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CHWY Defensive Bullish inclined - 18 Sep ExpiryCHWY is an online retailer of pet food. Since the start of the year is has generally been on a bullish uptrend. I picked CHWY as it's price movement seems pretty predictable and not very volatile. Price has recently hit a nice high 52 week high and now seems to be in a range and testing that key 52 week high price point. I feel that there is a higher probability of it moving downwards, especially with it's RSI leaning towards the higher band of 60. As my defensive trade is focused on picking off premium. As such I have made it bullish inclined with a Max gain at strike 70 and breakeven at 71.23. So the scenario I aim for is a bearish price that so that my contracts can just expiry worthless. I'm worried as Tradingview has pegged earnings at 21 Sep, but other sources has it at 8 Sep/15 Sep. I only realised this after the trade was entered and TOS showed a different earnings date. Defensive Profit $1333 Bought 18 Sep @ Strike 60 Calls +1, $2.7 Sold 18 Sep @ Strick 70 Calls -20, $0.81 BP block: 12k
NYSE:CHWYLong
by Ronin_trader
JETS ETF - Protected Bearish Inclination 18 Sep expiry There seems to be a resurgence of COVID-19 cases across the globe. Before Sep 18 I doubt there would be positive news for the travel industry, especially in the US. As price broke the support line, technically theres a chance it will continue dropping. Positive news on the stimulus won't help travel and I do not expect an influx of investors into the travel industry as it is one of the weakest sectors and money would probably flow first into something more solid like tech or at least the S&P 500. This is a protected trade. If price goes bearish, I have a chance to hit my max gain of est. $3222 but I must close the contract before it drops too much my way otherwise I will start losing. If prices don't go my way (goes bulls up) or ranges I will collect est. $1250 Would prefer this to be a 4 weeks contract, but 18 Sep (8 Weeks) had a better price for my trade structure Sold 80 Puts @ 0.26, Strike 12 Bought 10 Puts @ 0.73 Strike 14 BP block: 10k Max gain - est $3222 Planned Minimum gain - est $1250
AMEX:JETSShort
by Ronin_trader
Why I am planning to by PUT Options on NIFTYContext : August 31 was a the day when NIFTY broke it's normal routine of moving up slowly, which started in June. It also followed up by another leg of down move on Sep 4. I was able to play both these moves because of sound strategies. And Now with these two successful attempts, I completely understand , shorting again may not be a good idea. **** THIS IS HIGH RISK TRADE. PLEASE DO NOT FOLLOW> JUST SHARING FOR INFORMATIONAL PURPOSE **** the question arises, what is next? Are we done with correction or this time, something has changed? Nobody knows the answer. But as a trader, it is my job to create a logical viewpoint and design a trade which rewards me if NIFTY indeed goes in the way I imagined. For creating this view, I can dig deeper in the recent corrections and see if there is anything I can build upon from the data. Now I do not know if the current correction is over, but since 9 days have passed, I am willing to study the current move as well. Study of corrections so far ==================================================================== Correction 1 (June 8 - 12) Upswing Days : 8 (6G + 2R) Upswing Chg : 14.71% Upswing Angle : 68 --------------------------------------------- Correction onset : High Trap Correction Days : 4 (1G + 3R) Correction Chg : 7.59% Correction Angle : -71 Correction end : Large Candle + News --------------------------------------------- VIX Jump ~ 17% % Stocks above 20 SMA (Chg) ~ -3% (90.51%) No. of days to regain the top - 7 Note : No deeper close below 15 day EMA Sharp surprise emerged at climax low ***************************************************************** Correction 2 (June 24 - 29) Upswing Days : 8 (5G + 3R) Upswing Chg : 10.57% Upswing Angle : 62 --------------------------------------------- Correction onset : High Engulfing Correction Days : 4 (3G + 1R) Correction Chg : 3.12% Correction Angle : -59 Correction end : Indecision + Spring --------------------------------------------- VIX Jump ~ -2.25% % Stocks above 20 SMA (Chg) ~ -12.6% (75.36%) No. of days to regain the top - 3 Note : Stayed above 15 day EMA ******************************************************************* Correction 