which would be a very healthy return. Throughout this whole process, I’ll show you exactly how this process unfolds as it happens, and what apartments I’m looking at with video updates on my YouTube channel as they happen. My other plan for this wealth-building goal is possibly buying a resort in Mexico, and here’s why. Those of you who already follow me know with my company, Rockwell Trading, we do have a Mastermind program, and we have Mastermind meetings at least three times a year. Now, recently due to covid, we weren’t able to have these in-person meetings, but if buying a resort in Mexico is feasible, then not only could we host our Mastermind meetings here in the future, I can also rent these rooms out for Airbnb. Now while I have experience with real estate, I’ve never been in the hotel business, so this might be a really stupid idea, but maybe it is a good idea. Right now this is just a goal, and will look into the details deeper to figure out if this will be feasible. Cryptocurrency So we talked about trading for income and wealth-building with real estate. My next financial goal has to do with something that I definitely have on my radar is that this year, and that is cryptocurrencies. Some of you know that in the past, I’ve been very, very public about being completely against cryptocurrencies, but I can’t deny that Bitcoin had a fantastic run this year. Bitcoin is now trading above $30,000. So guess what? Seems I was wrong. Moving forward I will definitely be looking into Bitcoin and other cryptocurrencies more closely, and fortunately, I have access to some fantastic resources of experts on cryptocurrency that I will interview for myself. I will also share these findings with you on my YouTube channel, and future blog posts throughout the year. My Goals For Rockwell Trading At my company, Rockwell Trading, we offer The PowerX Optimizer Software, and I am determined to make this the very best software in the world. For this, I am planning to release PowerX Optimizer 2.0 in the first quarter of this year, and I’m also developing an awesome trading log that will be integrated with PowerX Optimizer. So why do you need a trading log? Well, with this trading log it will be easy for you to analyze your trades. We all need to analyze our trades, and so this is definitely something that I will tackle this year. One other feature that I want to look into is possibly being able to execute trades through PowerX Optimizer by integration with actual brokerages. As it stands right now, you use The PowerX Optimizer to find stock, and then you have to enter the trades into a broker platform separately. I want to see if I can make this process easier, because, I have the same challenges. I see it on PowerX Optimizer, and now I have to enter it into the broker platform, so not only making trading easier for myself, but for everyone who uses The PowerX Optimizer. I’m constantly thinking of ways to improve The PowerX Optimizer, because not only do I believe in it, but I believe in Rockwell Trading as a whole. I believe this company, Rockwell Trading, can be an Inc 500 company. I am super passionate about trading, creating the best trading tools, and showing you the very best trading strategies that you can use to grow your account. It’s because of this drive I have to provide awesome value for you, that makes me believe we can make their list of the fastest-growing companies. Now I’d like to move on and share my personal goals for 2021 with you. PERSONAL GOALS Writing More Books The first of my personal goals for this year is, I want to publish two more books. So the first book, as some of you are already aware, will be on The Wheel strategy, which is a trading strategy for trading options. Right now I’m in the process of giving the book one final proof-read before sending it to the printers, and I only have a few more chapters to go, but I will be rolling this one out shortly in the coming weeks. The second book I’m thinking about writing will cover wealth-building strategies, which will cover what I’ve been doing over the past years to become a multimillionaire. When I came to the United States in 2002 18 years ago, I had $30,000, and today I am a multimillionaire, so I know a thing or two about how to build wealth. I think this would be another great book to share with you, that you can get a lot of value from. Buying A Plane Here is an absolute crazy personal goal that I have for this year, and you might actually say that this is a stupid idea, but for years I have been dreaming & fantasizing about owning a private plane. I’ve decided that 2021 might be the year where I make this a reality. Now again, this could be an absolutely stupid idea. Don’t get me wrong, I’m pretty smart about how I spend my money, and I’m not planning to buy a 10 million dollar jet because here’s the deal. A private plane is an expense, not an investment, right? However, everybody is allowed to spend money however they want, and this might be one of the things that I decide to splurge on. For other people, it might be exotic vacations, for me, the idea here is a private plane. So it’s smaller like an executive plane, and this is the kind of plane that I’m looking into. I’m definitely not planning to fly it myself, so no worries there. I’m planning to have a pilot fly it for me because I have no idea how to do this. I will look deeper into this and see if buying a plane actually makes sense or not? These are some of my personal goals. Now, in terms of habits, there are also a few habits that I want to start doing this year. HABITS Keeping Track Of My Finances First of all, I want to track everything. What do I mean by this? Well, when I say track everything, I want to get better at tracking my wealth, which would be my net worth. Now I have a rough idea of what my net worth is, but I should be probably getting much better about this so that I know at any given time how many millions I have. You see, the challenge is once you have money, it’s not that important anymore, but I want to do this and I also want to get a little bit better about tracking my expenses. Remember earlier, when I was talking about how I wasn’t sure exactly what my monthly expenses were? This is where being better at keeping track of finances, as a whole comes into play. I said that I’m planning to trade for income on my YouTube channel and that I think I need $15,000 a month, but I actually don’t know exactly how much I need. So I need to get better about keeping track of my finances. Health & Fitness I also want to get better at tracking my weight and calories. I’m 51, so I’m getting older, so it’s important to take care of this. I want to track everything from my water intake, calorie intake, and what kinds of food I’m eating. I also want to keep track of my workouts, and as of now, my workouts are very, very easy to track because it is actually zero, so I want to be better at getting exercise as well. My YouTube Channel Now how does all of this affect you? I mean, why would you even care about all this? Well, this is the beautiful thing about my channel. If