Investor Education Conference 2020: High-Probability Trading

Just another WordPress site

Investor Education Conference 2020: High-Probability Trading

welcome to the investor education conference this is the high probability trading session and my name is scott connor thanks for taking your time to join us here on a saturday afternoon um we’re going to have a lot of fun here covering a lot of different topics talk about some strategies talk about how we can look and and leverage the thinkorswim trading platform to help us better understand those strategies their risk profiles and finally we’ll tie together what it’s like to manage a group of option strategies combined taking an overall look and uh and understanding potential management strategies around that now uh let’s just talk about a couple points we want to get out of the way here before we start and number one uh everything we’re covering here of course is any are intended for educational information purposes we’re not giving advice we will look at a couple examples um using our paper money platform but again we’re using them just as example now options if you’re new to options of course they do involve risks and they’re not suitable for all investors we’ll be looking at strategies that have certain not requirements but meet certain specified parameters and one of those is you’ll learn is defined risk so still options are not suitable for all investors we’ll be talking a little bit about the greeks as well as we go through the program now obviously for all investors and traders you want to always consider your investment objectives your risks charges expenses anything like that and of course we will point that out point those out as we go through the session all right well again let me introduce myself scott connor i’m director of trader education here at td ameritrade a little bit about my background i’ve been with the company since 2007 but before that i spent about 25 years on the chicago board of options exchange as a member of the exchange and what they call a market maker so if you ever saw the movie trading places that’s exactly what i did stood in something that felt like a crowded elevator screaming and shouting buying and selling all day long exactly what i did so a valuable experience learned obviously a lot about options trading and and uh for 25 years that was my source of income uh there was no paycheck being a market maker uh your livelihood depended on how successful you were as an options trader so throughout the session today not only we learned about strategies but i’m going to share with you what i learned as a professional trader someone some takeaways that you can keep with you forever about trading options we’ll talk a little bit about a watch list we’ll talk a lot about probability but these are all very important things now if you’re new to options definitely take some notes here but i will always let you know when there’s an important point i’ll say write this down so uh let’s keep going and uh talk a little bit about our agenda what are we going to be covering today well today you’re going to be learning about high probability trading and again that’s what focuses mainly around options and what separates options from other uh investment assets like stocks uh etfs things like that we’ll talk about a couple examples one of those will be an iron condor uh the second one will be a calendar spread and then we’ll talk about a version of the calendar spread and then finally we’ll put them all together as i mentioned and talk about combining strategies and and what’s involved with the management of a group of strategies so we have a lot cut out for us here but it’s going to be fun and we’re going to be covering a lot of information and there’ll be some great takeaways for you as we go now first of all before we get into the the option strategies themselves you might be wondering well scott this is great i’m a long-term investor how do options apply to me well that is actually a very good question what ends up happening is even traders on the cboe or our exchanges still are long-term investors they have other accounts with long-term investment portfolios so there’s for most people or many people it ends up being having portfolios of both now we’re going to talk a bit today about how i could have an investment portfolio and perhaps add a certain segment of that or a certain part of that portfolio to shorter term option strategies right options do have expiration dates as you know um unlike stocks so how how could those potentially be combined and how does do option strategies which might be shorter term uh trades if you will fit into a long-term portfolio so we’ll be talking about that as well as we go along now let’s talk a little bit about high probability that is the title of this session and let’s spend a minute here on high probability and what our goals are here through the option strategy we’ll be looking at we want to generate potentially generate income and we also want to take advantage and leverage probability of success we want to have the highest probability that we’re comfortable with when we talk about trading off risk and reward now we want to see greater consistency uh as an options trader

and uh consider high probability strategies that will help manage directional dr risk uh benefit from what we call time decay and of course always make considerations as to what our outlook for volatility is now you can see all three greeks align with those so if you’re feeling familiar with those when you’re talking about direction that’s the greek delta it measures how much of an option price changes when the underlying stock moves and theta is simply the greek that measures how much one day or a 24 hour period affects the value of options and when i say options i mean calls and puts because theta affects both of them and finally vega is the greek that measures how a change in volatility can affect the price of options now we’ll break those down a little bit more detail going on but again the greeks are an important or integral part of what we’re going to be talking about today now like i mentioned we’ll be looking at a couple uh investment plans in other words how will we supplement a longer term investing portfolio by using some of these option strategies that we’ll be talking about and of course two of the main examples will be iron condors which is simply combining vertical spreads and calendar spreads uh again and what’s important about these two strategies is that they are the basic building blocks for most options strategies i remember when i first started on the floor i thought oh how am i ever going to remember all these different kinds of strategies because as you get as you learn more you learn about advanced strategies some some people call them complex strategies but i found a very easy way to break them down once you understand the vertical spread which is what we’ll use to build iron condors and the calendar spread every option strategy from that point on no matter how complex is just a combination of one and or those two building blocks so these are key takeaways that options traders need to obviously understand going forward now what we’ll do is we’ll kick it off with iron condors but like i said before we get into the actual iron condor itself i want to talk a little bit about probability so what is probability involved well here’s what got me to start getting interested and move from california to chicago to join to become a member of the exchange and that is i learned about probability now this is a key concept for options traders because if you think about it when i buy a stock let’s say i purchase the stock from my portfolio from the moment i purchase that stock here’s what you have to ask yourself what is the probability of that stock going up or down from the moment i purchased that stock well i can guess a lot of you are saying well scott that’s probably 50 50. well guess what you’re right it can go up and you make money you can go down you lose okay so granted we’re all on the same page there but what about options well again that’s what interests me options open the door to you picking the probability of not the stock just going up or down but of the stock moving to different levels in a specified time so let’s say a month from now i purchased that stock well then i know my 50 50 proposition if you will in terms of you know uh probability but what if my outlook was okay in one month’s time i don’t think the stock is really going to move that high let’s say more than five dollars all right well there’s a probability attached to the stock getting to that certain price point five dollars or higher from where it is now between now and expiration and that’s again we’re saying four weeks all right well we can attach through through the laws of probability if you will um what the probability of the stock actually doing that is and so you’re able to take advantage of saying okay well if i don’t think it’s going to move five dollars or higher then that means i don’t mind if it moves four dollars three dollars two dollars if it stays where it is if it goes down two or three or four dollars or if it goes a lot more than that and so here’s what we did as market makers on the floor and i’ll share this with you real quick uh we didn’t have when i first started sophisticated touch pads and screens and computers we basically had to use our hands and fingers right so here’s what we did we looked at a stock and we said this what are the five outcomes that that stock can have between now and expiration and this kind of really helps illustrate the point of those probabilities i was just talking about so let’s say uh we’ll consider five probabilities number one the stock stays right where it is now we’ll use that as the middle so in the next four weeks the stock stays where it is there’s a probability attached to that then there’s a probability of what the stock goes up just a little bit all right we’re going to attach probably that what’s the probably the stock goes up more than that a significant amount okay and then same thing on the downside down a little bit or down a lot so now we have the five array of five outcomes and if we attach a probably each of those let’s just say it’s 20 for each one then someone who’s saying well i don’t really want to sell the stock or short the stock because i don’t think it’s going to go up but i’d like to have