3 (July 13 - 16) Upswing Days : 10 (7G + 3R) Upswing Chg : 6.56% Upswing Angle : 44 --------------------------------------------- Correction onset : False Breakout Correction Days : 4 (1G + 3R) Correction Chg : 2.79% Correction Angle : -60 Correction end : Hammer --------------------------------------------- VIX Jump ~ 0% % Stocks above 20 SMA (Chg) ~ -16.49% (35.84%) No. of days to regain the top - 2 Note : Just touched 15 day EMA, did not close ******************************************************************* Correction 4 (July 29 - August 3) Upswing Days : 9 (7G + 2R) Upswing Chg : 6.97% Upswing Angle : 54 --------------------------------------------- Correction onset : Silent, No pattern Correction Days : 4 (4R) Correction Chg : 4% Correction Angle : -69 Correction end : Climax Exhaustion --------------------------------------------- VIX Jump ~ 4.4% % Stocks above 20 SMA (Chg) ~ -2.2% (36.1%) No. of days to regain the top - 6 Note : Closed below 15 day EMA, strong negative close. ******************************************************************* Correction 5 (August 11 - 14) Upswing Days : 5 (4G + 1R) Upswing Chg : 4.32% Upswing Angle : 53 --------------------------------------------- Correction onset : Dragonfly doji Top Correction Days : 4 (2R + 2G) Correction Chg : 4% Correction Angle : -55 Correction end : Climax Exhaustion --------------------------------------------- VIX Jump ~ 0% % Stocks above 20 SMA (Chg) ~ -2.5% (71.69%) No. of days to regain the top - 2 Note : Just touched 15 day EMA, did not close ******************************************************************* Correction 6 (Or Trend Change) (August 31 - ?) Upswing Days : 10 (8G + 2R) Upswing Chg : 5.83% Upswing Angle : 47 --------------------------------------------- Correction onset : Large Bearish Engulfing Correction Days : 8 (5R + 3G) ... Correction Chg : 5.19% ... Correction Angle : -59 ... Correction end : Gap Reversal (?) --------------------------------------------- VIX Jump ~ 25% % Stocks above 20 SMA (Chg) ~ -25.65% (27.66%) No. of days to regain the top - 9 days has not regained the top Note : Stayed below 15 day EMA for 4 candles. ******************************************************************* My observations about current correction ----------------------------------------- 1) Current downmove has made the NIFTY participants fearful. VIX jumped 25% during the period. 2) So far 9 days have passed and NIFTY has not been able to reclaim the 11800 level. 3) Market breadth has weakened considerably. There are only 27% stocks above 20 SMA 4) NIFTY broke 15 day EMA and stayed below it for some time, which none of previous corrections did. My view ------- 1) All these observations mean, the buyers are not enthusiastic here to aggressively buy. 2) Buyers are fearful and only betting on few names (27% of the stocks) 3) If buyers are waiting for lower prices, NIFTY will drift down under selling pressure. 4) For now, intention to sell is also not very clear. 11800 and 11600 levels , there was selling, but it is not confirmed. 5) Sellers are scared that NIFTY may again move up and then buying will accelerate. They are comfortable selling once previous point is taken out. Possibilities ------------ 1) For now, I assume the possibility of NIFTY breaking down further , how much - lets assume 10%, that is the healthy correction even in bull market. That is roughly 10600-10700 level 2) Will NIFTY go and touch 11800 in between, yes may be. But for building my view, I assume it wont cross 11800 convincingly. 3) This move can be sharp or can form complex top - distribution pattern. How to trade this? ------------------ 1) I'll buy a October 29 11000 PUT , preferably when NIFTY is around 11400 - 11500. Current price for this is 162 rs 2) Anytime, this goes to 400 Rs or closed, I'll close the trade or hedge it to secure profits. (NIFTY 10700-10600 on SPOT) 3) My stop loss is NIFTY closing above 11900 for 2-3 days. How I can further reduce my risk? --------------------------------- 1) Since I am buying the PUT , I can offset some of its cost by selling 10600/10700 PUT every week. But this is potentially restricting move, so need to be executed only when strong buying is seen on lower time frames. How much loss I can see? ------------------------- If NIFTY hits stop loss by Sept 30, PUT will be around 40 rs ~ that is 9000 rs loss per lot.