you’re interested in what I’m doing with these goals, I’m planning to post videos there throughout 2021. Five times per week, I will post a daily stock market update. I used to talk about what was going on in the markets during the “Coffee with Markus” live streams. These are now separate, daily videos, 5 days a week, and this will be in four minutes or less. Two to three times per week, I will continue the “Coffee with Markus” live streams, but without the market updates, as they will now be in the other videos. I am planning actually keeping you updated on the wealth-building strategies I was talking about, with video updates. I will post videos updating everyone on the progress of my goals, and, of course, I also will continue to post videos covering the very specific strategies that I will use for trading. When it comes to trading, I will continue to show you exactly the two strategies that I’m currently using, which is The Wheel strategy, and the PowerX strategy. If I decide to trade any other strategies this year, I will post videos about that as well. I will share videos with my real estate adventures, which as of right now, is where I’m planning to invest in a 10 million dollar apartment, possibly buying a resort in Mexico. I’ll be sharing everything with you, the good, the bad, and the ugly. I also want to cover topics I haven’t covered before, for example, credit cards. I have a bunch of credit cards and I’m using them wisely, so for instance, topics about credit cards like, “The Apple Card, is it worth it?” I have 3 American Express cards so I’ll cover whether or not they’re worth it. I also can tell you that right now I have 650,000 airline miles, so I will show you exactly what I’m doing to get all of these points because, with 650,000 airline miles, you can go around the world several times. Another topic of interest is that interest rates are low right now. So we will talk about, for example, LOC these lines of credit, or does it make sense to refinance your home? I have been looking into refinancing my home and I will let you know what I found of whether it makes sense or not, and other strategies to employ when interest rates are low, and then when interest rates are high. For example, when interest rates are high, I will cover high yield savings accounts as well as CDs. YouTube also has these so-called “shorts” and these are videos below one minute or less. These will be videos that I do as a quick reference guide. So for example, what is the bid/ask spread? What is Theta in options? Recap So let’s just briefly recap, I wanted to share my goals with you for 2021 and they are: - Will publicly trade here for income with a new $500,000 margin account, with the goal of making $180,000 a year. - For wealth building. I’m planning to buy a 10 million dollar apartment complex, and am looking into buying a resort in Mexico for the Mastermind meetings for Airbnb? - I will look into cryptocurrencies and see which cryptocurrency. Does it make sense to invest in Bitcoin? Are there any other cryptocurrencies worth investing in? Is it better to maybe invest in gold or silver? - I will look into publishing two books. - Improving the PowerX Optimizer Strategy. - I’m looking into if a private plane is a stupid idea or not. - Keeping better track of my health and finances. - Becoming an Inc. Fastest Growing Company. - Providing more content on my Youtube channel. So long story short, this will be an exciting year. I am super excited for 2021. This is the first time ever that I’m doing anything like this, and I will really be pulling back the curtain throughout to show you everything that I personally do. I hope that you find this not only interesting but that these are also strategies that you can employ in your life right away, but this really depends on what stage of life you’re at. You might be at a stage where you are still trading for growth, trying to build an income, and I will show you very specific trading strategies for doing this. It might be that you have a retirement account and you’re looking back right now. You’re getting your initial statement and you say, “You know what? This hasn’t been doing anything over the past year and I want to have better wealth-building strategies.” If so, there will be videos on my channel as well. Sometimes you might be wondering, “Does it make sense for me to open an American Express account or to have an American Express credit card?” Or something relating to this. And I will share all of this with you. Hope that you’re enjoying this. And this is what you can expect from me in 2021.
TVC:NDQEducation
by rockwelltrading
3
Five types of major support and resistance levelsWant to buy the bottom and sell the top? Want to predict major turning points in a security's price? Want to avoid buying too early or selling too late? Then you need to understand support and resistance levels! I know a lot of people who mostly trade breakouts. That can be a very successful strategy, and I've used it myself to good effect. But if you buy a breakout after it happens, you pay a "breakout premium"-- especially if you're buying option calls or puts. You'll get a much better price on options if you buy them *before* a breakout or *before* a major change in momentum. How do you do that? Know your support and resistance levels! Once you know how to identify the different types of support and resistance, you can look to see where several different types of support or resistance coincide . Those will be key price points at which different types of investors who rely on different types of indicators will all buy or sell at the same time.
NYSE:HPEEducation
by ChristopherCarrollSmith
3
Call Ratio Spread DebitThe ratio call spread for debit is the same strategy as ratio call spread credit. But now, the upper and lower strike price are farther apart. This change, give different mathematical results as you can see on the chart. If you didn’t read the previous post, please do. In the chart we see a ratio spread of 2:1, in this case, the options that were sold are now worth less than the call that was bought. So this position is now with debit. Inputs: MA (Mastercard) Debit paid -> 3.8 (-$380 for one position) Stock price -> 338 Upper strike -> 350 , 2 calls sold Lower strike -> 330 , 1 call bought Days to expire -> 36 Implied Volatility -> 0.309 (30.9%) Date -> 12/11/2020 The Debit paid is $380, the maximum profit is $1620 with less than 1% probability, the maximum loss is theoretically unlimited. In this example, one call was bought at 330 strike price for 12.7 and two calls were sold at 350 strike price for 4.45 each, in total 8.9. The debit = 8.9-12.7 = (-3.8) If at expiration the stock price will be below the lower strike (330), all of the options will be worthless and the loss will be only (-$380). Maximum profit = Difference between strike – debit paid = 350-330 – 3.8 = 16.2 This position is neutral. At the expiration: Between 333.8 to 366.2 the position will be with a profit. $0 - $1620 Under 330.17 the position will lose (-$380) no matter what price. Above 369.80 the risk is getting bigger.