better than 50 50 probability to align with my outlook okay let’s go back to a strategy maybe i could just sell that call and say all right i don’t believe the stock is going to move up a lot all right so if it doesn’t do that we are profitable right now if it goes up a lot that’s going to hurt us that’s 1 out of twenty but if it’s it goes up just a little bit that’s fine we win there if it goes up it stays where it is fine if it goes down a little fine if it goes down a lot that’s fine too so really there’s only one out of the five outcomes that can hurt us exactly so there’s only a 20 probability of that particular strategy working against us or actually resulting in a loss so that’s how market makers took advantage uh if you will of the uh the probabilities to put them in their favor all right so very important takeaway uh there for all of us now let’s do this let’s talk a little bit about iron condors and we’ll keep talking about that concept of high probability so let’s follow along with the iron condor strategy now what is the iron condor strategy basically its objective well let’s read this together is to profit from a neutral moving stock or an exchange traded fund um through time decay so in other words if the stock stays within a certain range right uh the the strategy will end up being profitable right now what’s the actual structure of that if you look here to the right first of all let’s take a quick look you can see let’s just say the stock price is here on the right if the stock were to move up or stay below this bar and above this bar then that gives this idea of a range-bound movement now this is the kind of strategy that could take advantage of that because you’re essentially sort of taking this upper line and saying well that’s my goal post on one side and this lower price and say well that’s my goal post on the other side i want the stock to end up between the goal post on expiration day so that’s basically what you’re saying and how is it built well actually it’s fairly simple once we understand the concept of vertical spread and don’t worry we’re going to go through this process together it’s simply combining two vertical spreads so let’s say we say take the stock where it is now we’re going to go to a point above the stock and sell a call spread now we’re also going to go an equidistant below and sell a put spread now how do spreads work when you sell them well the maximum gain is the credit you receive when you sell the call spread in the put spread ideally if the stock stays between those two spreads both of them expire worthless on expiration now that’s our hope and our objective is that stock stays between them and whatever the credit will receive from selling the call spread and the credit we receive from selling the put spread on expiration if the stock is between those strikes then we realize that the options expire worthless um and that’s the objective there so pretty simple uh when you think about the the the actual structure of the iron condor now we have a slide here that kind of says all right well let’s talk a little bit about considerations that when you’re entering into this now it says entry rules these aren’t rules again these are just sort of guidelines if you will um and everyone’s going to sort of pick ones that they’re comfortable with but let’s just use an example here so let’s talk about strikes well select an expiration month to take advantage of time decay now what would that expiration date be well again we’re just going to highlight maybe 20 to 40 days or 20 to 50 days somewhere in that range uh and why is that well if we’re selling call spreads and selling put spreads we’re looking to take advantage of time decay remember i said we will hopefully the value of those both those spreads goes to zero and they expire worthless well how do they go to zero well if they run out of time and they’re out of the money then they’re they have no more time value left so we’re looking to take advantage of that constant decay of time value remember the greek theta t for theta t for time that’s an easy way to remember it so the greek theta was what measures that for us now what about strike pro strike strikes well let’s take a look down here selling options with maybe a 20 to 30 probability of expiring in the money now what does that mean inspiring the money well remember our example with the stock is here and we sell a call spread up here well if the stock moves up to our call spreader goes through it those options are in the money and that’s the point where we could incur a loss on this now it’s a fixed amount a defined amount but uh that’s what we want we want those stock those options or those two spreads to end up out of the money so looking for maybe something like the 20 25 30 percent probability is sort of a guide mark or a benchmark that some uh traders will look at to set up the iron condor uh what about getting out of the iron condor right well let’s take a look at a couple things managing the winner in other words if the stock stays between our strikes or in the inside the goal post so to speak you can consider entering any time right as long as the market’s open under normal circumstances we could close this trade we’re not obligated to hold it all the way till expiration let’s say we collected a 70 cent credit and with a week to go it’s still inside our goal post the stock is

inside the range between the call spreads maybe that spreads down to 20 cents now maybe we’ll decide well at that point we’re going to go ahead and take some profit or perhaps all again nothing wrong with taking a profit and that’s why you see down here we talk about potentially exiting between four days ten days why four to ten days well again we’re getting close to expiration and again then we have some other dynamics that started to come to play uh in other words we have gamma which is the the rate that measures how fast delta changes that can really kind of spike up when we get towards expiration so get a little of that movement risk if you will uh when we get close to expiration uh i also want to consider transaction costs obviously in iron condor we’re selling two two vertical spreads one above and below that’s four options so you always want to consider any kind of transaction costs uh that go along with that now let’s do this let’s go to the thinkorswim platform and uh let’s build an example uh strategy using the iron condor so follow along with me i’m gonna jump into the thinkorswim platform and as you can see i am on the trade tab right now i have walmart in there as my symbols to tell you what let’s use that as our symbol i’m going to hide the left side bar here so we can just look at the trade tab a little more closely now let’s start off with this strategy again the outlook would be that we think the stock is going to stay in a range for let’s say about the next four weeks all right so whenever we start with an option strategy obviously the first step time and price what time how far out do we want to go now we just talked about that maybe that 20 to 40 day range why is that well that’s the range where options really start to accelerate their time decay so if we can kind of plan our expiration day date of the options that we choose around that point where options really start to accelerate their time decay well that might make sense so let’s do that in this case so our time let’s go out to the options that aspire here in 27 days perfect that’s about four weeks and we’ll open up those options so now we have our time our price what we think the price of the stock is going to stay in a range now if that was the outlook for an options trader then this certainly might make sense this type of strategy all right so we have several strikes here i’m going to widen those out and add a couple more strikes here just so we can move up and down the option chain if you will all right so we can see that the stock is weight we don’t need that many hold on i’m just going to put in maybe 26 so stay with me there all right so we have the options open i’m going to highlight where the current stock is now it’s right about 146 so i’m going to highlight that here’s the call and here’s the put remember calls and left puts on the right and we’re looking at the 146 strike so that’s the middle of our goal post so to speak now let’s pick some strikes of where we think that stock might be well what could be one of our guiding principles well we talked about maybe options that have a probability of staying out of the money somewhere in that uh well what do we say maybe the 20 20 25 30 range well how do i do that well what i want to make sure do i do is change my uh my column headers to that as a matter of fact i’ve set up one here that has theo price and probability in the money so now we have our probabilities right here well if we know the stock is 146 let’s look at an option that maybe has a probability of um around that 25 probability that we thought of staying out of the money right so what’s the probability of stock actually getting up to 152 about a 26 probability that means there’s roughly a 74 chance that it will not all right well that means we have um a degree of high probability working in our favor so let’s go ahead and build the first leg of first part of our option strategy and what we’ll do is we’ll sell the 152 and a half call right when you sell a call you take on the obligation of potentially selling the stock up at that price right but if the stock stays below 152 that would be our first strike now i’m going to hold down my control key and we’re going to buy the next strike above it the 155 so you can see right here we have the vertical spread of course selling a 152 and a half call buying a 155 and a half call now that’s our spread now why did we do a spread why didn’t we just sell the 152 call well we could do that and get a bigger credit however you’re taking on a lot more risk with that one the stock continues to go well above 152 and a half the more it goes the more we could potentially lose with this when you sell a vertical spread remember we have defined risk that spread cannot go beyond the width of the strikes which in our case is two and a half dollars all right so now we have our goal post uh for the upside now let’s go back and look on the put side and again i’m going to highlight where the stock is now about 146 well let’s go equidistant down let’s look for that that put that somewhere down well i’m going to highlight it right here down about that 25 percentile that we were just talking about so what what’s the probability that the stock will stay above 138 well it’s about 75 percent all right well let’s go ahead and look at selling our put spread there i’m going to hold down my control key again sell the 138 put and then keep that control key down and

