Earnings Ratio Diagonals | Mike Follett | 1-15-20 | Multi-Leg Option Strategies

Earnings Ratio Diagonals | Mike Follett | 1-15-20 | Multi-Leg Option Strategies


[Music] you [Music] good morning there and welcome
to multi leg option strategies this is
Mike Follet I’m happy to be here with
you today and you can follow me on
Twitter M Follet underscore t da if you
feel so inclined it’s just a terrific
way for us to stay in touch outside of
regular class time also you can reach
all of the coaches or follow them on
Twitter kind of following that same naming
convention and one thing you’re going to
notice along with our new webcast
offering here complete with the with the cap M
or the cap cam classes which are kind
of the complete portfolio management
classes is we’ve got Scott Thompson back on
the microphone and you can find him
on Tuesday afternoons teaching long
options so a lot of good stuff happening
a lot of interaction that can happen
with the coaches using these social
networking programs hey just remember as
well you can feel free to like and
subscribe to the channel here and that would
actually allow you to easily find these
webcasts especially if you want to go
back and just take a look at all the
other webcast offerings outside of
just this class all the webcasts are
organized into tiny little playlists there
on the youtube channel which make it
really easy to find the topic that
you’re interested in and listen to an
archived webcast as well as be notified
as the live classes are about the live
classes that come your way alright so as
we get started though let me go ahead
and just hit some disclosures I remember
this is multi leg options so we will be
talking options today and all this that
we discuss is for educational
purposes only and when you’re using multi leg
up ssin strategies I just remember there
are you know multiple transaction fees
that you’re going to be exposed to
and although commissions are gone
there are transaction fees that you need
to be aware of when you’re trading
options in order to demonstrate the
functionality of the platform we’re going to
use symbols however as we do this
remember that we’re not making
recommendations to buy or sell any investment
decision you make in yourself directed to cow it’s solely your responsibility
paper money is for educational
purposes only and successful virtual trading
does not guarantee success with live
money because market conditions do
change all investing involves risk
including the risk of loss no soliciting no
recording no taking pictures nard no part
of this presentation should be
rebroadcast without the written consent of
TD Ameritrade and remember just
make sure that options are suitable for
you before you get started with them when
you’re dealing with spreads or
straddles other multi like strategies the
complexity can go up also trades the minimum
profit benefit can be more impacted by
those transactions probabilities not a guarantee of an outcome and
because often times in this class we
deal with the shorter side you know and
what I mean is shorter time horizon
side of using options there is going to
be close monitoring that might need to be
done here and these trades could be
subject to significant volatility but
that’s one of the reasons why in most cases
we use defined risk trades is so that
if the volatility gets away from us the
market moves too far you know certainly
we can limit the amount of losses occur incurred in these examples in
this class there’s a quick look at your
Greeks Delta Gamma theta and Vega and
remember those are measurements of how an
options price can be exposed to price
time and implied volatility exposure by
the way if you’re joining me for the
first time because you were in my class out
there in Chicago and you feel like
you’re gonna try out these webcasts
well it’s good to have you aboard and also
if you are a wily old veteran it’s good
to have you back in class today so let’s discuss some kind of
some thoughts I had this morning with
the agenda for the class today and I
do not have a slide there with the
agenda just didn’t get that written down so
let me just describe one of the things
well a couple of things that I really
want to go into today number one we are
on the doorstep of earnings in fact
we’ve had some pretty significant earnings released already in financials
and one of the questions that I got a
lot when I was out there in Chicago this
last week at our advanced concepts workshop was how to
define and how to use some of the tools on thinkorswim to identify what
stocks have got earnings upcoming and also
how to potentially combine upcoming
earnings with potential volatility
scenarios like is implied volatility relatively
high or relatively low so what I want to
do and help you with in terms of a
learning outcome today is understand how
to use some of the primary tools within thinkorswim to identify earnings situations that are coming down
the pipe that’s one thing also another
thing that I wanted to talk about today is
how to use multi leg options in a ratio
format to potentially benefit if
implied volatility goes higher so a
ratio format potentially benefit if
volatility goes up now just to give you a heads
up that’s some complexity I’ll try
to walk through slowly some of the
dynamics of this type of a trade and it’s
it’s one of these trade examples that may