NSE:NIFTYShort
by Observe_Think_Act_Think
4
FB Buy Zone(s) IdentifiedPlaying around with some technical analysis tonight.. I found a found a pretty decent buy zone for FB. In the video I explain how I identified it.. I also go into a little bit of detail about how I chose the the option contract I'd like to play. I hope you enjoy! Sorry if it's a bit awkward, it's my first video upload.. More to come, I hope! Have a good one, everybody. Please reach out with criticism or questions! I'm happy to engage with any trader.
NASDAQ:META
by DonjonCapital
Options Idea: Sell The JD Oct 16 2020 62.5 Put @ $1.03JD has been in an ascending parallel channel since the COVID-19 peak in March and shows no sign of slowing down. I sold an October 16 2020 62.5 Put @ 1.03 near the bottom of the channel today with the idea that the uptrend will continue over the next couple months. This is one of China's biggest e-retailers and its been having a great time with extra sales due to the pandemic. Don't see any reason why that should stop anytime soon. An alternative idea for a more aggressive trade would be to sell the $70 Put for a much larger credit. The $70 Put will be just below the bottom of the channel on the Oct 16 expiration. 20-JD-01 Opening Date: August 20, 2020 Expiration Date: October 16, 2020 DTE: 57 IV: 44% IV Percentile: 36% Odds of Winning: 80% Win: > 61.47 @ Expiration Loss: < 61.47 @ Expiration Reg-T Margin @ Open: $720 Chart Legend The green area represents 100% win zone. The yellow area is a win, but we have to give back some of the initial credit taken in. The red area is loss. 1 SD, 2 SD, 3 SD projections from Opening Date to Expiration Date are included.
NASDAQ:JDLong
by OptionsCoach
2
PTON Bullish and bearish flow before earningsBacktested the breakout point ($72.1) on Sep 4 or pivot point and held the 20 SMA. Earnings whisper is expecting .13c EPS and $560 mill revenue. Previous Q was $524 Mill, which was a beat. Bullish option flow bought Sep 2 - Over 4000 Sep 11 $120 calls bought and 2900 $110 calls (These would be all down). Bearish flow - On sep 1, Oct/ Jan 2021 call spread $80 bought sold the $85's. Sep 4, the Apr 2021 $90 calls were sold. I would play the run up into ER, then sell.
NASDAQ:PTON
by hockeysniper
2
Options Idea: Sell The PAM Sep. 18, 2020 10.0 Put @ $0.40Pampa Energia (PAM) is reversing a long-term downtrend, and beginning to trend upwards. After hitting a low of $8.72 in March, we’ve been seeing higher highs and lower lows for the last 4 months. This is an Argentine stock and it’ll probably see a bump higher after the government finishes its sovereign debt restructuring. Also, PAM has a share buy-back program in place and management has been very aggressive about buying back their ADRs when they get close to the $10 zone, which is the strike we've chosen for our naked put. Warning : PAM options are not liquid. So if you decide to enter into this trade, you’ll probably have to take all the way to Sep 18. Since there isn’t much liquidity, so probably won't be for everyone, but we think the current set-up offers a good risk/reward ratio. 20-PAM-02 Opening Date: July 27, 2020 Expiration Date: September 18, 2020 DTE: 53 IV: 76.42% IV Percentile: 42% Odds of Winning: 77.87%% Odds of Losing: 22.13%% Win: > 9.60 @ Expiration Loss: < 9.60 @ Expiration Reg-T Margin: $290 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we keep 100% of our initial credit. The size of the green area is the size of credit (our maximum win). Yellow Area: Danger Zone: We still win, but we have to give back some of the initial credit taken in. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
NYSE:PAMLong
by OptionsCoach
Marriott bullish inclined defensive options - 28 Aug ExpiryThe hotel industry is one of the weaker sectors due to COVID-19. 8 Months deep into the pandemic price volatility has stabilised. With earnings recently over Implied volatility seems to have returned to the previous range. I don't think people will be rushing into this sector anytime soon. This is perfect for my options strategy which does not do so well against price gaps or rapid movements. after a few months of trading ETFs with this defensive strategy, I have decided to widen my opportunities. Trading stocks at key price points seems like a good extension. The goal is to incline my trade towards the direction of the key price point break. If it doesn't break, I still get to collect the spread. This is a defensive trade. If price goes bullish, I have a chance to hit my max gain of est. $1668. But I must close the contract before it rises beyond my breakeven point where I will start losing. If prices don't go my way (Bearish) or ranges I will collect est. $520 Sold 14 Calls @ 0.64, Strike 110 Bought 1 Call @ 3.70 Strike 98.5 BP block: 13k