buy the 136 put now let’s take a look at what we built here it says iron condor here so that’s all set that’s square and we sold the 152 and a half 155 well that was our choice we didn’t have any other strikes we could pick so that’s a two and a half dollar wide call spread and our put spread is a two dollar wide so it’s going to be slightly different but this is how it is sometimes we can only go with the strikes that we have available and in this case four weeks out we’ll have a two and a half dollar wide call and a two dollar wide put but that’s okay now let’s take the next step i’m going to right click on this let’s analyze this together and take a look at our risk profile this is where we want to spend some time here and get familiar with not just the p l but the greeks that go with it and there’s no better place to do that in the thinkers and platform and on the analyze tab so i right clicked on that trade from the trade tab takes us right in here to the analyze tab and you can see we’re on the wrist profile here’s the mesa shape that’s what we should see this is if you will the risk profile of the iron condor now really quickly for those who may be saying okay scott what is this we’re looking at we’re going to look at the blue line because the blue line represents the profit or loss on expiration all right the pink line is kind of what your p l would be today but let’s look at here now this is the stock prices on the on the horizontal axis and this is gains up here and losses over here on the left axis you can see where we are now stock is likely said right here about 146 so we’re right in the center of or pretty close to the center of this um profit area so we’re in the profit area now remember i said we want to end up in the profit area or between the goal posts well where are our goal posts well let’s go out and look here’s our break even on the upside 153 on the upside is our break even what about the downside well if i hold my mouse there it looks like it’s about 137 and a half on the downside now if we go outside of those well then we break into the lost area and you can see there’s a loss here here and a loss area if it goes above one about above 153. now we do know the probabilities of staying inside this area remember we looked at the probabilities of getting to the put strike or the call strike or our goal post it was about 25 right so staying in this area has about a 75 probability of occurring right there’s no guarantee it will but we certainly have high probability on our side to begin with so that’s a very important takeaway here for the iron condor now let’s look at the price slices i open those up i want to see what the greeks are in this theta remember that is the the amount of credit that is collected on a daily basis every 24 hours as time progresses now we’re assuming the stock is just going to stay about where it is this strategy should bring in about a dollar 30 each day right in time decay what kind of delta does it have well delta is how much exposure you have to movement up or down not much one delta that’s actually very minimal that’s a very short amount vega it is a negative number in other words it does not want to see volatility well that makes sense we don’t want volatility we don’t want the the ball to move outside of our goal post right if it was a volatile windy day in soldier field and that ball moved outside we don’t want that we want a calm nice market right we want the stock to kind of stay in our what about eight or ten dollar range that we have here actually uh looking at my breakevens it’s 153 it’s about a 15 range so um we want that it doesn’t like volatility so there you go now if we add more numbers to this you can see it just changes our theta numbers and our delta numbers and our vega exposure but this is basically the takeaway for the iron condor so so far so good we’ve got our first strategy in the books if you will and again that is the iron condor strategy looking for a stock to stay within a range and be be aware also when we’re looking at this risk profile if you’d like to take a quick look at all right well scott what would happen if i took the break evens on this and i’d like to see those on a chart i’m going to just show you something real quick i’m going to move over here to show actions menu and i’m going to set my slices to charts well first of all i’m going to set my slices to break even let’s do that first and i want to break even on the expiration date so by doing that now i have a slice here and a slice here and you can see those down below 153 and about 137 and a half right those are my break evens now i can also take those break evens and and move those slices uh to the chart to a chart right and so now we can see let me get rid of this remove that drawing and then we can take a look over here and i’m just going to highlight the right part of this and we can see kind of where the stock is now and where those break evens are up above here and like we said down here about 137 and a half right so if we see where the stock currently is we’re pretty well centered with where that is and it kind of gives you an idea from a chart so kind of a nice little takeaway that you can use on the analyze tab when you’re looking at those now whenever you come back you can always reset slices and if you don’t want to see all three of the slices maybe just the one the middle you can delete obviously the outside slices and again give yourself a little bit more room there so now we’re just looking at

the current stock price and the greeks that go with it all right so so far so good um remember if you do have questions i believe you can go ahead and type those in we have a team that’s listening in and they can send them to me as well so so far so good now let’s go back to where we were um before and now move to calendar spreads all right now we’re pretty familiar with the iron condor range bound strategy kind of has that mesa shape um where we’d like the stock to stay in the mesa and not drop off the sides into the loss areas above or below so let’s talk a little bit about calendar spreads right the other basic building block for options traders what is the strategy of this objective well to make money on a market neutral stock or an etf through time decay and rising implied volatility well it sounds like the first part of this is very similar to the iron condor and that’s true but look at this last two words here rising implied volatility so iron condor sorry um calorie spreads if they’re set up in a neutral way they still would are sensitive to changes in volatility and if volatility is rising that is actually potentially beneficial to the um the calendar spread all right now let’s drop down what about the structure how are these built well we talked about the vertical spreads which are the components of the iron condor we were buying and selling calls and puts in the same expiration right and put those all together to build our iron condor big difference with the calendar sped we’re going to be selling a front month option and buying a back month option so in other words let me repeat what that is we’re going to be selling an option with a shorter date till expiration and buying an option with a longer date until expiration so we’re not buying and selling options in the same month they’re different months now they’ll have the same strike we’ll buy a call and sell a call of the same strike but it’s just going to be different months right now where do we pick those strikes now this is key to the calendar strategy the strikes we’re going to pick is where we think the stock is going to be on expiration now when we say on expiration well on the expiration of the shorter dated option because that’s obviously the one that’s coming first so but again when you use the calendar spread the longer data and shorter data they’re both the same strike so just think in terms of whatever strike we choose for our calendar that’s where we want the stock to be on expiration all right so that’s our objective on this one now i actually have a quick picture here if you will of the the risk profile just like we looked here a minute ago of the risk profile of the iron condor now the first thing jumps out is you scott this is completely different this is not the mesa shape that we had with our walmart example and we’re going to go back and build a counter spread here just for a second but this is we’re just using a symbol here xyz and that current stock is let’s just say it was trading at 146 as you can see here and what we did is we bought the 146 call out in september and sold -1 of the same strike the 146 call but in august now what are we putting this on well this is like in july if you look up here you can see this is july so july august and september so august we’re selling the short dated and we’re buying the longer dated out in september so we’re 46 call buy one selling one now quite a different shape here oftentimes uh often traders options traders refer this as a volcano so a lot a bit different than our mesa but basically we’d like the stock to stay where well at the peak of this volcano at the highest level of possible gain and you can see if you go straight across here that’s somewhere above 300 right in this range here that’s the peak of the volcano what if the stock drops to 142 well it’s still in the profit area but from this point if we go straight over well it’s now it’s about 150 somewhere in this range okay so anywhere in on the volcano uh we’ll have potentially have profit on expiration uh so again what’s the width of this well let’s take a look at our break even it’s down here at 136 and up here at 156 so potentially depending on the current conditions it can still have a fairly wide break even although it would like the stock to stay in a range somewhat close to where wherever the strikes are that we picked all right so now i think you get a pretty good idea of that what about entry guidelines going into something like that where do we sell the shorter dated option to take advantage of time decay remember we just talked about our iron condor we were looking in that 20 to 40 day range same thing the contract that we’re thinking about selling here oftentimes will be ones that sort of meet with that same sort of point where time decay really kicks in because if that’s the call or the option you’re selling that’s the one that’s going to be decaying fastest right so what about the one we’re buying well this says here option expiration maybe 50 days to 90 days to 150 days this can be this is actually has quite a wide range of choices because depending on how long you think it is the stock might move in