not be you know easy to find
necessarily and always evident but I want to go
through some examples with you and talk
about how to combine some of these
individual option positions to create
something that has positive volatility
exposure especially as quite possibly we
could see volatility rise if the
market does have a bit of a sell-off here
volatility may go up and certainly as
earnings comes around we might actually
see on some of these names that have
maybe a week or two left before their
earnings quite possibly we could see some additional volatility lifts so
those are a couple of things that I wanted
to talk about today and by the way it’s
good to see you all out there I’m seeing
names from Steve – Charles – J – Kathy
Jill Anthony Michelle also Mike
welcome everybody it’s good to have you
on board today and anyhow so let’s get
right to it shall we speaking of earnings by the way
oh look at that the S&P has actually moved into positive
territory when I was looking at that
before the market opened things were
bidding down slightly but we did have some
earnings today Goldman Sachs actually had a
report that stock is down pretty strong on
the open at least relative to the up
movement it’s had its pretty good down
move here and it looks like it’s down
right around 2% 1.8% so maybe not huge this
was kind of interesting this goldman
sachs situation this is one of those
examples of a stock that had really
strong sales numbers their sales numbers were
very high but they took some charges
that actually sent their EPS kind of
in a disappointing zone so it’s one
of those situations where if you break
down the numbers you know some of the
core metrics that drive stock and
company performance which are overall
sales apparently they looked pretty
good but you know factoring in some
charges and costs of the business it
actually took a hit on the EPS so that’s kind of
an interesting to see what’s are an interesting example to see
what’s going on today also though in the
world of financials Blackrock BLK not GS
blk but Blackrock believe they had an
earnings report today as well and yet
before the market their numbers aren’t
appearing here when I put my number on top
of the icon there but anyhow that stock
is getting a bit of a rally here
they’re up about one point three percent so Blackrock I believe they are the
world’s biggest asset manager I think
they’ve got something like seven
trillion dollars on the books and Larry
Fink actually was on TV yesterday
talking about his thoughts about capital allocation in terms of five in
terms of new categories he talked a lot
about climate change and you know how
some you know quite possibly there could
be kind of a new look in the world in
the coming years about how to allocate
capital towards climate change conscious
companies and it made me think a little bit
about Tesla and just the move that
Tesla is getting how you know certainly
with their electric car business and
the thoughts there about the global
for the climate friendliness there makes
me wonder if quite possibly there’s
some overlap between what Larry Fink
said yesterday and what Tesla’s doing
but anyhow interesting kind of
rotation that’s happening in the market
in these financials certainly seem to be
doing pretty well JP Morgan they
reported earnings yesterday that stock
had a pretty strong move up especially intraday but then they faded
toward the end although today after a lower
open they’re seeing a little bit of
strength here on JP Morgan just trying to
think of some of these others here’s
one that was kind of a disappointment
Wells Fargo and Wells Fargo continues to get
beaten up today down another 2% it kind
of looks like in general the
markets pretty optimistic about some of these financials but there are cases
where you are seeing weakness Wells Fargo
being one of those got Citigroup here Citigroup had a pretty strong
report that stock actually gapped
higher yesterday and you know when you
take a look at what it’s doing today it
is off just a little bit then you know
just let’s let’s take Citigroup for
just a quick example here for just one
second as we’re talking about some of
these earnings names I you know after
earnings gets released oftentimes you’ll
see a pretty strong pullback and
implied volatility and if you’re
wondering where you can view the situation
regarding implied volatility at the moment
let me go ahead and make this screen
just a little bit easier to see for you
there but one one place you can look
at is essentially this right at the
bottom of the page we’ve got this implied volatility indicator right here
and you can see that in I guess we’re
what two days now after their earnings announcement implied volatility
was already kinda low before that
earning announcement and they’re
dropping even further now on the implied
volatility scenario or in the implied
volatility situation let’s say somebody
wanted to put together a multi leg trade
they could benefit for maybe a
continuation of a trend here if they thought
that the stock could continue to go
higher but also give them the situation
where they’re actually buying some of
this low volatility right in theory you
know traders may want to get involved
with buying volatility or positive
Vega trades when volatility is low
especially if they expect it to rise that
might be another situation here about