NASDAQ:MARLong
by Ronin_trader
2
Locking in a Profit Without Day TradingDay trading can be a quick way to capture intraday profits. However, not all accounts are suitable for day trading or can afford the pattern day trader requirements. If a trader has already completed three day trades in the past five trading days, it leaves them with two options when they have a profit on a newly opened position. 1. Either close the position, take the profit, and trigger a pattern day trade label or 2. Hold the position until the next day and hope the profit is still there. There is a third option that locks in a profit while still avoiding a day trade. This is done by legging into a debit spread. Legging into a Debit Spread A vertical debit spread is created when an investor buys-to-open (BTO) one option and sells-to-open (STO) another option further OTM. Both legs are opened on the same underlying equity and use the same expiration. However, both legs do not need to be opened at the same time. An investor can instead buy-to-open (BTO) the long leg first and then setup a sell-to-open (STO) order for another option further OTM. The STO order should be placed for a credit greater than or equal to the debit paid for the BTO leg. This is called legging into a debit spread. Example: BTO September 200 put for $10.00 of debit. Instead of placing a closing order for the 200 put, place an order to STO September 195 put for $10.00 of credit. When the STO order fills, this will create a September debit spread with a net debit of $0.00. (BTO for $10.00 debit - STO for $10.00 credit = $0.00 net debit) The risk on the trade is $0.00. The maximum risk, or potential loss, from a vertical debit spread is the net debit (cost basis) of the spread (BTO leg debit minus the STO leg credit). The potential profit is $5.00. The maximum profit that can be earned from a vertical debit spread is equal to the width of the spread minus the cost of opening the spread. No further action should be taken on this spread until the next trading day. Even placing a closing order the same day opens up the risk of being filled and tagged with two day trades. The next market day, a closing order should be placed to STC the entire spread for a credit. This order can be placed in premarket or at market open. Regardless of when the order is placed, it should be worked until the position is closed. When locking in a zero cost basis, the current value of the spread is the profit. Example: Holding a legged into debit spread with $0.00 cost basis. STC the spread for 3.40 of credit. The spread was BTO for $0.00 and STC for $3.40 resulting in a $3.40 profit. The total profit on the position is $3.40 per share, or $340 per contract. Locking in Profits This strategy can also be used to lock in profits of a position that was initially intended to be held overnight. An investor BTO a TSLA call based on an upcoming earnings play. TSLA moves 50 points going into market close and the current position has $25 of profit per share. Instead of using a day trade to close the position, STO an adjacent strike to create a debit spread to lock in a profit. Then BTO a new TSLA call to realign the account for the same earnings play. Example: 7/21 13:15 PM ET TSLA trading at 1560. BTO Aug 1560 Call for $150 per share. 