NYSE:MAEducation
by ZoharCho
1
Call Ratio Spread CreditA ratio call spread is a neutral strategy in which we buy several calls at a lower strike and sells more calls at a higher strike. In a ratio call spread with credit, there is no downside risk. The ratio spread that we see on the chart has a ratio of 2:1. We can see from the chart the non-linear behavior of options. Inputs: MA (Mastercard) Credit received -> 3.1 ($310 for one position) Stock price -> 332 Upper strike -> 340 , 2 calls sold Lower strike -> 330 , 1 call bought Days to expire -> 37 Implied Volatility -> 0.291 (29.1%) Date -> 11/11/2020 The credit received is $310, the maximum profit is $1310 with less than 1% probability, the maximum loss is theoretically unlimited. In this example, one call was bought at 330 strike price for 14.2 and two calls were sold at 340 strike price for 8.65 each, in total 17.3. The credit = 17.3-14.2 = 3.1 If at expiration the stock price will be below the lower strike (330), all of the options will be worthless and all the credit will be received. The maximum profit at expiration for a ratio spread occurs if the stock is exactly at the striking price of the sold options. The reason is that the call that was bought has some profit (stock price above strike price) and the sold options are worthless. Maximum profit = The spread (340-330=10) + Credit received (17.3) – Debit paid (14.2) = 13.1 => $1310 (mulitpling by 100 shers per option contract) The risk in this position is to the upside. The calculation for the break-even at expiration. Break-even point = Upper strike price + the points of max profit = 340+13.1=353.1 This strategy has a high probability in general and even more so when used correctly. The example that has been used could profit the most in the blue zone, where the profit is greater than 50% of the maximum profit, but it will take 34 days out of 37 to reach there. How implied volatility affect this position? In a ratio spread, there are more options sold than bought, in the previous posts we saw that volatility increase is harming sold options and benefits bought options, this example is no different. 10% increase in implied volatility, the lines are now in a worse location compare to the original position. 10% decrease in implied volatility, the lines are now in a better location compare to the original position. The position can now reach the 50% max profit zone in 30 days. The next post will be on ratio spread debit, that looks different from the ratio spread credit, the solution to the partial differential equations of the Black-Scholes model can be seen.
NYSE:MAEducation
by ZoharCho
1
Call Bull spread vs Call Bear spreadA lot of traders don’t understand why when they entering a spread they don’t receive most of the money even if the stock price is going their way immediately, in this post we will see why. A spread is a position in which we buy one option and sell another option on the same stock. All the options are Calls, with put spreads all the options are puts. There are three types of spreads (when you buy one option and sell another, unlike ratio spread). Vertical, horizontal, and diagonal. What you see on the charts are Vertical spreads. Vertical – The calls have the same expiration dates but different strike prices. From the chart: Bull spread (Left chart)->Call upper strike (sold)-> 85, Call lower strike (Bought) -> 80, the expiration date is the same on the 18 of December 2020. Horizontal – The calls have the same striking price but different expiration dates, for example, both sold and bought calls have the same strike price of 80, but the one that is being sold ends on the 18 of December 2020, and the one that bought on the 15 on January 2021. Diagonal – a mix of vertical and diagonal, not the same strike and not the same expiration date. I will only show here the Vertical spreads. In the call bull spread, the position will profit if the price will be above the upper strike price (85) at expiration, and will lose if the position will be under the lower strike price (80). The options will not be worthless so to avoid commissions the position will be closed before expiration. We can also see from the chart that in order to close the spread early, the stock will need to do relatively big moves. A call bull spread is a debit spread. In the call bear spread (right chart), the position will profit if the price will be under the lower strike price (80) at expiration, and will lose if the position will be above the upper strike price (85). Under 80, all the options are worthless at expiration and all the credit will be received . The amount by dollars, not percent that the stock needs to move to close this position early in the bear spread is lesser than the bull spread, but on the other hand, the directions are different and we should not take a position based only on this criteria. If the implied volatility will decrease all the lines will move to the center. If the implied volatility will increase the lines will move from the center. In the next post, I will show the ratio spread.
NASDAQ:MRNAEducation
by ZoharCho
1
Options strategy Iron CondorIron Condor - a spread with limited risk and limited profit, using four different striking prices but the same expiration date. The position is a combination of puts and calls all of which are Out of the money. The maximum profit is realized between the two inner strikes, and the maximum loss is realized outside of the higher and lower strikes. This strategy is preferable for beginner traders because there is no unlimited risk theoretically, unlike selling straddle/strangle. When selling an Iron Condor (or Iron Butterfly), the trader is neutral. Because all the options are Out of the money, the trader receives credit for it. The inner options are being sold, those options worth more than the outer options that being bought, inner options are closer to the stock price, which means their strike is closer to At the money strike (to more expensive options). If the stock price closes between the two inner strikes at expiration, all the options will expire worthless. The trader will receive all the credit. Chart example: Inputs: Credit recived-> 13.45, Stock price-> 484, Top Upper strike (Bought) ->560 Call Top Lower strike (Sold) ->530 Call Bottom Upper strike (Sold) ->450 Put Bottom Lower strike (Bought) ->450 Put Days to expire -> 46 Implied Volatility -> 46.7% (0.467) Date - > 02/11/2020 Maximum Profit = The credit recived = $1345 Maximum Loss = Difference in Upper (or Lower) Strike – the credit = 560 - 530 – 13.45 = 16.55 = 450 - 420 – 13.45 =16.55 Maximum Loss = $1655 If the Iron Condor is not balanced (the differences between strikes are not equal like in this example), the calculations are different. Like selling Straddle / Strangle, the same conclusions about increase or decrease in Implied volatility are true here. In these conditions, it will take 10 days for the position to enter the profit zone and 35 days to receive 50% of the credit. This post relates to previous posts.