whether or not a trader expects to expects
the volatility to go back up but
certainly it is low and then again the
thought is if volatility is low some
traders will look for opportunities to
actually get positive Vega trades that are benefitting potentially a
volatility goes back up again so how could
you combine something that’s bullish
and also buying some of that
volatility well here’s one way to do it without
even going into multi leg options and
I think this is important by the way and
I would encourage everybody to maybe
practice doing this every time they
structure a trade especially if they want to
know about what type of exposure
they’re getting is the trade bullish
what kind of an impact in theory is
volatility changing gonna have on that
position what you might want to do is
just hit the analyze page and simulate
that trade before you even get started and
let me do this I’m going to go to the
analyze page and let’s go with an option
that’s at least 65 days away from
expiration we’ll give it a few months here
or a couple of months at least if we just simulated just left
clicking on the ask price of an 80 strike
price call right here at the bottom of
the page what you’re going to see
are the Greek’s for that option and this will
happen if you’re dealing with a multi leg
trade or just a single leg trade what you
can that you are and we’ll see that price each unit if is that the gamma
could actually make the Delta grow for
you in potentially a positive way that
means if the market goes higher here and somebody’s making money on this
cuz they got positive Delta that Delta
could actually get bigger it could
work its way to a positive one 100 which
means the the position could get
better along the way also one thing about
this it has some negative theta that’s
happening here so we got some negative
time decay and we’ll just do that or oh no
no that is that the one okay still there
oh this sorry I have my lovely assistant
Vanna Crowder here helping me helping
me out I just got word that maybe quite
possibly there’s a little bit of a lag
that’s happening so we’re just shutting
down the camera here all right there
we go and thank you Rick I didn’t see
that but I did see Brett coming in all
right camera gone now back to this
situation all right we got whenever we’re simulating this long call we got positive Delta positive gamma
that just means that the Delta could go to
a positive one for you or it could
go to zero the positive gamma is kind
of interesting I don’t have time to
go into all the details there but if
someone’s directional that’s actually a
pretty good thing that means the market
goes your way the Delta could grow in
your favor if the market goes against
you the Delta actually gets smaller
which reduces potentially the risk per
point on the trade anyhow interesting
point there the theta is negative 1.9
– which means this trade has exposure to
about negative 2 on the time decay per
day that means two dollars worth of
time to okay in theory per day going
against it but here’s the thing positive
Vega right and so going back all the way to
when I started this little conversation positive Delta and positive Vega
those are both strong elements to this
trade if someone wants to buy the
volatility they want it they might want to
see positive Vega and if they’re
bullish they might want to see positive
Delta so in terms of the Greeks the
Greeks are just kind of reflecting those
two things now one thing that might throw a
trader off here is that it’s negative
decay right so if the trader is
thinking I actually want to have positive
decay in this position that trade might
not be the one for them but if
someone’s doing this just a simple long call
like this the Greeks are just telling us
we need the stock to move up faster then
time is decaying and or we’d like to see volatility go higher to boost
this position as well so price time
and implied volatility from the
Greeks I would encourage you to practice
that whenever you simulate a trade
but let’s say someone’s objective is
positive Delta positive Vega and positive
theta so they want to be bullish they
want to buy some volatility and they
want to actually in theory have
volatility excuse me time decay working for
them and or at least not working
against them so much well this is where
someone could introduce the idea of a multi
leg trade and so if they’re buying this
for example this 80 strike price
call they might decide to sell a call
against it bring in the short side and
let’s just go with something that’s closer
to expiration let’s say let’s see
where we can get maybe 16 days out from expiration and let’s say we go
up here to the let’s say we go with an
82 and a half call and we just sell that
thing so I’m going to hold the ctrl key
down on the keyboard and click the bid
price on that 82 and a half call well now
let’s see what happens to the Greeks
and by the way clicking the bid with
the ctrl key down what that actually does
is it turns this into a trade called a
long diagonal spread a long diagonal
spread because control key down click
in the bid what that does is it combines
these two options the computers the
software is just smart enough to know that
hey you’re trying to combine these
two things and create what logically
would be a diagonal spread so if we
did that this would be positive 22 Delta