14:30 PM ET TSLA is now trading at 1610. The Aug 1560 Call is now worth $175, equaling $25 of profit per share. STO Aug 1570 Call for $170 per share. This creates a debit spread with a $20 net credit . BTO for a debit of $150, STO for a credit of $170 = $20 net credit . This is now a debit spread with a credit as the cost basis. Depending on your trading platform, this may be shown as a negative cost basis. This is because it is a credit on a debit spread. Max risk = $20 profit, no risk on the trade. Locking in a credit is a guaranteed profit on the trade. Max profit = $30: $20 of credit + $10 of spread width. BTO the Aug 1605 call for $157 per share. This allows the account to still be setup for an earnings play. Net risk of the two positions is $157 debit - $20 credit = $137 of risk per share. Next Market Day: 7/22 9:30 AM ET TSLA gaps open to 1679 due to earnings. STC the Aug 1560/1570 debit spread for a credit of 6.70. Total profit on the spread is the $20 net credit + 6.70 of credit to close = $26.70 of profit per share or $2,670 of profit per contract. STC the Aug 1605 call for $195 credit. BTO for $157, STC for $195 = $38 profit per share or $3,800 profit per contract. Total profit is $64.70 on a net risk of $137 = 47.2% return and no day trades used. Credit on a Debit Spread In the above example, the stock moved enough for the STO leg to have a higher value than that of the debit paid on the BTO leg. This legging in allowed for a credit cost basis when normally a debit cost basis would be held if both legs had been opened at the same time. When the credit received on the STO leg is higher than the debit paid on the BTO leg, this creates a credit on the spread. This does not make it a credit spread. It is still a correctly constructed debit spread because the STO leg is further OTM than the BTO leg, but instead of holding a debit and risk on the trade, the position now has a credit, no risk on the trade, and a guaranteed profit If a debit spread with a credit is held until expiration and expires out of the money, the “loss” on the spread is actually a profit equal to the credit held. When a strike is OTM at expiration, it no longer has any value to it. It has lost all time value and because it is OTM, it contains no intrinsic (ITM) value. Example: The BTO leg for $150 is STC for $0.00 = $150 loss. The STO leg for $170 is BTC for $0.00 = $170 profit. $170 profit - $150 loss = $20 profit per share or $2,000 per contract. If both legs of the debit spread are in the money at expiration, the profit on the spread is equal to the credit held plus the spread width. When a strike is ITM at expiration, it only contains intrinsic (ITM) value. It has lost all time value. Example: AMZN settles at expiration at 1580. The 1560 call is 20 points ITM. The 1570 call is 10 points ITM. The BTO leg for $150 is STC for $20 = $130 loss. The STO leg for $170 is BTC for $10 = $160 profit. $160 profit - $130 loss = $30 profit per share or $3,000 per contract. It is not recommended to hold ITM spreads on American style options until expiration due to risk of assignment/exercise. American vs European Style Options Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration. Indexes such as SPX, NDX, and RUT are European style options. This means that any exercise or assignment may only occur at expiration. Trading spreads on European style options, can alleviate the concern of early exercise/assignment. If both legs are ITM, they can only be exercised or assigned at expiration. For American style options, the closer to expiration and the further ITM the STO leg is, the more likely it is to be exercised/assigned. This is why building time into the position is beneficial by using an expiration at least 2-3 weeks out. Additional Information This strategy works best on long options, BTO a call or BTO a put. It is not recommended to be used to lock in a profit on an existing debit or credit spread. While you can use this strategy to leg into a credit spread, debit spreads tend to be more efficient as credit spreads rely on rapid time value decay so generally require sooner expirations. The legging in strategy works with any spread width. However, the larger the spread width the further the underlying will have to move for the STO leg to be at the same value or higher than the cost basis of the BTO leg. When legging into wide spreads if you can lock in a cost basis less than the current spread value you still have profit potential. Legging into a debit spread is an efficient way to avoid day trading but still guarantee yourself a position that can be closed the next market day for a profit. As long as the debit spread is not at expiration or extremely far out of the money, the spread should have value to it. A zero cost basis debit spread can be closed for a profit equal to the current value of the spread. While locking in a credit on a debit spread results in a guaranteed profit equal to the credit on the spread plus the current value of the spread.
