Managing an Options Portfolio | Options Greeks | 6-14-19 | Cameron May

Managing an Options Portfolio | Options Greeks | 6-14-19 | Cameron May


[MUSIC PLAYING] Good morning and
welcome, everyone. My name is Cameron May. It’s a Friday morning. That means it’s time to get
back into our ongoing series of discussion called Managing an
Options Portfolio, where we’ve been using a sample
portfolio to illustrate the sorts of logical processes
that a self-directed options trader might go
through as they’re attending to their own
self-directed portfolio. And today, our focus is
using the options Greeks to give us greater clarity
into how our portfolio is set to perform as
we see exposure to price, time, and volatility. And we’re going to use
those Greeks to customize that portfolio in
case we’re misaligned with our expectations for
price, time, and volatility. So I’m looking very
much forward to it. And specifically, we’re going to
be looking at vertical spreads today and how they might be used
in a number of different ways to accomplish different
Greeks objectives. So I think it’s going to
be a very good discussion. We’ll set a specific
agenda in just a moment. But let me, first
of all, welcome you veterans who come back
every week, week after week. I appreciate your attendance
and your contributions. I think it helps everyone with
their own personal learning curve, wherever
they happen to be, as they’re trying to learn
about options trading. I think your
contributions help a lot. And if you happen to
be in today’s webcast watching me for the
very first time, I want to welcome you as well. To set the expectation,
we spend about 45 minutes to an hour together
every Friday morning. So let’s try to get as much
value in this as we can. Let me say hello there, Robert. Good morning. You say it’s beautiful
there in Indiana. That’s fantastic. It is fantastic outside. It’s stunning. Beautiful June day. Ken, good morning. Great to see you. All right. But as we always do, quick
reminder of the risks associated with our investing. Risks are real. The following presentation is
for educational purposes only. Options are not suitable
for all investors. Spreads, straddles, and other
multi-leg options strategies can entail substantial
transaction costs. Any investment decision you make
in your self-directed account is solely your responsibility. Past performance of any
security or strategy does not guarantee future
results or success. All investing involves risks,
including risk of loss. We are going to be using real
examples in today’s discussion. Please don’t take that as a
recommendation or endorsement of any particular
security or strategy. The usage of a stop order is not
a guarantee you’ll buy or sell at a specific price. And finally, here’s an
overview of those Greeks that we are going to be using. And we do use them extensively
in these Friday morning discussions. So if you haven’t acquainted
yourself with these definitions yet, you may want to do that. All right. So setting the stage for what
we want to accomplish today– three items on the agenda. First, we’re going to
compare our current portfolio Greeks to our stock and
options market conditions. What does that mean? We’re looking to see what is
our exposure to price, and time, and volatility, and does it
align with our expectations for stock price,
time, and volatility? And then we’re going to
close some existing trades, if it’s appropriate to do that
and as our Greeks may dictate. And then finally, we’re going
to add new trades to adjust our portfolio Greeks,
to align our portfolio with our expectations
for market conditions, and we’ll revisit those Greeks. So we’re going to
have a starting point with our exposure to price,
time, and volatility, and then an ending point
for that exposure. So by the accomplishment
of these three steps, what I want you to
take away is that when you’re looking at your
paperMoney portfolio of options and you see, wow, I’m out of
whack with my expectations for price, or time,
or volatility, you know how that
might be adjusted. OK. So let’s do it. First, let’s take a look
at that account exposure to price, time, and volatility. And that’s measured using
delta, theta, and vega. And to weight our portfolio
against a major index, what we’ve done here is– you’ll notice there’s a
box that’s been checked that says beta weighting. We check that box. It’ll be right there on
your paperMoney portfolio. And then we’ve entered
SPX in the symbol box to tell the system, what we want
is an automatic calculation of, how will our portfolio perform
if the S&P were to go up? That seems like that might
be important information. So let’s look. You veterans, you tell
me, if the S&P were to continue a rally today– and it looked like we
were set for a soft open. I haven’t seen that yet
since the open coincided with the launch of this session. But if the S&P were
to continue to rally, would that theoretically
benefit or harm this portfolio as currently constructed? Well, if we look at that delta,
if you see a positive number down here at the
bottom line, that’s telling us that if the
S&P rises one point, the theoretical performance
of this portfolio should be around that number. And it’s literally a
dollar figure there. So about $12. The S&P goes up a point
with the positions that we have right now,
we should make about $12. And the S&P moving several
points is not unusual in a day. So is that a lot
of account leverage with an options portfolio? That’s going to be in
the eye of the beholder. Is it even in alignment with
our expectations for the S&P? What I’d like to know– class,
if you wouldn’t mind, chime in. Let me know, what do you
think the S&P is going to do between now
and the next time we come back to look at
and manage this portfolio? Do you think we’re going
to be higher or lower? Because we need to make
a decision whether we need to be maybe more bullish
with the portfolio, maybe neutral position,
or even reverse this to a bearish outlook. But right now there’s a
bullish bias to this portfolio. So let’s make a