a particular direction or stay where it is well remember that’s where you’re going to put the peak of that calendar spread so again it just depends how far out you want to go now why do i say that well let’s say you want to go out a little bit longer three or four months right and what happens is if we keep selling a shorter dated option that expires every four weeks we’re gonna have several opportunities to sell that three or four week option while the long term option has all that time till it expires so you can see example we had a let’s say we had a long term option that went out to maybe april or something like that but we might have an option the chance to sell a january call against it and when that expires we might have the chance to sell a february call against it and then finally maybe a march call against that long-term april call because it hasn’t expired yet so again there’s uh lots that you can do here in terms of picking those days so a little bit more obviously than uh than the vertical spread that expires same date now what about sample strike selection well when selecting strikes as i said choose where you think the stock is going to be trading or at least near where you think it’s going to be trading when the options expire all right now what if we think that that the peak of the cone we want to put not where the stock is now but lower because we think the stock is actually going to trend lower so we’d like to see it that volcano or if you will that risk profile down below because that way if the stock drops down it’ll move right into the peak of that volcano well then we’re going to want to use a put calendar right now why a put calendar well because we’re starting with out of the money options that’s why what about if you think the stock is going higher well then we’re going to use calls we’re going to use to you know move that peak of the calendar spread above to a higher strike so if the stock moves higher it’ll move right into that volcano uh but at a higher strike in using calls why well because then we’ll be starting with out of the money calls now why so much emphasis on out of the money well options that are out of the money have a lower likelihood of being assigned or exercised than in the money options right now that’s not to say an out of the money option can never be assigned no because any option can be assigned any time but the likelihood of that happening is what’s important the probability of that happening when options go in the money that probability does go higher right now and finally if you have no directional bias of course selling as we did in our example there um maybe even looking at selling uh the calendar spread right on that current price now what about the out of the money put okay well we could talk about um looking at those price ranges 30 to 40 percent probability again if there’s no dect real bias and what we’ll do is we’ll look at something called a double calendar where we could maybe go outside and kind of create that goal post again using a couple calendar spreads but um that’s the example here so that’s called a double calendar so if the stock were at 146 we could go up above and sell maybe a call spread i may see a call buy a call calendar up here and go down below and buy a put calendar so we’re going to also take a look at what you know what that looks like uh and uh and this is basically what it ends up giving you instead of having one dome in the middle we have two domes so if we went up down to 143 and did a put calendar well that’s the peak right here and if we went above and did the 151 call calendar there’s the peak right there so it’s kind of i don’t know maybe it’s a double volcano right um and what does that help us do well it kind of pushes out our breakevens maybe a little bit above and below but gives us sort of a couple peaks of where the stock might go and uh still work out pretty well for this particular strategy all right so now we have an idea of of how those can be combined now let’s take a quick look at calor spreads what about getting out of calendar spreads and again some some potential guidelines uh when the stock is at your strike 10 to 20 days before and again this is just a guideline this is not necessarily thing you have to use so remember we said with the we want the stock to go to the strike of the calendar spread well what if there’s still like 10 days to go and it’s pretty close to our our strike it’s actually worked out pretty well well we could certainly start thinking about taking some of that position off or all of that position again as long as the market’s open under normal circumstances we should be able to close that trade or at least start closing it if it were before the expiration date right well another guideline the short option is 10 of the strike with uh in the option chain again these are again guidelines or if the stock moves towards your short strike again all of these kind of complement each other uh and maybe four to ten days before expiration just in general right so in other words if it’s at our strike and it’s very close to expiration then we kind of have to think a little bit about that gamma risk we were talking about and the potential of volatility from that point on because that picks up as options get very close to expiration so we have a lot of different uh things that we can consider here uh but let’s go live to the thinkorswim platform again and uh let’s go ahead and build a

calendar and maybe a double calendar and let’s put them all together so i’m going to jump back to the thinkorswim platform and let’s go back to the trade tab i’m going to hide the trade that we had here actually you know what i can do here now that i’m back on the trade tab i’m going to go ahead and delete that because our example trades still in the risk profile so we’ll go back to that now calendar spreads what we’re gonna have to pick our two expiration dates tell you what let’s stay with we’ll use the one month for our short option this would be our expiring option now we don’t need to have as many strikes here so we can we can tighten these up just a little bit here um and what about our long-term option well i’ll tell you what we’ll go out close to 50 days how’s that all right so now we have some options expiring 25 days close to that and some expiring uh almost 50 days close to that 47 in this case let’s start off with a basic premise that an options trader is thinking okay in the next three or four weeks i think the stock is going to stay fairly close to where it is not sure if it’s going to go up or down a couple dollars that might happen as well but i just don’t see for example this traders thinking that there’s going to be much movement maybe they’ve already had earnings the market’s consolidating for whatever reason let’s go ahead and build a call calendar at the current strike price how do we do it well let’s go through the process together let’s go to the options expire in 47 days and i’ll hide the 146 call there and here’s the ones that expire in a shorter period i’ll highlight that call there now we’re going to buy the long dated so go ahead and click on the ask price and there’s our buy of the long the 146 call out in december i’m going to hold down my control key and now let’s sell the uh call that expires here on the 4th of december so basically we have one that expires on the 24th that’s our longer dated and one expires on the shorter uh shorter time frame which is the fourth of december and how much are we paying for this about 50 cents key takeaway here what’s our max loss on the calendar what we paid for the calendar spread all right if we were to sell this uh send this trade out you can see max uh max cost of the trade max loss would be fifty dollars we don’t have it here because we have a couple of the positions in there but i’m just gonna go ahead and delete that whoops let me go back through that process again i didn’t mean to delete it oh stay with me there we go now we’re right back to that 50 cent debit now i’m going to right click on that let’s take this to the analyze tab as well and look at it alone so i’m going to uncheck the iron condor and then just take a look at i’m going to move this up just a little bit here’s our calendar spread buying the 146 call on the 24th selling the 146 call on the 4th of december and let’s go ahead and look at our risk profile here now there is that exact shape we saw before the volcano and uh again we’re using walmart same as we used last time you can see our iron condor strategy here and i’m going to lower this just a little bit so we can zoom in just a little bit on the on the actual risk profile itself let’s look at that blue line because that blue line is telling us what profit loss would be when the short term call expires right 27 days from now if the stock stays around 146 it looks like if i go across the left about 250 gain all right if it drops down to 143 that looks like it’s close to about a 150. again we can we have above and below our breakevens up here about 155 and a half and about 137 or just below so obviously like the iron condor we’d like to stay it inside our goal posts if you will or break evens if it moves significantly beyond down below or up above what’s our maximum loss on this well it’s what we paid remember 50 cents or times 150 dollars keep in mind to make it a little bit easier for you when you’re using the thinkorswim platform keep your eye on the little blue number here that is the expiration p l so if i’m right here you can see that expiration number that blue number down here about 275 if i’d like to see what would happen if it dropped to 142 well just look at the blue number down that left-hand corner it says 112 still a profit but obviously significantly less what if i’m i’m wrong it actually moves down to 139 okay i’ll move my mouse over 139 here well now we’re only down to about a 35 profit um of course minus any transaction cost but you can see we’re still inside the volcano if you will above above the the break even line here the zero p l as you can see right here so we’re still okay on that what about the greeks that go along with this well let’s look at the price slices it has positive time decay just like the iron condor uh has very neutral delta almost no delta here because we’re right in the peak of the volcano as we sit now what about vega well interestingly enough this is long vega now that’s a little bit different than the iron condor i’m going to uncheck the calendar spread let’s go back to the iron condor and look at the vega vega is negative on the iron condor well this is interesting two range bound strategies that both have positive um theta so the time decay is working for them if you will they both have fairly neutral delta but they have different different uh responses or