SP:SPXEducation
by NewCycleTrading
4
JSW Steel ltd from 21 August 2020The stock has been continuously going up for some time in an aggressive manner and has reached the previous high (supply zone) ... . Shooting star pattern has been formed though the upward wick is small Expecting a healthy retracement till 240 level when crosses 270 mark while going down Trading Strategy: Safe : sell PE above 290 at good cost ... AUG and SEP month --> strategy with breakever above 300 is safest Heart of Steel: when crosses 270 level ; buy 240 PE and Sell 270 CE ---> collect premium and exit at good profit use calendar spread with different month expiry to get good profit MFI is in overbought zone for some time expecting it to cool down now
NSE:JSWSTEELShort
by Trade_with_yash
CLV0: Two Potential SetupsThe above chart shows potential price development scenarios before the expiry of this contract. The higher timeframes are showing signs of selling, any weakness in oil at this point can be justified by long interest vacating their holdings at almost a 100% gain from YTD low. Though aggressive bears might join in for a swing lower, it is imperative to be looking for buying opportunities upon signs of weakness. Another way to buy the dip is to sell a put option, let's say a CL Dec'20 strike @ $38.50, which would give the option writer a $1.5k premium at the current market, giving him/her a Break-Even price of around $37.00 where the stop sells would be placed separately on the CLZ0 contract.
NYMEX:CLV2020
by Zoen_Trieste
2
Options Idea: Sell The Sep 18 2020 WFC 22.5-20 Put Spread @ 0.34WFC is in a long-term downtrend, but wants to reverse course. There is a resistance around the $24 area that has held except in mid May when WFC made its 52-week low at $22 and then bounced quickly back the next day to close at $24. I'm going to sell a Bullish Put Spread at the 22.50-20.00 strikes. Since we are in a downtrend I'm going to play it safe and I'm not going to sell naked just in case WFC wants to make a new 52-week low during the next two months. This is a negative probability trade (expected loss > expected win), so it may not be for everyone. 20-WFC-01 Opening Date: July 29, 2020 Expiration Date: September 18, 2020 DTE: 51 IV: 44.94% IV Percentile: 59% Odds of Winning: 73.74% Odds of Max Loss: 12.38% Win: > 22.16 @ Expiration Loss: < 22.16 @ Expiration Reg-T Margin: $250 Chart Legend Green Area: 100% Win Zone. If we finish above or in the green area, we keep 100% of our initial credit. The size of the green area is the size of credit (our maximum win). Yellow Area: Danger Zone: We still win, but we have to give back some of the initial credit taken in. Red Area: If we finish in this area we have a loss. The size of the red area is the size of our maximum loss. 1 standard deviation, 2 standard deviation, 3 standard deviation projections from Opening Date to Expiration Date are included.
NYSE:WFCLong
by OptionsCoach
Options Idea: Sell The September 18, 2020 Put @ $1.3ALRM seems to have stopped its downward trend. It has recovered the EMA 8 and is heading back to EMA 20 territory. I sold a Sep 18 2020 55.0 Put @ 1.3 with the idea that the uptrend will continue over the next few days or weeks. 20-ALRM-01 Opening Date: August 20, 2020 Expiration Date: September 18, 2020 DTE: 29 IV: 44% IV Percentile: 37% Odds of Winning: 68% Win: > 53.70 @ Expiration Loss: < 53.70 @ Expiration Chart Legend The green area represents 100% win zone. The yellow area is a win, but we have to give back some of the initial credit taken in. The red area is loss. 1 SD, 2 SD, 3 SD projections from Opening Date to Expiration Date are included.