note of that delta. Right now we’re
at a plus $12.44. All right. Now, what’s our
exposure to time decay? Just the passage of
the next 24 hours, would this portfolio
theoretically benefit if we held our
other variables constant, if price didn’t move, if
volatility didn’t change? And the only thing that happened
is the passage of 24 hours. Well, if we see a
positive number here, that tells us that we’re
theoretically positioned to benefit in the form
of unrealized gains from the passage of time. We have a positive theta as
of this moment of $12.89. And we’ve made a stylistic
decision for the administration of this portfolio
that that’s going to be a consistent theme–
keeping a positive theta or a positive time exposure. So that’s going to be a
point of emphasis today. And then finally,
we have our vega. Vega starts with V. That’s
our account’s exposure to volatility increases. So if volatility
or, specifically, if the VIX were to rise
by one percentage point, what would our account do? Well, we have a
positive number here, which would imply that we
have a positive exposure. If volatility rises,
great for this account. If it falls, not so good. So let’s put in
our current value. The reason we’re noting these– so it looks like we’re at 32
and 1/2 at my at last glance. The reason we’re noting these
is we’ve now determined that we are somewhat bullish
with this portfolio, we have a somewhat positive
exposure to time decay, and we have a positive
outlook for volatility. Now we just need to go
check the conditions and see if that is what
we expect to happen. The one condition that we
always know is going to happen is that time is going to go by. So for this portfolio, we keep
a positive theta at all times, although that’s not
the only way to do it. OK? All right, Robert. We have a difference
of opinion here, and that’s not at all
surprising, right? Robert says, we might
probably go a little bit lower by next Friday. Ken is saying, it’s hard to say,
but maybe a little bit higher? CG SPX neutral to
bullish for one week. OK. Well, let’s go see. Is there a right or
wrong answer there? Could I possibly say, Robert,
sure, you’re off kilter there. Ken, no way is that
going to happen. Nope. We don’t know what the future
brings for the markets. If we did, we could
really leverage ourselves and create some position
to theoretically make a lot of money if we had
that perfect foresight into the foreseeable future. We don’t have that. But let’s at least go see
if we can develop a bias. Let’s go to the charts. And I’m going to
bring up the S&P 500. Now, you may follow
some other index. The Dow, the NASDAQ,
RUT, whatever. But I’m going to have– let me just clean
off this one drawing that seems to be floating
out there in space. I don’t know why I
drew that on there. I was probably just
tinkering around recently. Anyway, so here is what we’ve
been seeing on the S&P 500. And this is a technical view. Obviously, there are
plenty of market observers that would also take a moment
table to look at what’s happening fundamentally. We don’t do that
on Friday mornings because I do do that
on Friday afternoons. If you want to come check out
my discussion called the Options Weekend Review, it’s the last
30 minutes of the trading week. So on Fridays at 3:30
Eastern Standard Time, we meet for 30 minutes
and we take a look at what’s happening
economically, what news seems to be
driving the markets, what’s happening with earnings
trends, and what’s happening with how the
options market seems to be reacting to those. So if you want to come and
have a fundamental discussion, we’ll do that. Maybe I can weave in a little
bit of fundamental analysis here. But technically, we hit an
all-time high on the S&P right here. That was back right
toward the end of April. Sold off to a low, rallied
up to a near-term peak, sold off again to
a short-term low. So during this period, we had
lower highs, we had lower lows. A technician may
come to a conclusion there that there
was a downtrend. Bearish outlook for
the S&P, but that seems to have reversed,
at least to some degree. Let me get a quick opinion here. If we have a high right here on
the S&P and a high right there, do you think a case
could be made now that we have a higher high? I think that point
could be made. However, what about the lows? There is a low right there. There is a low right there. And if those are the two
lows that are your focus, at most we might say, well,
that lower low, higher high– that combination is
a sideways trend. So that might give
some technical credence or credibility to
what CG has said. Now, someone else
might look at this and say, yeah, but there
were two days pulling back, and then we got
a confirmed close above the high of the low day
bounce right here yesterday. And so therefore,
maybe a technician calls this a new high or low. In that case, if we
had a higher high and we have a higher
low to go with it, that may be defined
as an uptrend. Yeah, this one’s kind of
a tougher call, isn’t it? For today’s discussion–
now, you may have an entirely different take on the markets,
but just to illustrate how the Greeks can be adjusted
to realign a portfolio with your assumptions– oh, I think you may
have heard that alarm. I was hoping there wasn’t going
to be an ongoing fire alarm. Looks like it was just a– I don’t know what that was. Anyway, hiccup. But my point is that I
just want to show you how a portfolio can be
adjusted because you’re going to have to come
to your own conclusions about the markets, right? Every trader does. They have to come to
their own conclusions, make their own
judgments if they’re directing their own portfolio. So here is going to
be our bottom line. Let’s go with the
assumption that we’re seeing higher highs and
a strengthening of lows, higher lows. And let’s just assume
that between now and next Friday, we’re
seeing more of an upward move to the market and we want
to optimize the portfolio to perform under
those conditions. What would we do
then with our delta? Well, we have a comparatively