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NASDAQ:NFLXEducation
by ZoharCho
12
Option strategy sell Strangle/Straddle In the chart, you see the strangle strategy when sold, I will show what will happen if the implied volatility changes, you can see this strategy being bought in the next post. You can come back to this post and watch how things play out. As a rule of thumb, strategies are sold when implied volatility is relatively high and bought when implied volatility is relatively low, the seller would try to anticipate IV decrease and the buyer would try to anticipate IV increase. Selling Strangle The strangle is a position involving calls and puts, they will have the same expiration date but different strike prices. Selling Strangle is established by selling Out of the money calls and puts when the stock price is usually in the center. This strategy when selling a strangle is neutral, the seller anticipates that in the life of the options the stock price will remain between the strikes, and at expiration, the options will be worthless and the seller will receive all the credit. The green zone is the profit zone, the yellow lines are the break-even lines, the blue lines are losing lines, the lime green lines represent when you can realize 50% of the credit. I added pink broken lines to show where this strategy will have the maximum profit at expiration. For example, from the chart, these options are from 29/10/2020 close in Zoom. The strategy sold for -> 44.6, meaning credit is received. Stock price-> 489.68 , Upper strike (call)-> 600, Lower strike (put)-> 400 Days-> 50, Impleid volatility-> 82% (0.82), date-> 29/10/2020 For one position we received 44.6, multiplying by 100 (number of shares per contract) if the stock price will be between 400 to 600 at the expiration date , all the options will expire worthless, the seller will receive all the credit $4460 this is the maximum profit. Upper break-even point at expiration: The upper strike + credit received = 600+44.6 = 644.6 Lower break-even point at expiration: The lower strike - credit received = 400-44.6 = 355.4 Between 600-644.6 and 355.4-400, one of the options is not worthless at expiration, so it has intrinsic value, the seller will get between $0-$4460, the seller will need to close the position before expiration to avoid assignment. If the price got to 689.2 or 310.8, the position is losing, in this case (-$4460), this strategy has a limited profit and theoretically unlimited loss. You can see from the chart that It will take at least 22 days to realize 50% of the credit, some traders don’t want to wait until expiration and they prefer to close the position at 50% credit. How implied volatility affects the position? (20% increase and decrease) The blue area is the new profit zone, the purple lines are the new losing lines. If the IV will raise after entering the trade (left chart), the seller will need to wait 18 days before his position will re-enter the profit zone, what was before a profit area will now be a losing area. On the other hand, if the IV will fall (right chart), the seller will profit much quicker, the losing lines will be farther away. Selling Straddle This strategy is a private case to the strangle (the general strategy), in the straddle both options the calls and puts are at the same strike price, usually At the money. The strategy is sold at the money because the time premium is the largest there. This means that the seller receives a lot more credit for this strategy, the downside is for getting the maximum profit the stock price needs to finish exactly at the strike price, the probability for this to happen is less than 1%. The opportunity to realize 50% of the maximum profit will take longer than the strangle, in this example 39 days. The break-even lines will be much closer. The maximum profit for this example is $11,690, much larger than the strangle. The risks are also much larger. How implied volatility affects the position? (20% increase and decrease) The selling of the strangle and straddle are not for beginner traders, due to the risk involved, a less risker strategy is the Iron Condor . In the next post, I will show the buying side of the strategies.
NASDAQ:ZMEducation
by ZoharCho
3
Understanding ETFsHello traders, in this post I will explain different types of ETFs and what is an ETF (Exchange-Traded Funds). ETF for example is a package of different stocks that have similar characteristics. One characteristic could be that they all are in the same sector. Some ETFs track indexes, commodities, and more. Those packages are listed on an exchange and are traded just like stocks. Traders and investors use ETFs to diversify with the provided indexes (or other products) with lower costs, or if the trader can’t trade in futures contracts, it is possible to use ETFs that are related to a specific future. Also, there are options on ETFs that can be used as an alternative for expensive indexes. Leveraged ETFs Most of the ETFs are trading in a 1:1 ratio, for example, NASDAQ 100 is currently at $12621 and the relevant ETF QQQ is $307.8, the difference is 1 to 40, but the returns are the same (1:1). The ETF NUGT on the other hand is moving with correlation to the gold miners index, but if the index return will be 10%, the ETF NUGT return will be 20%, because it is leveraged 2 to 1. Those kinds of ETFs are not for investors or long-term traders, only for the short term. This is because the returns are multiplied by 2. If the index will move down 7% NUGT will move down 14%. Eventually, it will move substantially lower in price because there will be a major correction of 30%+ that will cause a 60%+ drop in price. Thus, there will be a split. If you look at September 2012 you can see that NUGT price is $36000, this is because there were many splits due to the phenomenon I described above. NUGT was never really traded at $36000. In the chart, the orange line NUGT. Moving 300% between March to August, the blue line GOLD 40%. Reverse ETFs ETFs that move in the opposite direction to the index. For example, DUST is a leveraged ETF and going in the opposite direction to the gold miners index. In the chart, the green line DUST. Decreasing substantial percents due to leverage. ETFs that based on Futures There are two types: ETFs that own the commodity – those ETFs are moving almost the same as the commodity itself. For example GLD In the chart above, the blue line is the GOLD price in cash, the red line is GLD. ETFs that buy the futures of the commodity and not the physical commodity, don’t track the commodity with the same returns as the previous type, for example, VXX (VIX), USO (oil), UNG (gas). As discussed in the previous post Futures have a time premium. When you buy ETF that is based on futures, that means that you buy also the premium attached to that future. As time passes, that premium is lost, and then the ETF buys the next contract with a new time premium. As time will pass, you will lose this premium also… and so forth… This is something to be aware of.