um uh was it different influences by the changes in volatility and they do kind of seem to counter each other if the iron condor is negative the calendar spread is positive so adding the two together kind of interesting here now this is a fun part of options trading when you’re starting to combine strategies and this is something um i think is very important for all options traders to to learn and get comfortable with we’re looking at risk profiles here together we’ve gotten very comfortable with the mesa we’ve gotten comfortable with the calendar spread and what you can start doing is envisioning what happens in your mind of what happens when i start adding strategies together what kind of risk profile will i have and you know what if you start thinking about those shapes and what they might look like combined oftentimes you’ll find you’re very close so we know the iron condor is the flat mesa uncheck it we know that the calendar spread is the peak what happens when we add them both let’s check them both well we kind of have the mesa with a bit of a peak in it but we know that we did we added to our theta so now we’re close to seven dollars a day in time decay working for us and we reduced the vega that we had with the three iron condors because remember it used to be like nine now we’ve cut that so we have less exposure to potential moves in volatility so far so good all right well let’s keep going with this because i’d like to now break it down a little bit more in terms of what happens if we add another strategy and of course this one as i mentioned was the uh double calendar spread all right so let’s go back to where we were and i’ll leave these here we’ll go back to the trade page let’s talk about the double calendar i’m going to delete the the individual calendar that we had now before we get into this one let’s talk about the sort of range bound strategy or the neutral strategies that we’ve been looking at here so far right so let’s say that volatility has peaked and come up a little bit higher than it normally is right and we’ve seen that in the marketplace right now the volatility or vix for the overall market i’m going to open up my left side bar here as you can see is right now at 24.25 right that’s come down here in the last few weeks all right well actually last week it came down quite a bit it was in the mid to high 30s but we’re 24 25 now and remember what vix is it’s an overall gauge of the amount of uncertainty or fear if you will in the marketplace but that’s still relatively high historically if we go back and look at what is the average for volatility for the marketplace which was vixx represents it’s probably in the teens like 16 17 18 somewhere down there so you you could say that we are relatively high with volatility right now so why does that matter well if we’re looking at the two strategies we’re just talking about i’m going to go back to the analyze tab here just for a minute and just put in the iron condor we know that it has negative vega in other words it will benefit if volatility drops right because remember what vega is it’s what you can potentially make or lose with a one percent change in the volatility right we know that that right now is uh depending on what strikes we’re using we can look on the on the trade tab it will tell you what your volatility levels are we’re looking at 32 here for our short ones and somewhere close to that about 29 for the longer dated but we can get an idea what those implied volatility levels are and when we’re on the analyze tab if those volatility levels move up or move down that’s going to affect the value of our strategies here so moving higher if volatility goes up that’s not necessarily a good thing here for our iron condor because it has negative vega all right so volatility goes up one percent this strategy loses what 9.83 okay well we don’t really want that um what about the calendar spread let’s go back and look at that well here if volatility goes up one percent this this one and this is just one calendar this actually adds five dollars a value right if volatility goes up so in both cases one it’s working for one it’s working for the other so a key takeaway here is we’re looking at both range-bound strategies or neutral strategies but ones that have different outlooks on volatility now this is key because as i was starting to learn options um vega wasn’t something that i initially focused on and i don’t think a lot of people do initially they really focus on delta in other words how much am i going to make if the stock moves up or down a dollar right well that’s what delta does for every dollar move in the stock tells you how much your option or your option strategy makes or loses with that one dollar everyone watches that right theta time decay i need to know what’s going to happen every 24 hours to the value of my options right times whittling away that that what we call premium or time premium some people refer to that as extrinsic value of the option right and that’s constantly taking away whether it’s a call or a put it’s it’s working against both of them but what about volatility well that’s the one that sometimes if volatility is really not moving