and now notice how the theta actually
went positive but there’s a bit of a trade-off there right we gave up
some of the Delta to get the positive
theta and note one thing though we did
give up some of the Vega as well but
still were positive seven there on the Vega
so if the traders objective was
positive Delta positive theta and positive Vega
that position does kind of match all
three of those characteristics and just
for our paper money account here let’s
go ahead and put a couple of these in
here if someone were doing a diagonal
spread like this essentially the risk
on this trade is going to be the debit
that gets paid here the risk in this case
will be two dollars and 54 cents and
that’s not including assignments if there
were an assignment that means the trader
would have to sell the stock we don’t
actually own the stock here but we do own
a call which gives us the right to buy
the stock but the call that’s long
at the 80 strike even if there was an
assignment we had to sell the call because
we got assigned on the 80 to 50s
effectively what that would do is still
hedge a short stock a long call will
hedge a short stock position right but
the trade will get a lot more expensive
out of pocket the risk will stay the
same but the trade will get a lot
more expensive to cover the margin requirement on a short sale so
just be aware of that but what we’ll do
here is we’ll put in four of these and
I’ll hit confirm and send right here from
the analyze page and the reason I’m
going with four is that’s going to be
about a thousand dollars not including
any assignment that could happen or
fees that are involved here and
that’s usually about where we size a
position is right around a thousand for
this class so I’m just going to go
ahead and hit Send on that and see how
that one performs over time now the one
thing about a diagonal spread like
that one of those types of trades is that as
time goes by this trade does have the
ability to roll which means if these options
that we sold and let me just do sorry highlighting the options we sold
here if they get cheap enough to buy
back we could buy those back and then
resell more options in an extended
duration to effectively generate some income
on this trade but ultimately the best
scenario would potentially the option we in value right and another
another dollars worth of intrinsic value
and then potentially that could be
rolled as well but that’s an example of a
diagonal spread and hopefully I’m not
going too fast for you there just whenever
you’ve got an idea in mind about what
you’d like to accomplish from price
time and implied volatility simulate the
trade bring it over here to the
analyze page and do that on your next
simulated trade example that you’re putting
together in your paper money account and
just see what those Greeks are actually
saying about it to analyze whether or
not that trades a good reflection of how
you want to profit all right so anyhow we’ve talked
about some of the earnings that are
going on or that have happened today it
will really over the last couple of
days and you know what the financials
coming out that is really kind of the
primary kickoff to earnings season so
we’re gonna be right in the thick of
it here and let’s transition into kind
of my primary goal for the class today
in addition to just putting
together multi leg trades based on something
that’s already reported earnings but
what’s got earnings actually coming up in
the future right and so there’s some
pretty strong tools that are available
here on thinkorswim to see what stocks
will be having earnings and also you can
combine that with current volatility
scenarios and let me show you how some of
these tools are going to work so I’m
gonna jump over to the market watch
page and the reason I’m going to go to
market watch is because we have a
calendar here this is a pretty cool calendar
because what it allows you to do and I
got to click on that calendar there on
the sub tab here but what it allows you
to do is select specific events and if
the event that we’re after and just
looking over here on the left hand side of
the page if the event we’re after is
earnings all we need to do is make sure we
click that box now when you first come here
just making sure you know I get it
your screen will probably look
different than mine but when you first get here
you’re probably going to see show all
clicked which means everything is
checked here I’m going to uncheck the show
all and then just go right to earnings
and what that will do is just narrow our focus down to things on the
calendar related to earnings now one
thing about this too I’ve actually got my
screens already kind of set up in a
custom way let me go ahead and just reset
this thing to where you’re seeing
something pretty to where my screens
probably looking somewhere very close to
yours when you first look at this
you’re probably going to see this
calendar which will have the days of the
week usually it’s defaulted to weekly
plus the list of names at the bottom
of the page here basically just any day
you click here on this calendar it’s
going to show you usually on the late
in the existing day and the following
day what earnings are going to be
released so if we clicked on the 16th we’re
gonna see primarily the earnings that are
going to be released on the 17th and