AMEX:NUGTEducation
by ZoharCho
5
Assigned With A Wheel Trade & The Market TanksI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. In this article, I want to talk about what to do when you get assigned with a Wheel trade. Previously, I have shown you the Wheel strategy. It’s a strategy that I’ve been trading for several months and I haven’t had a single losing trade yet, knock on wood. So I received a lot of comments on my videos asking, “Yeah. That’s all good. But what do you do when you get assigned with a Wheel trade and the market crashes?” And that’s exactly what we are going to talk about today. What To Do When You Get Assigned With A Wheel Trade I want to show you how to handle getting assigned when the market crashes by using a real trade as an example where this happened to me, and I couldn’t have timed it more perfectly because a little over a month ago, on October 28th, I was recently in such a trade. The market was down more than 3% and it was a bloodbath. Luckily, this scenario provides me with an opportunity to use it as a template to show you what to do when this happens. The TQQQ trade I was in at the time works as a perfect example, so let me just show you how things panned out. So with this TQQQ trade, had an open P&L of -$2,667. So what does this mean? Does it mean that we do have a big loss here? No. This is only an unrealized loss, and this is how I handled it. I simply followed the 5 steps of The Wheel strategy, and the 5 steps are as follows: Pick a stock that’s going sideways or slightly moving up. Sell a Put Option , i.e. you have to buy the stock at the strike price. Collect Premium and buy the Put back when we see 90% of the profits. If we get assigned, i.e. have to buy the stock, we will sell Covered Calls against these shares to try and sell the shares at the strike price. Collect premium and buy the Call back when we see 90% of the profits. Selling Puts The trade initially started on September 3rd, so let’s backtrack a little bit to really dissect it step by step. TQQQ met all my criteria, and on September 3rd is when I first trading this. September 3th, when I started trading this, I sold 150 put for $0.66, which is $66 because I traded one contract, and one contract represents 100 shares. The next day I got assigned. I got assigned because when you’re selling puts it means that if the stock goes below the strike price at expiration, 150 in this case, I would get assigned. This is exactly what happened a day later when the option expired. So I made $66 by collecting premium, even though I got assigned 100 shares at $150/share, but here’s the deal. Since I sold the put for $0.66 this means that my cost basis, since I keep that premium regardless of whether I am assigned or not, gets lower. So this means that the $150 a share I paid minus the $0.66 I collected per share, brings my cost basis down to $149.34. Now doesn’t sound a lot, but it basically means that the stock now does not have to go above $150 anymore. As soon as TQQQ goes up to $149.34 I’m breaking even. Now if it goes above this, I’m making money. Simple right? Selling Covered Calls Now that we have been assigned, this is where we start selling Covered Calls. When you sell Covered Calls against these shares, the goal is to try and sell them at that strike price of that Call, while collecting more premium. Here’s the trade that I did. I sold a 155 Call for $2.10 on the 10th after realizing 90% of the profits, I bought it back for $0.37 the next day. So $2.10 minus $0.37 means I made $173. And now my cost basis gets reduced by another $1.73. Well, now our cost basis is going lower. Our cost basis of $149.34 drops by $1.73, so our new cost basis is now $147.61. This means that if the stock goes back to $147.61 we break even, and if it goes above we are making money. Easy right? Next, I sold the September 80 Call, the September 18 150 Call, for $0.45, then bought it back for $0.05. So this means at this point we made another $40, bringing our cost basis down by another $0.40 to $147.21. The stock kept going against us. It was going down and this is what many of you are concerned about. “What do I do if the stock keeps going down?” Well, you keep selling premium, and by doing so, you’re lowering the cost basis. Well, what I did next was really cool. Selling More Puts? So next, I sold actually two puts for $110 and $118. So that averages out to $114. Then I bought them back at $0.06. This means $114 minus $0.06. So we made another $108 here. Now I’ll explain in a moment why I sold a put here even though right now since we own stocks, and we should be selling calls. There’s a very specific reason for it, and I’ll explain it to you. Looking back at our trade, we are lowering our cost basis to $146.13. Next, after we sold the puts and they expired worthless I actually sold another 100 put for $2.40 and bought it back for $24. So we made another $216 here. Bringing our cost basis down again from $146.13 minus $2.16 to now $143.97. When To Sell Puts INSTEAD Of Calls So if you are supposed to sell Covered Calls during this stage of The Wheel Strategy, why did I sell those Puts? I already owned 100 shares of TQQQ that were assigned to me, so why risk getting assigned more? Well, I sold these Puts, instead of Calls for a specific reason. At this stage of The Wheel Strategy is where you normally would sell Calls, however, if you are on this part of this strategy, and the market is tanking, you have to make an adjustment to this strategy if the price keeps dropping, to help keep your cost basis as low as possible. These were 100 Puts, meaning if the price would have dropped below $100 at expiration for either of them, and I would have been assigned the shares. If that were to happen, I would now own 100 shares at $100 each, on top of the 100 shares I already own at $150 each. So now I own 200 shares, I paid a total of $250 for, bringing the average price per share to $125. Getting assigned these shares would have lowered my cost basis tremendously. If you subtract the total Premium I received on all of these trades, which was $12.05 a share ($1,205 overall) from the average price per share, which in this case is now $125, this comes to a cost basis of $112.95. This is what the cost basis would have been IF I was assigned these additional 100 shares at $100 each. I wasn’t assigned these shares, however, and my final cost basis was $137.95. Do you see why getting assigned is a good thing? People are afraid of getting assigned, but as long as you have adequate buying power, and are following my methods for picking good stocks, assignment should be looked at as a good thing. Selling Premium You see, this is what the Wheel does. You can sell premium while you own the stocks. So I then sold a $150 call for $1.57, bought it back at 15. So this means that I made another $142 bringing down my cost basis again to $142.55. Now, I don’t want to bore you and make this article too long here, but long story short, as you can see, I sold a few more of the calls and I bought them back. So overall, by just selling premium, even though I still owned the stock, I was continuing to lower my cost basis. At this point, the stock was down $2,770. However, by doing this, by selling more calls and puts here, I was able to make $1,748 in premium. So this means I made $17.48 per share on these 100 shares. So if you take the $150 minus $17.48 right now, right now my cost basis to break even on this trade is $132.52. So as soon as TQQQ goes back to $132. Now, what happens if TQQQ keeps going down? I will keep doing what I’ve been doing, following The Wheel Strategy. I’ll keep collecting premium until at some point, I can sell these shares for a profit. Recap So now you know what to do when you get assigned with a Wheel trade, and hopefully, it becomes less scary for you. I look forward to getting assigned with a Wheel trade because that allows me to sell calls and make even more money. If the stock keeps going down, I’ll just keep selling, and I will continue to lower my break even more and more. So, right now, TQQQ does no longer have to go all the way up to 150. It only needs to go up to $132.52. I just wanted to address this process because I know that many people who are trading this strategy are concerned saying, "Oh my gosh, what if I get assigned with a Wheel trade?” It’s a good thing. It’s a good thing and now you know why.