people perhaps don’t pay as much attention to it and that’s an easy sort of sort of mode to move into but when we are when volatility does sort of become more active sometimes it can become the most important greek if it really moves up or down that can affect the you know obviously the value or the profitability of any strategy now it’s kind of interesting if we’re combining these two neutral strategies one is sort of long vega the other short vega there is a little bit of a neutralizing effect between those two all right so far so good let’s go back to the trade page now and we’ll stay on the calendar strategy and let’s look at the double calendar the double calendar now what is that well let’s say we know where the stock is now and kind of like the iron condor we went above and sold a call spread and we went below and sold a put spread we’re gonna do the same thing we’re gonna go above but instead of selling a call spread on the iron condor we’re gonna buy a call calendar then we’re gonna go below the stock price and buy a put calendar so we should have two volcanoes one above one below and we saw that earlier we saw that risk profile so we should that’s what we’re gonna be looking for we’re gonna be looking for something that you know sort of mimics that that risk profile that we saw before all right well let’s go through the process together and build a double calendar right now some it might show up as double diagonal but same kind of principle now stock is currently 146. i’m going to add just a couple more strikes here so that we can look uh at these two let me just go ahead and add a few more strikes here that’s too many i just want to see if we can get the strikes that we might want to consider here all right let’s widen it out a little bit that’s good all right let’s go out to our longer dated option because that’s the one that we’re going to be looking at purchasing right and i’ll highlight where the stock is now 146 we can see that’s here and this is the longer dated call out 24th of december let’s go ahead and look at uh well tell you what we’ll go up let’s see we’re 146 now tell you what i’ll go four dollars higher how’s that we’ll go four dollars higher for the call calendar four dollars lower for the put counter so i’m going to start off going up to the 150 strike uh we’re here we go now that has a problem about 35 so uh kind of in that range so here i’m going to start off by buying the 150 call that expires in 47 days perfect now i’m going to scroll down and sell the 150 call that expires in 27 days all right so hold down my control key and just sell that same 150 call so here you go you can see on the left side it says calendar and uh buying it’s a 150 call calendar it’s like we’re paying about 70 cents for that all right so far so good so we have our calendar set above now let’s go ahead and do the same thing below since the stock is 146 and we went four higher let’s go four lower down to 142. all right now let’s go ahead and buy that 142 put that expires at the further date out that’s on the 24th of december so i’m going to hold down my control keys because i want to add this to the call calendar so hold down my control key click on the ask price perfect now let’s go back to the shorter dated i’ll highlight that so you can see it that’s the 142 call that expires in 27 days again hold down my control key and click on the bid to sell that one now it’s all together and you can see double diagonal double calendar same family let’s make sure let’s take a look and see what it looks like here well we’re buying the 150 put out in the 24th i’m susie call the 150 call and selling the 150 call at the shorter check that’s good now let’s go out to the puts buying the 24th of december put perfect that’s plus one and selling minus one the shorter data put all right looks like we’re all good here looks like it’s got about a dollar 30 in value or debit that we pay for this now that’s what we’re paying for this remember a dollar 31 and that would be our max loss on this if the stock were to go way above or way below our strikes or a break even we could potentially have that loss of a dollar thirty and again remember we are looking at four options on this strategy now let’s right click this one as we did before and take it to the analyze tab as well and see what happens here now i’m going to check everything else uncheck and look at our double calendar now if you’re kind of becoming an architect of risk profiles and learning your strategies this kind of is what you should be imagine in your head we know it’s two volcanoes when we combine them together kind of looks like a i don’t know it’s a suspension bridge i’ve heard people call this the golden gate bridge strategy right because it kind of looks like if there were two towers on the bridge uh this is your suspension cable that kind of moves up here and kind of gives you an idea now if that’s something that works for you great look for that suspension bridge when you’re building a double a double calendar sped because that’s what we have here now let’s take a look at it i’m going to lower this down just so we can widen out our risk profile here so here we go now where is the stock right now well it’s currently right here at 146. what does it have for in terms of vega well actually it has some pretty good positive air nine nine positive positive vega well why is that higher than the individual calendar spread which is only four well because we have two calendar

spreads here a call in a point so that’s why it’s giving us nine vega what about theta again we have positive time decay so one of those early uh points that we talked about is why why are we looking at these kinds of strategies or adding these to a stock portfolio if you will again we’re looking to have that sort of generation of potential income in a high probability fashion with defined risk so that we can uh add that uh to our sort of investing plan if you will overall all right well let’s keep looking at this delta right now again minimal less than one uh because it’s right centered in the middle of where we want to be now this was kind of interesting we knew that the double calendar because do we want it to say exactly where it is well i mean we’re okay uh if i hold my mouse right here and we look at the blue number here it says we have a pnl about 209 right well what if it does move what if it doesn’t stay right here and moves up to 150 well now it jumps up about 275 what if it drops to 142 again about to about 270 right around that 270 275 so actually we’re okay with this strategy for the stock moving away from where it is now four higher four four lower that’s actually better for this particular strategy now if it does move higher or lower we also would be okay with the volatility going higher right now this is another important consideration when you’re looking at the expectations for volatility when a stock moves or the market moves in either direction what should we expect potentially for volatility to do if the market’s moving higher now generally when the markets are moving higher or stocks moving higher there’s what less fear in the market all right it’s a bullish type of move and typically that puts downward pressure on volatility right and vega if we’re long vega that potentially could hurt it let’s look at the other side what if the stock is moving lower moving towards this peak down here well typically when market selloff stock sell off that can add more uncertainty or fear which pushes potentially pushes volatility higher so that could benefit on the way down so basically looking at this double calendar if the stock does start to move higher that’s great because it’s moving towards the peak up here around 150 but we also might expect that volatility might come down a little bit what about moving to the downside well good we’re moving towards that 142 peak but that peak might actually be a little bit higher if it gets there because as it moves lower we might expect a little bit of a pop in over in volatility for this particular stock so that peak could actually be a little bit higher on expiration day so kind of interesting to see that now i’m going to show you uh we have time i want to show you one other thing here that when we’re looking at a strategy like this and we see what our peak gains are remember these peak gains on a double calendar or a single calendar are showing you peak gains if the stock moves to those levels and volatility stays where it is but what if i’d like to see well what happens volatility changes a little bit right well down here i can change some things that i’m looking at in terms of volatility we have we can change interest rates we can change dates and if i click on this little icon here i can adjust the volatility as well now let me show you that one more time click on the little gear icon here that brings up i can adjust stock price but i can adjust volatility now this is a great little tool because it allows you to kind of forward test uh the risk profile or the p l uh if volatility does change right so what i’m going to do here is just remember with the stock right here if it stays right where it is here we’re looking at a p l number here look down here of about we said about 209 okay now i’m going to take volatility up uh just clicking on on this and take it up one percentage point right not a big move uh one percentage move something that could potentially happen i’m going to move my mouse back up there now look remember it was 210 now look look at that blue number again now it’s up to about 235 234 right in that range well you can see that’s a significant difference in the profit loss potential of this trade because we saw move higher in implied volatility uh and again if i thought it was going to go lower i could move that down against it you can see that takes value away from potential p l i’m taking it down one percent now let’s go back to there and remember it was 209 now it’s like 189 185 somewhere in that range so again it works both ways but important considerations when you’re looking at vega and you might be thinking well scott why is it important to have long vegan short vega with these sort of bound type strategies well because if volatility does move as you can see it can affect our eventual uh potential profit and loss right so um so far so good with our different strategies now what happens when we’re looking at this particular strategy and i’m going to reset everything here and just take my