you’re gonna see those names down here at the
bottom of the page and if you scroll
down you’re actually going to see you
know an icon here telling you how many
companies are reporting earnings on that
day so for example Thursday or excuse
me that would be if we click on The
Today the 15th you’re gonna see that we
got basically 29 that are going to
be reported that should be for
Thursday the 16th ok now this particular view
is fine and you can see your list of
companies right here but what you know if
you’re looking for something that I
like to look at whenever I’m looking at
upcoming earnings I actually don’t mind
using this list so if you go over here
to where you see the day week month
you know the view that you want to
have for your calendar I like to click
this list it just kind of goes overlooked sometimes and the list what that
allows us to do is just see the
earnings that are upcoming and they’re just
all you know in order a chronological
order listed by date here alright so
for example and I just look over
here at this left-hand column the column
over here on the Left where it says
gives you the day plus before or after
market and here you can just kind of scroll
through that and see what earnings
announcements are going to be coming up here
in the near term now one thing about about it if
we’re option traders and we like to
focus on things that are fairly liquid
you know for example you know S&P 500
components or Nasdaq components which tend
to be more of the liquid stocks that
are out there remember liquidity is a big
factor when we’re trading our option
strategies here because you know there’s just
slippage every time we put in a trade
especially if it’s multi leg there slippage
between the price we need to get in the
ask in the bid right you know selling
at the bed or close to the bid buying
it the ask but wider those differences
are the more slippage the trader
actually is going to have to face so in an
effort to try to keep that slippage lower
maybe focus on more liquid stocks now
there is a quick way to narrow this list
to S&P 500 components for example
Nasdaq components stocks that trade
Wheatley’s options this used to be named
the weeklies options class and let
me just remind you of how you can
restrict your results to those types of
companies over here on the left-hand side of
the page and I’ll just grab my annotation
tool here but on the left-hand side
up in here you’re gonna see a gear
icon in a symbol box okay what I’m gonna
do is this I’m going to click that
gear icon and that’ll allow us to actually
run this calendar against a public
or even one of your personal watch lists
if you created a personal scan or a
personal watch list you can run the earnings against
that but I’m actually going to just
direct this toward public and I’ll go
to just for fun Nasdaq 100 okay so out
of all Nasdaq 100 components here is a
list of the upcoming earnings so if you
wanted to know what’s coming out for
example in the next couple of days on the
Nasdaq well what’s coming out what days
today today’s the 15th right it
doesn’t look like anything’s coming out on
the Nasdaq today after the market closes
but tomorrow we’ve got CSX right
here CSX they’re going to be reporting
earnings after the market closed then fast and all that’s going
to be on the 17th and that’s before the
market opens so basically that’ll be you know someone’s looking to trade that
somehow that’ll be a trade that could be
done on this sixteenth as well this one next Monday is when
some of the real volatility fireworks are
going to be starting because we got
Netflix coming out they will be
reporting earnings after the market on the
21st but there’s just a quick way to
see what’s coming down the pipe now what this doesn’t tell you
is anything about the volatility
scenarios for these stocks right if you’re
looking for names on this list that are
going to be reporting earnings in the
next week or whatever you’re not actually
seeing you know anything related to
volatility so enter I a scan right I’m
going to jump over to a scan tab here and
I’m just gonna keep this believe it
or not the stock hacker but if we go to
scan and then stock hacker let me go
ahead and just reset the whole thing
here so I’m just gonna start with a
clean sheet of music as if there is no scan
built at all this is where you can direct
your scan to different areas and add different qualifiers to your
results so for example if we wanted to scan
in all stocks right we could just go
ahead and make sure that’s selected but
let’s say we wanted to narrow this to not
just all stocks but maybe just all S&P
500 components right we could go to
public and go to S&P 500 and even if
you wanted to you could intersect that a
little bit further right if you wanted to
look at by industry group you know go to
a certain industry if you’re
interested in health care whatever health care
has been pretty strong the last
little while you know whatever you want to do
you can cross-reference this against
another list I’m just gonna keep it to a
scan in the S&P 500 for now though now
what I want to do is see within the S&P
500 how about what’s coming up with
earnings in the next 5 5 price bars in
the next five trading days well what we
could do is actually add a filter so look
at the add a filter here and one thing
about this we’re gonna use study and