NASDAQ:ALRMLong
by OptionsCoach
1
Trader's Guide to Vertical Debit SpreadsThe strategies and ideas presented in this guide have been designed to provide you with a comprehensive program of learning. The goal is to guide you through the learning experience so you may be an independent, educated, confident and successful trader. There are numerous variations of traditional options strategies and each has a desired outcome. Some are very risky strategies and others require a considerable amount of time to find, execute and manage positions. Spreads are a limited risk strategy. Spreads Spreads are simply an option trade that combines two options into one position. The two legs of one spread position could have different expiration dates and/or different strikes. Spreads can be established as bearish or bullish positions. How the spread is constructed will define whether it is bullish (rising bias) or bearish (declining bias). Different types of spreads can be used for the same directional bias of the stock. For example, if the stock has a declining bias, a call credit spread or a put debit spread could be opened to take advantage of the same anticipated move down. In this guide we will be talking about Vertical Debit Spreads, which are a limited risk strategy. Learning how to manage risk is as important as learning the details of a strategy. Vertical Debit Spreads A vertical debit spread is created when an investor simultaneously buys-to-open (BTO) one option and sells-to-open (STO) another option. The premium paid for the BTO is always greater than the premium received for the STO thus, creating a net debit from the trader’s account. Example: BTO a call using the May 180 strike for a debit of $7.57 STO a call using the May 190 strike for a credit of $3.42 Net debit for the spread is $4.15 The proper construction of a vertical debit spread is to BTO an at-the-money (ATM) strike and STO the strike that is 5 – 10 points further out-of-the-money (OTM). When opening a call debit spread, further OTM means a higher strike. When opening a put debit spread, further OTM means a lower strike. Both legs are opened on the same underlying equity and use the same expiration month. The Delta Ratio Delta is a factor in how profitable a debit spread may be. When the underlying stock moves, the value of the options will change at the rate of the Delta. Delta values will be different for different strikes depending on how far out-of-the-money or in-the-money the strike is. Look at an options chain for the current expiration month. Find the Delta of the at-the-money strike and compare it to the Delta of a strike 20 points out-of-the-money. The ATM strike will always have a higher delta than the OTM strike. This means that the value of the ATM strike will change more quickly than the OTM strike, as the underlying stock moves. When properly constructed, a debit spread is designed to take advantage of the Delta relationship between the long and short options. By STO a strike further out-of-the-money than the BTO strike, the long leg will increase in value more rapidly than the short leg. This is referred to as the Delta Ratio. Put debit spreads are used when the stock shows a declining bias. Puts increase in value as the stock decreases in value. In this case, the long put would increase in value creating a profit. The short leg would increase in value creating a loss. However, as we learned earlier, due to the Delta Ratio, the long put is increasing in value faster than the short put is creating a loss. This will create an overall position profit as the stock moves down. Here is an example: Stock trading at 520 and has a declining bias. BTO 520 put STO 510 put This spread creates a debit of $4.80 Stock declines to 510 causing the values of the puts to increase. The position can now be closed for a profit. STC 520 put BTC 510 put The value of the spread has increased to $5.80. Since the stock declined in value, the put options are more expensive. The spread was BTO for a debit of $4.80 and STC for a credit of $5.80 resulting in a $1.00 profit. Call debit spreads are used when the stock shows a rising bias. Calls increase in value as the stock rises. In this case, the long call would increase in value creating a profit. At the same time, the short call would increase in value creating a loss. However, as we learned earlier, due to the Delta Ratio, the long call is increasing in value faster than the short call is creating a loss. Stock trading at 500 and has a rising bias. BTO 500 call STO 510 call This spread creates a debit of $4.80 Stock rises to 510 causing the values of the calls to also rise. The position can now be closed for a profit. STC 500 call BTC 510 call The value of the spread has increased to $5.80. Since the stock increased in value, the call options are more expensive. The spread was BTO for a debit of $4.80 and STC for a credit of $5.80 resulting in a $1.00 profit. Risk and Reward on Vertical Debit Spreads Reward The maximum profit that can be earned from a vertical debit spread is equal to the width of the spread minus the cost of opening the spread. For a vertical debit spread to realize the maximum potential profit, both legs of the spread would need to expire in-the-money which means the position would need to be held until expiration. I do not recommend holding positions until expiration. Short term movements in the stock/index plus limited time value decay provide opportunities to close out positions for a profit of about 10%. If a position is profitable and the trader decides to hold the