volatility back again back to zero i can just back that out and put in zero enter and we’re back to where we were so now things reset all right perfect so some great tools you can use here on the thinkers and platform when you’re on the analyze tab to put these things together all right so so far so good um i’m looking at just a couple of the quick questions here that are coming in uh is there any way to set and forget an iron condor so it would be automatically closed if the underlying stock went above or below certain prices right well there are yes there are conditional orders you can put in right uh and i would um i would recommend going into some of the webcasts that we have uh or even on td ameritradenetwork.com going to the archives and just search under that under uh conditional orders all right and they’ll get great explanations on how you can set orders that if stocks get to certain prices it kicks in in order to either open close or neutralize an existing position um but again i i wouldn’t always consider these kinds of strategies set and forget i mean it’s great when they work out that way and the stock just kind of moves up a little down a little and it kind of stays in your range and since we have a high probability you might expect that to happen a high probability of the time well it does tend to work out that way but when stocks do move up and down there can be some management involved right now we do have a amount of defined risk with these strategies that’s an important takeaway but there still can be some potential management right in other words if we have a defined amount of risk are there things we can do to keep that risk or that loss to a minimum if it does start to move like i said outside of our goal posts now let’s move in and we’ll start talking a little bit about you know what we can potentially do in terms of in terms of of managing these trades but for all the options traders out there particularly options traders that are you know new i mean you’re really starting to to improve and build your skill set for trading options i’m just going to put out three things there and i would say write these down uh and and keep them somewhere handy put them on the stick of note and put them on your screen or whatever it is that will keep your attention and these are kind of like what i call uh or what many traders refer to as uh like a trading checklist right now we looked at our strategy and we determined this strategy was something that would align with our our first step which is our outlook time and price and of course volatility well that’s great but once it comes down to picking the exact strategy because if we were neutral we could have picked the double calendar could have picked the individual calendar right at the stock price we could have picked the iron condor you know how is it that we picked these different strategies and we might even want to buy a call if we really thought it was going to maybe move up or sell a call if we thought a call alone again we’re going to have different risk profiles so those who take on some more undefined risk but how do we choose amongst them well i’m going to give you sort of three i don’t want to say criteria but more maybe parameters that you want to consider when it comes to actually selecting the strategy itself and number one write these down like i said if you if you have something handy that defined risk element extremely important i learned that very early as an options trader defined risk why well let’s look at our double calendar and i’m going to scrunch our numbers here it again so if this stock moves way up let’s go up to 164 or wherever it is or 169 i’m only losing 126 right that’s my max loss and on the downside you know it’s maybe 110 150 120 somewhere in that range right if i can sleep at night i’m comfortable with that i’m not going to have to panic out of my position so to speak at some point or we used to call that throw in the white towel because there are certain strategies that the more it moves against you the more you lose unlimited risk strategies and as you’re learning trade options having that happen on you having this trade blow up on you and just saying oh my gosh if it keeps going i’m going to lose more and finally so i can’t take it anymore i’m just going to take my loss and realize it and be done we’re not worrying about that here right could we have losses sure but we know what those are and i can sleep at night knowing what those are that’s tremendously important when you’re first learning about option strategy you want to be able to sleep at night right so that define risk important number two positive time decay we just talked about that um during the lifetime of this strategy as each day ticks by and maybe the stock’s not moving much or the volatility is not changing much is that trade working formally or against me in terms of time decay because there’s really nothing we can do to stop time decay someone pulled me over on the trading floor my one of my first days down there scott he asked me what’s the one thing that happens to options every day 100 of the time and i thought well uh options they can expire no no no 100 of the time and and i said give up what is it he goes time decay options lose time to lose value over time now since we can’t stop time that’s going to be a continuous effect on the price of all our calls and puts and whatever we have in our strategies here so since we can’t stop that would we ideally like to have that

workforce instead of against us the answer is preferably work for us if that’s possible now in all the cases here the calendars and the the iron condor we saw positive theta all right so these are strategies that kind of meet two of those parameters we’re just talking about right so time time defined risk and what’s the third one well it’s what we kicked this whole session off with high probability that’s what we’re talking about here today right we looked at this strategy here uh let’s go back to the you can see the screen here i’ll move my mouse again and you can see that well what’s the probability of the stock staying again in our breakeven that’s below 156 and above 136 that’s that’s our break even right and uh we know in this particular strategy these options are expiring on december 4th i believe that’s what it was um yeah december 4th so between now and december 4th what’s the probability of staying above 136 and above one below 156 well we can always go back here and take a look what’s the probability of staying below that 156 and we can see it’s less than 20 percent i mean there’s a there’s less than a 20 chance it’ll get above that 155 level i’ll highlight here so you can see it so yes this does have high probability the probability of it getting up there’s only 20 or you can say 80 that it won’t again either way you want to look at it that’s high probability so again that checklist of defined risk time decay in your favor and high probability these strategies seem to check all of those off now there’s a little bit look different on volatility but uh they sort of meet the the criteria or parameters that options traders often kind of use as a individual checklist right now there could be things you’ll want to add to your checklist as well but these are often three parameters that many options traders start with and then maybe add or tweak themselves all right so let me just do a quick time check all right we’re in good shape now let’s do this let’s go back to the analyze tab and start talking a little bit about well let’s say we ended up now again we’re just looking at one stock walmart let’s say we had several stocks and we had different options strategies based on all of them how can we look at them together to kind of get our idea of these greeks well let’s do that what i’m going to do then is we built three different strategies here based on walmart so i’m going to click all three of those and you can see as you add them right you can see that we kind of look at the collective greeks if you will of of all three strategies right so again uh let’s just go back to the iron condor by itself we had about four dollars of positive theta and negative vega here and not much delta okay calendar spread about two dollars three dollars of theta positive data data that’s working for us in other words again that time decay is working against the options that we sold and uh long vega and then finally the double calendar again positive theta again and again long beta now let’s add all those together and you can see that uh with the iron condor we’ve gotten our vega number down to a fairly low level so if this is not as sensitive to movements in volatility but look at the theta number now it’s up to about 11 or 12 dollars a day being collected now we’re looking at some pretty you know relatively small positions uh our calendar spreads we did just one the smallest amount you can do and on condors you can see we have three of those listed here um but again what if i want to kind of tweak these numbers and say well listen i’d like to get my theta up number up just a little bit more um i could do this maybe add to my iron condors right i mean that is that is one uh certainly one possibility of what i could do and now my theta is up to that 14 level and my vega is pretty much neutral right so we can kind of see by adding or tweaking the size or the quantity of the different strategies how we can kind of get these overall greek numbers uh theta numbers exposure to movement which is delta and what kind of exposure we have to changes in volatility and sort of get those to where we where we want them and tweak them right now again i said we’re starting with fairly small um uh quantities and sizes which is always i always recommend that for anybody who’s learning about options keep your size small right learn as you go improve your skills add to your potential quantity as you go on right now let me jump back uh real quick to our slideshow and uh continue on and follow along now we looked at inventory here let’s talk about building that inventory so if let me just starting with this how do i get started with this well in our case we started with an iron condor and some people like to do that using iron condors is sort of the first trade to get in there establish their probabilities where they think the stock could move and use small allocations right and again again we’re looking at that 20 to