NASDAQ:TQQQEducation
by rockwelltrading
1
How To Place A Wheel TradeI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. All right, so how exactly do you place a trade for The Wheel? Well if you have been following me for a while, then you know that I love trading two strategies. The first strategy I trade with is The PowerX strategy and it’s my bread and butter strategy. The second strategy I love trading is The Wheel strategy and this strategy has a very high winning percentage. In fact, I’ve been trading it publicly live on my YouTube channel over the past few months, and thus far, knock on wood, I have a 100% winning percentage. Having a trading strategy is key, but how do you actually place a trade? In this article, I will show what steps you need to take, from what type of account you need, to how exactly to place the trade. I’ll show you these steps using two popular brokers, first on tastyworks, and then on Interactive Brokers because I know that many international traders use this platform. Getting The Right Trading Permissions Firstly, you can trade The Wheel in any account you want, even in a retirement account. You just need to make sure you have the right options for trading permissions. When it comes to options trading there are four levels. On any account opening form they ask you, as any broker would, “What type of activity do you plan to conduct in your options account?” It doesn’t matter whether it is a cash account, a margin account, or a retirement account, all you need for trading The Wheel strategy is the lowest permission possible which is Tier 1. With Tier 1, you can write and sell covered calls, as well as writing and selling cash-secured puts. This is exactly what we are doing with The Wheel strategy. So this is step number one because if you don’t have these permissions, there’s not a whole lot that you can do. Contact your broker and make sure that you have Tier 1 options permissions, which again, are writing covered calls and cash-secured puts. If you have a higher Tier, like Tier 2 or 3, that’s okay, because Tier 1 is included in the higher Tiers. The 4 Things You Need To Know Before placing a trade, there are the first four things that you need to know: What type of option are you trading? Are you trading a call or a put? You need to know what is the expiration of the option. What is the strike price? What’s the minimum premium that we want to get in this trade when trading The Wheel strategy? For those who may not be aware, when I take a trade I send out an alert notifying those who opt into our Power Income Alerts feature. I recently sent an alert out for a trade with WYNN that I recently took. According to this alert, the idea is we believed that WYNN would stay above 70 by October 30th, but if it is less than $70, we would be assigned shares, then sell calls against the position. The alert contained the four things needed to know in order to place the trade. It had the strike price, the expiration, and the credit that we wanted to achieve. With this information from this alert, I’m now going to explain to you how would enter this trade in tastyworks, and then I will explain to you how exactly you do this on Interactive Brokers as well. How To Enter A Trade In Tastyworks Once you bring up the tastyworks platform, the first thing that you need to do is enter the symbol. In the upper-left-hand side, we would enter WYNN because this is the stock that the alert went out for, so we type in W-Y-N-N. Now, the second thing is, as soon as we bring it up, you click on the “TRADE” on the left-hand side. After you click the “TRADE” tab, you have to select the expiration from the list that populates. According to the alert, the expiration we are looking for is October 30th so this is the expiration we would select. Now you’ll see all the calls on the left-hand side and all the puts on the right-hand side. You just click on the bid price, and after clicking, it’ll say “S1”. So this means now that you are selling one contract. Now, depending on your account size, you might want to sell more than one contract. This is why the alert will tell you the buying power that you would need to trade one option if you want to trade it cash secured, which I highly recommend you do cash secured, and that would be $7,000 for each option that you want to trade. So for me personally, in the account I was using, I wanted to trade three options so I adjusted the quantity until I saw three options. So the next thing is that you need to specify is the minimum amount of premium that you want to achieve. In the alert, I specified that you should receive at least $0.50 credit. The bid/ask of this option right now is between $0.80 for the bid and $0.84 for the ask, and it makes sense to go with the mid-price which most brokers suggest. Now click on “REVIEW AND SEND”, and then you have the opportunity to quickly reviewing your order. So now we have three WYNN options here that we are selling (-3), with an expiration of October 30th, and a strike price of 70. You’ll see a P which stands for “put,” and STO means “sell to open.” The limit order I used to sell it was at $0.82. Now $0.82 is above the $0.50 credit that I suggested that you get at a minimum in the alert, so if you are able to get more than the minimum, good, do it. There are estimated commissions and fees, and then you just have to hit “SEND ORDER” and the order gets placed. You now just have to wait to get filled. If you’re not getting filled right away, you can adjust your bid and ask, so instead of going for $0.82, you can then try lowering your bid to see if you get filled. As you can see, it’s very simple, and next, I want to show you also exactly how to do this on Interactive Brokers, and it’s just as easy. How To Enter A Trade In Interactive Brokers All right, so let’s go over how to place a trade with the Interactive Brokers platform. Now I will be using the information from the same alert we used when placing the tastyworks trade. This platform looks slightly different, but the functionality is always relatively the same. There will be a place where you can enter the symbol, so we are typing in WYNN as the symbol in the upper left. As soon as we hit Enter, it will ask us if we want to trade stocks, or do we want to trade options, so of course, we pick “options.” This will bring up the options chain. An alternative way to bring up the options chain is to click “New Window” above the field where you input the stock ticker and click “OptionTrader” to bring up the options chain. I will look almost similar to how it looks on tastyworks. So here again, we enter, simply W-Y-N-N and now we need to pick the expiration. The expiration going back to the alert is October 30th and a strike price of 70. Just like we did in tastyworks, after selecting the strike price of 70, we click on the bid. Once we click on the bid, it will bring up the order at the top. It asks for a limit order, and we can also adjust the number of contracts. So instead of trading one contract, we can trade three contracts. We can also adjust the limit order to 82, as we had with tastyworks. When we’re done, all we need to do right now is hit the T for Transmit. Summary As you can see, there are differences between these packages. I personally use Interactive Brokers a lot, and it is very popular with international traders. I also use the tastyworks platform and find it a little bit easier to use. Now you know how to place a trade according to the Wheel, using tastyworks and Interactive Brokers. Other brokers, other than these two, will be very, very similar. After reading this article, you now know what type of account you need for trading The Wheel Strategy, and you can use a cash account, a retirement account, or a margin. It doesn’t matter as long as you have Tier 1 options permissions meaning you can write/sell covered calls, and cash-secured puts. Within the platform, all you need to do is input whether you’re trading a call or put, the expiration, strike price, and what’s the minimum premium that you want to collect. It really is that easy.