as I click study here study is only
available on a live account so if you’re
following along and you’re using a paper
money account don’t get frustrated
studies not going to be there but lo and behold you can do
this in a live account so hit study that’s
where we’re going and as we hit study
watch this about the fourth one down
on the list is corporate actions and
this is where we can hit earnings so
let’s say we want something that has
earnings anytime in the next number of
price bars now just for fun let’s just say
how about we go seven price bars not
too far out but not too short either so
when the next seven price bars so just
over a full week’s worth of time here
we go the next seven price bars what’s got earnings boom you can run a scan
and here out of the S&P 500 these
are the components that have got
earnings coming up in the near term right now
one more thing if you wanted to locate
the ones that maybe have higher amounts
of implied volatility or even lower
amounts of implied volatility whatever
you want to do you can actually add
another filter to this so I’m going to
add another study filter again this
is available in a live account not
a paper and then set this additional
study down to volatility so let’s go with volatility and I’ll click the IV percentile that’s what we’re
after IV percentile and let’s say
we’re looking for higher volatility
situations you know so what has kind of
unusually high volatility that also has
earnings this is if somebody wants to
potentially sell that volatility you know on
an earnings situation they could
just set up the desired number let’s go
80% so between 80 and 100 percent and
for those of you who aren’t quite sure
what that means what this is looking for
are of the occurrences where we’ve had
prints on volatility in the past year
we’re looking for stocks that are
within the upper 80 percent of all of those occurrences so the top 20% of
the upside here is that sort of makes sense
so in other words 80 percent of the
time volatility is printed lower than this in the last calendar year
so we’ll go between 80 and a hundred
percent that’s gonna be pretty high
volatility and let me just oh that’s too
high yeah so let’s just minimize it here
let’s go with how about sixty and a
hundred percent and we’ll scan that
again we’ll see okay so what’s coming up with
earnings in the next little while here that has
between 60 and 100 percent terms the
percent like this you can quickly kind
of get right to where you want to go
and you can also look for volatility
scenarios as well on the downside not
necessarily the upside so if someone is
looking for maybe a strong price movement
but something that has low implied volatility with earnings in the
next seven days well they could
actually just shift this toward the bottom
site so they could choose a zero on
their implied volatility average
percentile and maybe 20% is going to be
pretty low but anyhow let’s scan for it
anyway there you go so in terms of
what’s got low volatility right now and
still has earnings in the next couple of
days boom right there between 0 and 20%
look at this a lot of these are
financials and healthcare stocks United
Healthcare Johnson & Johnson Morgan Stanley
and then on down the list right
there ok so there you go by the way if you
ever set up these scans and you want to
save these so that you don’t have to
rebuild them every time or you can even
have these kind of set to on a
repeated basis just keep running for you and
build a watch list out of these results
all you need to do I think our connection might
have stopped there but I think it’s
back now all right Wednesday morning shenanigans
anyhow I’m just checking some of the chats
there to see how we’re doing okay so I think we’re in good
shape now all right but if you wanted to
save any of these all you need to do is
just click the menu button right next
to the fire icon that stands for sizzle
but if you just click that menu button
right there you can save the skin and whatever you want to call it
give it a name and then and I think this actually scans
it should rerun Rhys country run
the scan don’t hate me if I get this
wrong but I think it’s every three minutes
if you save this let me go ahead and
just save it here and you’ll see what I’m
talking about save that scan query so if
you come back here you can load that
scan personal scan and anyhow should
be in here somewhere I’ve made a lot of these yet
right here low vol urns S&P 500 click that
or if you’re on your market watch page
right and you’re typically looking at
the calendar if you go back to
quotes you could actually set your quote
watchlist here to be that personal
watchlist here and where is it low vol there it
was low vol earns S&P 500 and again I’ve
got a ton of scans that I already
built here so it’s kind of confusing but
you click that and that’ll just go ahead
and keep that watchlist kind of updated
for you so once you get that your
screens kind of set up you can kind of forget
about it right and just let this work
and just kind of come back to these and
maintain the situation okay now on to so that’s something I
wanted to show you related to how you
can use some of these tools to evaluate
what’s got earnings that are coming up
now one thing that I also wanted to go into was how could
somebody maybe structure a trade if
they’re thinking volatility might I