50 day expiration um consider selling early to midweek for consistency and time decay again we just talked a little bit about uh when you want to use that data i think the most important takeaway is kind of around that 30 day right look for opportunities when volatilities rise now again we just mentioned uh volatility is still fairly high historically so selling vertical spread i mean iron condors which it involves the vertical spreads remember has negative vega in other words it would be good if volatility came down right so again these are considerations what if volatility was overall market volatility was low or for our particular stock was low would we want to be jumping into iron condors at that time well maybe not maybe we’re going to use we the double calendar might make more sense because if we feel we’re at or near kind of the low area for volatility we still want to have a range-bound trade but maybe the double calendar might make more sense because remember it has positive values so if the stock kind of moves a little bit between now and expiration and volatility does start to move up from those sort of historically low levels well that would benefit that strategy right so what can happen sometimes is your building strategies maybe if volatility is high and we’re saying all right in this particular case maybe we’ll start off with the iron condor but we want to and we want to incorporate that into not just our time and price but what we think volatility might be doing so maybe volatility is high or relatively high to start off with and maybe the trader options trader will consider putting range bound strategies with the iron condor now let’s just say maybe a week or two passes and and volatility low and behold starts to come down um and uh we’d like to add to those positions well now the volatility is a little bit on the lower side maybe we’ll add to those range bound strategies by using calendars or double calendars and adding to that giving us some positive theta so if markets do start to move our volatility starts to move back up it could potentially offset that short vega that the iron condor has all right and you can see down here below when volatile is really below maybe a greater allocation of of the uh the calendar type spreads volatility’s high um we can also talk about rolling calendars now we didn’t spend too much time about rolling in our example we just use a shorter dated calendar but that’s certainly important if you’re using longer dated options right and of course short verticals can be added to as a market bias if your bias changes in other words if you think a stock might be doing in the case of walmart our example we can also add individual vertical spreads which can add what more negative vega and how can i also add a little bit of directional delta to a trade so there’s lots of different things that can be done um and the fun part is what kind of experience you know is in paper money and as as as stocks move learning about those different things all right so what about the greeks we’re just looking at so we were looking at the group just a minute ago and we looked at the overall greeks looked at the probability of the entire portfolio you can from there review your strikes and then start thinking a little bit about about trade management right so what are the kind of questions we ask well we went through those just kind of briefly but again we’re looking at delta and when i look at the whole group of greeks what is my delta risk for the whole group not just for one strategy right what’s my daily rate of decay here for the whole position not just one right and uh what about my vega is my vega consistent with my outlook and my expectations of where i think volatility is going to go again we want to review that as well right now gamma of course is you know what do we think do we think the delta is going to change in other words if the market starts to move or our particular stock starts to move you know how fast might our deltas change and of course gamma will tell us that but again here’s a quick slide if you will uh that kind of shows those numbers and exactly what we’re looking at and you can see the risk profile of this example somewhat similar to what our combined strategy was now if you have lots of different underlyings this is what we can do we can go to what’s called beta weighting the position right and then putting in a beta weighted symbol it can be perhaps a broad-based etf it can be a future it can be maybe an indices like the s p 500 lots of different things you can do to beta weight a portfolio to look at kind of those overall greeks now our case we just had one single stock so it was easy but again this is a way to put if you have different stocks in different positions kind of look at them overall together so use the beta weight symbol and i’ll show that just when we go back right now what about trade management and exit rules well again we’ll talk about i’ll give you one example here in just a minute but you’ll develop rules and for managing verticals and calendar spreads um and again don’t focus too much on what the position was when you’re originally entered once we’re looking at this sort of group risk profile

that’s what what we’re going to be looking at and that’s what we’re going to be trying to sort of uh if you will tweak the sort of the shape of that risk profile right so it doesn’t matter as much what is in your inventory now it’s what might we do to manage any potential changes in direction right all right so let’s go back to the platform we have just a couple minutes here how could i potentially manage this strategy if the stock starts to move higher or lower let’s say it starts to move up here to the 150 area you can see my delta is starting to get short here right and the more it moves the shorter i’m going to get i still have my theta is okay my vegas still a little bit longer here but i’m starting to worry about my delta so what are some of the things i could do well if i got a 31 delta here and i’m afraid it might just go through here and go higher but i don’t want to take my positions off because i think that might be maybe a short-term move and then maybe as we get closer to expiration the stock might just drop right back inside the peak of my profit dome well if i take off my options positions well then i’m not going to have that ability for the stock to move up test and then maybe drop back down in because remember the probability are still high that it will remain there that doesn’t mean it won’t test you to the upside or test you to the downside but the probability when it finishes on expiration is still like we said that 75 to 80 probability um but there’s a pretty high probability it’ll kind of move higher or lower so what might i do well one of the first things that people can look at is if i want let’s say the stock starts moving higher as you can see our deltas are getting more negative right so we don’t want that the higher it goes we don’t want to be shorter and shorter on the way up just like we don’t want to be longer and longer on the way down we could just use something very like delta we can add a simulated trade here and let’s go ahead and just uh tell you what we’ll buy some stock right and if you can see down here below we bought stock but we don’t want 100 shares because our delta at that time was uh only 30. so if i add 30 to that and and then go ahead and look at that take a look now at our wrist profile let’s go back down there and look at our wrist profile you can see wow look what it just did it tilted the whole thing so now that if if it does shoot through our our positions up above and i’m going to hide the price slices you can see that it’s reduced the amount of loss and if it keeps going higher well actually the number starts to move higher up here so what we did is we reduced that loss to the downside for this overall position as as not having those greeks now what happens if we wanted even more protection well again you can look at what happens if we add more shares of stock when it gets up to this area now we only have a very small loss if it goes through us and if it continues higher we actually break back into the profit area but here’s the question what if it does move up here and starts to move back down in here well then we eliminate the stock position let’s do that let’s take the stock position i’m just going to uncheck it now we’re back to where we were so in other words when it moved higher we had some some questions with our risk on the downside i mean on the upside but we temporarily used a stock position just shares 30 shares 40 shares 50 shares and if it continued then we had definitely uh reduced our our potential loss on the upside because look without the stock look at our potential loss for the positions we have now it’s close to a thousand right by adding those 30 40 shares we reduced it significantly um so uh and if we were to stop dropping back into the risk profile of where we wanted to be if it gets back down to this range where we put on the um the hedge or the management of longer delta we just take those off sell that stock back out we’re back to the original options position all right well i think we’re getting pretty close to our time uh i’m sorry i didn’t get a chance to get to all of our questions there but hopefully you’ve got a better idea of different option strategies even if you’re a long-term investor uh thinking about taking a certain percentage of a portfolio whether that’s two percent or three percent or five percent and saying listen i’m going to look to add option strategies maybe something like this that generate income income perhaps on a monthly basis give me high ranges of probability have defined risk and positive time decay is this something i could potentially add to a stock portfolio answers of course it is right but obviously you want to learn about options learn more about them start small learn about the different strategies we just outlined a couple strategies that could potentially make sense that meet that checklist of high probability time decay and defined risk right but again you can learn lots more about these through um the webcast that we have here at td ameritrade and of course watching the td ameritrade network as as we cover a lot of these different strategies on a daily basis all right well that’s going to wrap it up i think we’re at our time here thanks again for joining us here on the investor education conference again my name is scott connor uh if you’d like to follow me you can

follow me on twitter each day uh i tweet out the topics that we cover i cover on a daily basis on the td ameritrade network if you’d like to follow please do um and uh you can uh i hope i hope to see you again sometime either on the network through our webcast at our in-person events or our virtual web workshops lots of choices for education here at td ameritrade thanks again for spending your saturday part of your saturday afternoon i hope you enjoyed it take care good trading and i hope to see you again on another edition take care folks have a great weekend