NASDAQ:WYNNEducation
by rockwelltrading
VIX - Future / OptionsHello traders, a couple of facts on the VIX that you might didn’t know. VIX is a 30-day volatility measure. The calculation is based on two strips of SPX options that are used in the VIX calculation (now for example November and December option strips), the strips have a different weighting each day. Every day that passes we have fewer days in the current month and more days in the next month, for example, we have 12 days to the end of this month and 18 days in the next month and we get to 30 days, we can see that the next month has more weight. For longer-term Futures, expiring in later months they will not track VIX well. The VIX calculation can be applied to any set of options that have two strips of options in the two front-months. Because of this VIX calculation of volatility can be made for almost every stock, index, or futures. Examples: VXAPL (AAPL), VXAZN (AMZN), VXGS (Goldman Sachs), VXGOG (Google), VIXIBM (IBM), VXSLV (Silver ETF), and more. Volatility moves opposite to the direction of the stock, index, or futures almost 75% of the time. We can see in the chart that the green areas are when VIX and SPX are opposite in direction and in the red when they move in the same direction. A futures contract has an expiration date but no striking price, unlike an option contract. If a futures contract is trading at a higher price than the VIX, the futures are trading with a premium. If they trading at a lower price than VIX, the futures are trading with a discount. Example: VIX 24.3 VXZ2020 24.875 (December future) -> 24.875-24.3 = 0.575 Premium VXF2021 26.175 (January future) -> 26.175-24.3 = 1.875 Premium VXG2021 26.225 (Februry future) -> 26.225-24.3 = 1.925 Premium We can see that the prices are rising, usually when the markets are going up the longer-term futures will cost more and the futures will have premiums. If the VIX will go up and there will be a big correction or even a bear market the futures will trade with discounts. This since VIX is based on 30 days calculation. This means that the front contract (the contract this month) will have very high volatility and the long-term futures will have lower volatility because when the markets fall it is usually short but violent moves and there will be an expectation of the market to go sideways or reverse. Example: VIX 60 (December), VIX Future (January) 52, VIX Future (Febraury) 47. You can see that discounts can be quite large and the trader that would expect to profit from long-term VIX futures when the market falls, will be very disappointed. This is why usually traders buy the VIX front-month contract. One way to hedge the portfolio. (“Insurance”) Buying VIX calls compare to SPX puts. The calls are better. When buying puts on SPX about 7% out of the money, today example SPX 3567 and the strike price of the puts 3310. If the SPX will go up in price there will no longer be a 7% protection. When buying calls on VIX for protection, if the market will decline the VIX could easily go to 30 and even much higher, even if in the short term the VIX will go down. The lower the VIX when we buy the calls the effect will be much greater. Remember that in March 2020 the VIX was over 80.
Editors' picks
SP:SPXEducation
by ZoharCho
20
Cash Secured vs Naked PutsI’m Markus Heitkoetter and I’ve been an active trader for over 20 years. I often see people who start trading and expect their accounts to explode, based on promises and hype they see in ads and e-mails. They start trading and realize it doesn’t work this way. The purpose of these articles is to show you the trading strategies and tools that I personally use to trade my own account so that you can grow your own account systematically. Real money…real trades. Cash Secured vs Naked Puts What I want to talk about right now is the difference between cash secured vs naked puts. If you've been following Coffee with Markus, then you know that recently there was a comment from someone who said “They are the same thing!” Of course, that is not the case. So in this article, I’ll show you the differences between cash secured vs naked puts. I’ll also explain why I highly recommend that you trade cash secured puts when trading the Wheel strategy. Selling A Put Option When you sell a put option it means that you have to buy the stock at the strike price that you sold it for if the contract is exercised at expiration. This is very important, and you are obligated to do it. So, therefore, obviously what you want is that the stock stays above the strike price that you chose. Because in this case, you just keep the premium. Now, let me give you a very, very specific example here. Put Example: IBM So recently, I sold a 115 put on IBM . I did this with three days to expiration and I received a premium of $43 per option that I traded. Now, I traded two options, or two contracts. So this means that I received $86 in premium. If you divide this by three days, this means that we are looking at approximately $29 per day in premium, which is what I’m looking for. I mean, this is how I have achieved the very systematic results here of 22.7% over the last three months, and if I can keep this up, this would translate into 19.8% per year. So thus far, what does it have to do with cash secured or naked puts here? In this example, as long as IBM stays above 115 until expiration, I would just keep the $86 in premium and the option expires worthless. However, if IBM would close below 115 at expiration, then I have to buy 100 shares of IBM at a price of $115. So in my case, since I have sold two options, I would have to buy 200 shares of IBM at $115. This means that I would have to bring $23,000 to the table. But here’s the deal. In order to sell these puts, my broker only required around $4,400. Let’s take a look at this. See IBM here, it says capital required $4,453. That’s only 20% of the money that I actually need to buy the shares. The Differences Between Cash Secured vs Naked Puts Now let’s talk about the difference between cash-secured puts and naked puts. Cash secured puts mean that you have $23,000 in your account to cover the stocks if you are getting assigned. So if you only had $5,000 in your account, you could still place the trade. As you can see, the broker only required $4,453. However, you wouldn’t have enough money to actually buy the shares if you got assigned. This means that you sold the naked puts. You just don’t have enough money. You just had enough money for the broker, what he required to sell it. So why would the broker let me sell the puts for only $4,400 when I need $23,000 to buy the shares if I get assigned? Well, here is why the broker does it. He does it for two reasons. Reason number one, most options expire worthless. And number two, even if they don’t expire worthless most traders buy the option back. So they close it before they expire and the broker knows that. That’s why he’s only requesting 1/5 of the buying power that you need for buying the shares. And that’s all good as long as you close your position before expiration. However, when trading the Wheel, you actually want to get assigned. It is part of the strategy. You see, we not only sell a put option, if we get assigned we will sell calls and get the premium. So the question now is… What Happens If You Don’t Have Enough Money And You Get Assigned? Let’s say you have $5,000 in your account and you entered this trade. Now IBM is below 115 at expiration and you have to buy 200 shares at $115, but you don’t have the money. So what happens? Well, now your broker is buying them for you and you get a so-called ‘margin call’. What does it mean? A margin call basically means the broker asks you to wire the remaining $19,000 that you need for this into the account, and he wants to have this pretty much that day. What happens if you don’t have the money? If you don’t do this, the broker will sell the shares the next day at whatever price he can get. So this means that you lose all control over this trade. Your broker is now in control and that’s not good. You see, when trading the Wheel strategy you want to remain in control. After we get assigned the shares, we want to sell calls against it and collect even more premium. Summary I highly recommend that you trade cash-secured puts so that you have enough money in the account in case you get assigned. This way, you have full control over your shares and you can actually make money with them. Now you know the difference between cash-secured puts vs naked puts and you know when to use what.