position hoping for a bigger profit or in an attempt to carry the position to expiration, there is a good chance that the profit will disappear and the position could turn into a losing position. This also will increase the risk of assignment/exercise if trading an American style expiration. A good way to lose money is to wait for a bigger profit Risk The maximum risk, or potential loss, from a vertical debit spread is the net debit (cost basis) of the spread (BTO leg debit minus the STO leg credit). Example: BTO 2765 call for a debit of $11.70 STO 2770 call for a credit of $8.30 Cost basis of the spread is $3.40 $3.40 is the maximum risk. A maximum loss will occur when both strikes are out-of-the-money at expiration. Learning how to properly adjust positions will avoid this. A trader establishes a bullish (call) debit spread when the chart indicates a rising bias. The breakeven point is the lower strike price plus the net debit. Referring to the example above, if the stock was at 2768.40 at expiration, there would be no loss and no profit. Example of breakeven point on above debit spread: Stock settles at 2768.40 at expiration The 2765 strike is $3.40 ITM, the value of the strike has $3.40 of intrinsic value and no time value. The 2770 call expires OTM worthless and you keep the 8.30 of credit as profit. Since you do not want to exercise your right to own the stock, you sell the 2765 back at the price of $3.40. This results in a $8.30 loss. $11.70 BTO – $3.40 STC = $8.30 loss You get to keep the original credit of $8.30 from the 2770 call. This netted against the $8.30 loss results in breaking even on the position. A trader establishes a bearish (put) debit spread when the chart indicates a rising bias. The breakeven point is the BTO (higher) strike price minus the net debit. Calculating the Return The profit percent return is calculated by dividing the profit by the risk. After all, if the trade lost 100% of the risk that is the amount the trader would no longer have. In the example above, the net risk is $3.40. If the debit vertical spread trade resulted in a $1.00 profit, the percentage return would be 29.41% ($1.00 / $3.40). Lower risk drives higher returns relative to capital at risk. American vs European Style Options Most stocks and ETF’s are American style options. This means that if the buyer of an option chooses to exercise or assign their rights they may do so at any time prior to expiration. Indexes such as SPX, NDX, and RUT are European style options. This means that any exercise or assignment may only occur at expiration. Trading spreads on European style options, can alleviate the concern of early exercise/assignment. If both legs are ITM, they can only be exercised or assigned at expiration, which allows flexibility to continue to hold the position rather than take action to avoid assignment/exercise as would be suggested on American style options. Opening a new Put Debit Vertical Spread The following steps should be referred to when opening a new put debit vertical spread position: 1. Review the technical indicators on your chart and confirm there is a consensus between multiple indicators pointing to a declining bias. 2. Select an expiration that is one to three months out. One month is generally the minimum time to expiration you want to use. Building time into the position is advised in case it needs to be managed. The sweet spot for opening new positions is two months to expiration. 3. BTO the at-the-money (ATM) put strike. BTO the strike that is closest to the money. When the stock/index is trading between strikes, BTO the first strike higher than the current price of the stock. 4. STO the strike that is 10 points further out-of-the-money (OTM). With a put spread, further OTM means a lower strike. BTO ATM and STO 10 points further OTM will create a debit. Generally, when properly constructed, the debit will be in the range of $4.00 - $6.00. 5. When placing the order, always use a Limit order. A limit order specifies to the market the amount of the debit you will accept. A limit order will be filled at the specified limit or lower. Market orders should not be used. 6. With some stocks and indexes, the difference between the bid and ask is quite large. The broker will usually give you a quote called the “Mark”. This is the midpoint between the bid and ask. It is the price you should start with when submitting your limit debit order. 7. Calculate the risk of the position. Cost basis of position is risk. So a position with a debit of $4.50 would have a risk of $4.50. 8. Use the risk number to determine the number of contracts to open. Risk x 100 = the investment required for each contract. With $4.50 of risk and one contract, the total investment would be $450 ($4.50 x (1 contract x 100 shares per contract)). 9. Once you know the total investment required per contract, you can decide how many contracts to trade based on the size of your portfolio. Generally, allocating 5% of the total portfolio to each trade is good risk management. Smaller account sizes may require a higher investment per trade but should not exceed 10%. 10. After the trade has been opened, place a Good-til-Canceled (GTC) order to close the position for a $1.00 profit. A GTC order will stay active until market conditions are such that the position can be closed for a $1.00 profit. GTC orders execute automatically and do not require you to be in front of your computer to take advantage of the profit opportunity.
SP:SPXEducation
by NewCycleTrading
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