continue to go higher up into an earnings announcement and you know I was
just looking at healthcare related
stocks a little bit earlier this morning
because healthcare the sector as a whole
has actually been performing pretty
well and this stock came to mind here AM
GN let me just bring that up this is
not a recommendation right this is
just a stock that is one that’s in the healthcare environment it
doesn’t have earnings for a couple of weeks
earnings comes up on the 30th actual so let’s say an investor we’re
thinking that volatility could continue
to rise here volatility could continue
to rise and what if they were also
thinking that the stock or that ball did not
continue to rise but let’s say they
thought volatility could go back up
again getting a little bit closer to
that earnings announcement will it or
not I don’t know okay but we do have a
stock that looks like it’s kind of
bouncing and volatility is low ahead of
an earnings announcement if someone
were thinking hey maybe they wanted
to structure a trade they could do
you know a diagonal spread kind of like
what we’ve already talked about but
if they really were super bullish on the
stock and they wanted to maybe benefit
from a rise in volatility they could
try combining some option options to
create sort of a unique trade situation
so what I want you to do everybody is I
want you to put your hard hats on and I
want to explore the idea of maybe a
ratio spread for just one second and I forget this class was only
slated to go for 45 minutes so I’m
gonna go pretty quick on this but next
week will circle back around and evaluate
what’s going on with this trade but
here’s what I’m gonna do I’m gonna jump over
to the trade screen and on the trade
screen we’re gonna want to give this a
little bit of time now earnings on this
stock are on what the 30th in this
particular scenario I’m gonna choose
options that all expire after the earnings announcement okay so this is
going to be post earnings announcement and
the reason I’m doing this is because
these are going to be the options that
will be in theory exposed to an increase
in implied volatility probably the
most exposed to that but also I’m
gonna choose different expirations
because options that are longer-term
they actually have more exposure to volatility increasing so let’s
try to create something here what I’m
gonna do is open up will go with the ones
that expire on the earnings week
we’ll go with January 31 here and let’s
see if I’m gonna go right near the
money and just take a look at the price of
these options that are near the money
here’s my objective okay and this is
not a recommendation but this is the
objective that I’m kind of thinking about here is what
could we get for selling an option that’s
pretty close to the money that already
has some inflated volatility relatively
speaking but it’s still going to be alive
over the earnings announcement so
volatility might actually go up but it’s
weird because I’m actually looking at
selling that option why because
primarily maybe there’s already a little bit of
earnings volatility priced into it so
let’s go with an at the money call here
to 45 or to 42 and a half is right near
the money or right at the money looks like
those could be sold for about just
over 4 bucks and let me reduce the
number of strikes I’ve got on my screen
just to see if we can clean that up what
could I do or what could I get if if I
wanted to sell that but then you know what
could I buy maybe a higher strike price
in a longer duration here that would
cost for less than that four dollars and
ten cents so basically what I’m
looking trying to judge here is if I
sell this one contract here are there any
options longer-dated that could be
purchased that might give some unlimited
upside in case the stock really has a
strong move higher over time so here’s kind
of what I’m looking at what if we sold
one of these I’m just gonna create that
so I’m going to click the bid and out
here at the 255 those are pretty far out
of the money but it looks like you know
if I were gonna sell an option for 4
bucks you know effectively I could buy
pretty close to 4 of these that the 255
strike price out in time what if we were just to buy 2 of
these you’re just going to hold the
control key down on the keyboard click
the ask to buy 2 of those options right
so I’m selling one that’s close to
expiration and then buying two that are
farther away to higher strike what I’m
gonna do is actually analyze this trade
and see what we get here all right so it
looks like we’re getting something
that kind of looks like this on the risk
profile ultimately its best scenario is
that the stock at least for through the
near term expiration that the stock stays right where
it is that’s kind of where the profit
peak is but kind of what’s interesting
about this and you kind of have to
look at these lines and the way they
interact out here if the stock were to
have just a ginormous up move potentially
this trade could have unlimited
upside it could really grow to the upside
here and the reason for that is is we’ve
got these two long calls expiring in February and there is a little
bit of room all the way up to this
break-even point where the stock could go
higher between now and the earnings
state where it could still profit even if we
don’t get a move higher and sometimes