NYSE:IBMEducation
by rockwelltrading
2
Options buying and sellingI decided that before explaining complex strategies, I need to explain call options and put options and differences between buying and selling. (I'm adding down calls chart) The term "the option is worthless" meaning that the stock price didn’t finish above the strike price in calls or finish below in-puts. Buy Calls – Bullish “strategy”, you need to select a stock that will go up in price in a reasonable time. Limited loss (The maximum loss is what you paid for the option), theoretically unlimited profit. Buy Puts – Berish “strategy”, you need to select a stock that will go down in price in a reasonable time. Limited loss, theoretically unlimited profit. Selling Naked means that you only sell the option contract without owning the shares. 1 option contract equals 100 shares. Sell Calls (Naked) – In general, this a Berish “strategy”, but it depends. The seller wants the option to expire worthless, meaning all the value of the option will go to zero, the price of the stock needs to be at the expiration date under the strike price of the option. Theoretically unlimited loss, limited profit. Example: XYZ worth at the beginning $100 per share. The seller sold 1 option - Different calls: In the money option strike $95 worth - $6 ($5 intrinsic value + $1 time premium) At the money option strike $100 worth - $3 Out of the money option strike $105 worth - $1 In the money call sold – The seller sold a call at the strike price of $95 If the stock will finish anywhere below 95$ The call seller will profit $600 The stock has to go down at least $5 At the money call sold - The seller sold a call at the strike price of $100 If the stock will finish anywhere below 100$ The call seller will profit $300 The stock can be neutral or go down slightly. Out of the money call sold - The seller sold a call at the strike price of $105 If the stock will finish anywhere below 105$ The call seller will profit $100 The stock can be neutral or go down slightly or even go up in price and the seller will still profit. You should notice if the stock will go up in price large loss could happen. In theory, this loss is unlimited, in practice, the loss is limited by time. The stock cannot rise to infinity. Naked call selling is not the same as a short sale of stocks. While both have large potential risks, the short sale has much higher reward potential, but the call selling will do better if the stock remains at the same price. You can see from the example that the call seller can make money in situations when the short seller would have lost money. Covered call writing (selling) – I won’t go deep here, this means the seller of the option own 100 shares, the cover call writer is mildly bullish or neutral. People do this to decrease the risk of owning a stock or don’t believe the stock will go very high in price and they want extra profit. This limits the profit potential. Sell Puts (Naked) – In general, this a Bullish “strategy”, but it depends. The seller wants the option to expire worthless, meaning all the value of the option will go to zero, the price of the stock needs to be at the expiration date above the strike price of the option. Theoretically unlimited loss, limited profit. An example of selling puts is exactly the opposite of selling calls. The seller wants the stock price to be above the strike price of the option he sold. (Will show you down with another chart) What happens in the buyer and seller portfolio after expiration, several cases We will examine calls buy and sell if the stock finishes above the strike price of the option, for example, the strike price is 100 the stock finish at 105. The buyer needs to buy from the seller 100 shares ( 1 option contract) at the strike price, meaning he will need to have $10,000, but the stock is at 105. The buyer portfolio will be with 100 shares long at $100 with an unrealized profit of $500 minus the premium paid for the option minus commissions. The seller needs to provide those stocks, so he will be short 100 shares at $100, with a loss of (-$500) plus the premium he received from the buyer for the option, minus commissions. If the stock finish below the strike of the call option, the option is worthless and the buyer lost the debit he paid for the option, the seller received all the credit. No stock transaction is happening. Time – The more we get closer to expiration the greater the time decay, this is good for the seller and bad for the buyer, remember the seller wants the option price to go to zero, receive all the credit. Volatility – Raise in volatility is good for the buyer and bad for the seller, when volatility raises the option gets more expensive. If the option that was bought now worth more because of the rise in volatility the buyer profit from it. There is a lot more to say about this subject, every strategy has a different consideration that needs to be taken into account. Note: Naked option selling is usually a strategy for professional traders. Chart: Buy put – option price -> 129.4 , stock price -> 3286.33 , strike -> 3045, days -> 52 , implied volatility -> 47.4% (0.474), date-> 27/10/2020 Sell put – option price -> 127.25 , stock price -> 3286.33 , strike -> 3045, days -> 52 , implied volatility -> 47.4% (0.474), date-> 27/10/2020 Delta 0.3
NASDAQ:AMZNEducation
by ZoharCho
1