that’ll happen but this is what they
call kind of a ratio spread but it’s also
using different expirations now let’s
see what this creates now weirdly though
this has a negative Delta someone might
think well if I’m really bullish that
actually has negative Delta initially
that’s where someone might want to use
this risk profile to see if the risk
profile actually gives them the shape of
what they want but if someone is
thinking yeah it’s got negative Delta
upfront maybe that’s not for me in this particular example I’m gonna go
with the shape of the risk profile for
now note this as well it’s got positive
theta of $5 decay per day and it’s got a
whole lot of positive Vega here so
just for illustrative purposes I know
that this is kind of unique trade but what
we’re gonna do is paper trade a ratio
spread here that has unlimited
potential upside but they could potentially still
win even if the market goes sideways
up a little bit or down and that’s
where the negative Delta comes from so no
it’s weird but it’s kind of combining
the risk profile characteristics
with the Greeks that I’ve got going on
here it’s a little bit of an unusual trade
but this is going to be a ratioed
diagonal spread and the big point here is
that volatility might go up and
hopefully this is going to be a trade that
should be able to benefit from that and
if the stock just has a really big move
higher quite possibly it even benefit with us having to
long calls and only one short but
there is risk in between these two strike
prices here now nope this does bring in
two dollars credit here it does have
risk and the risk is going to be the difference between the strike
prices which is basically seven dollars
and oh no it’s $12.50 that is a little
bit wide I was thinking it was only seven
dollars and fifty cents wide maybe a
little bit wider than what I’ve what I’d
hoped for there but nevertheless let’s go
ahead and paper trade this and we’ll
track this in an upcoming session I’m
going to go ahead and hit confirm and
send on this but you see how it’s just
kind of fun that’s a very unusual trade
compared to maybe what you’ve looked at
in the past that’s we do in this
multi-legged option classes we’re not afraid
to combine options to see what we
come up with maybe one concern is the
negative Delta we’re going to look at the
shape of that risk profile though and
kind of go with the fact that based on
the shape this could make unlimited upside
if the stock has a big move but there
is going to be some risk if we only go up
a little but then again it could
win if the stock stays sideways or goes
down and we’ll see how it interacts
with implied volatility so just for illustrative purposes here we’ve
got a diagonalized actually ratio
spread that’s going on I’m going to go
ahead and confirm and send on that and
that’s something that we can circle
back around and track in a subsequent class
we’ll we’ll update that or we’ll
follow up on that next week as well so anyhow
we’ve got a couple of trades going on
and also I wanted you to see how you can
use the tools that are available on the thinkorswim platform to allow
you to evaluate earnings that are going
to be coming up we will in the next
couple of weeks have more earnings
specific examples here there isn’t a lot
going on today really but just tuned in
because we’re gonna have examples of
different trade scenarios actually over
the in earnings announcement over the
next couple of weeks as we get into
more earnings that are they’re coming
down the pipe but hopefully that allows you to
see some of the the primary tools
that are available and also kind of think
of different ways that you can sort
of structure trades to get
different objectives that you might have
hey join me today because in what about
two hours I guess it is when I go through
my high probability options class that’s actually going to be the next
webcast that comes up what I want to do
is take the principle of diagonal
spreads and both of these trades actually
had a diagonal element to them but I’m
going to structure those in a way to
where somebody is looking at the short
side of the market we’re gonna use what
they call short call and short put
diagonal spreads which is a little bit
different look on the way diagonals are
structured compared to the way you possibly
views those in the past and one of the
primary objectives is to actually bring
in probabilities a little bit more
to trading the diagonals so join me
today and that’ll happen at 12:30
eastern time 10:30 mountain time so hopefully
we’ll see that or see there in our
high probability class practice what
we talked about today see if you
can get it set up also listen to the other
webcasts that are out there ken rose does a great webcast on combining options for advanced
option strategies on Thursday that
might be a good one to follow up with in
addition to a class like this all right
so thanks for your time everybody and hope
you enjoyed or you learned some
things out of the class today everybody
have a terrific week I’m going to go
through some final disclosures here and
remember what we’ve talked about today is
not a recommendation to buy or sell
all right all right I think we’re in good
shape everybody have a terrific day
and we’ll see you in a couple of hours bye
now [Music] you

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