soft delta right now. It’s bullish, but
not very bullish. How about we
increase that delta? So let’s make sure that that
is the bolder of the two. And I’m going to unbold
the rest of this. We don’t need neutral. Actually, we don’t even
need that in there. That was our
discussion last week. That’s why that’s in there. All right. So that’s our first objective–
to increase our delta. We also have made a
stylistic decision to keep our theta positive. Let’s increase our theta
so that as time goes by, we’re positioned to make a
larger profit from that– well, at least an
unrealized gain. So we have this final
decision to make– what do we want to do with our vega? Let’s have a look at what’s
happening with volatility. So volatility has hit a
couple of recent peaks. You can see that here
on the 12 month chart. We hit a peak around
the middle of May, hit a peak again
here in early June, but we’ve dropped in volatility. For an options trader,
what that means is that there’s been downward
pressure on options prices, generally speaking. So if you had purchased and then
you get a drop in volatility, that can provide a bit of
a headwind on your journey toward profitability. So you might think,
well, then what do I do? Well, that’s a
headwind for buyers, it’s a tailwind for sellers. So if we expect volatilities
to continue to drop, then this may be more of a
seller’s market for options. And for today’s
discussion, I’m going to go forward with
that assumption that volatility is going
to continue to drop. Once again, someone
out there, I’m sure, is saying, no, no, Cameron. I think volatility is going
to bottom out right here and rise back up
to these levels. And it certainly could, right? But there’s a typical
association or relationship between price activity
and volatility. When prices rise on
the major indices, typically, they drop on the
major volatility indices. So when the S&P goes up,
typically, the VIX drops. So our S&P expectation,
at least the estimate that we made for this
next week, is for that to rise in our example. So for our example
for volatility, let’s assume that
it’s going to go down. So what would we
possibly want to do with our vega, our
volatility exposure? Let’s decrease that exposure. There we go. All right. So now we just need to discuss,
how do we accomplish all three of these objectives at the
same time with the same trade or with a group of trades? Well, if you’re bullish on your
outlook for the stock market, there are two– if we just
look at the most basic options approaches, you can buy
calls or you can sell Puts both of those are bullish. OK. So that’s how we might
increase our delta. To increase our theta– well, generally speaking,
if you buy an option, a long option has negative
time decay exposure. That would be
decreasing our theta. To increase your theta, you
would add a short position. And then finally, for vega,
to decrease that vega– if you look down here at
this sort of rule of thumb that I have our the screen– generally, to
increase your vega, you would add a long position. But we don’t want
to increase it. We want to decrease it. So to decrease, you
just do the opposite– add a short position. So connecting all
those dots, we want to do something bullish,
that is buy a call, sell a put, or variations
on those themes. But both theta and
vega are telling us to take a short position. So that’s what
we’re going to do. We’re going to do a short put. Now, we could do a naked
put, or a cash occurred put, or we could do a
vertical spread. In this class, what
we’ve done is a limited– we’ve defined the risk on our
positions, reduced the exposure through the application
of vertical spreads. So that’s what we’ll do today. But I’m going to look at
several different variations on that theme. How can you use
a vertical spread and customize it to customize
your Greeks outcome? So let’s get to that. Let’s play some trades here. And we just need
to find a stock. Let’s go back to
our monitor tab. Right now our active
position is we have Apple, Facebook,
MasterCard, MLM, Microsoft, Netflix. Those are our active positions. You can see these other ones. These are actually
some trades that I placed in another discussion
just as an example. I closed those out this morning. So you see those
are all zeroed out. These are active positions. All right. The reason I’m checking
those is because I may want– just in the spirit of keeping
things as simple as possible, let’s not place more options
on the same securities. It can be a little bit
more difficult to follow. Not necessarily. It doesn’t have to be
terribly complicated. But I’m going to go up
to our S&P 500 watchlist, and let’s maybe work through
some of these that are still solidly in the triple digits. Maybe some of these
bigger companies into it– HUM, [? A ?]
[? Biomed, ?] so on. And let’s go to our charts. Let’s find one of these stocks. And let’s look
for one that seems to be in keeping technically
with our expectations for the markets. Like, here’s Intuit. I’m going to right
click on this drawing. Let’s just clear
off this drawing set so it’s a nice clear view. So with Intuit, here
we had a recent low. We rallied up to a
peak, sold off to a low. This is kind of a similar low. Then we’ve run up
to another peak. So we have higher highs here,
and possibly a higher low forming. So a technician might be
able to make a quick argument or case for that. What about Humana? That looks like
more of a downtrend. [? A Biomed ?] seems to
be more of a downtrend. So let’s go back
to Intuit and let’s have a look at their options. Let’s go to the options chain. Let’s go out a few more
weeks into the future so that we have
things to talk about for the next several weeks while
we’re revisiting and managing these trades. And actually, you know what? Every once in a while, I’ll get
down a path in my presentation and realize I want to go
in a different direction. I did want to have a
look at maybe managing at least one position
so that we can see the Greeks’ impact from that. So let’s park Intuit
for just a moment. We’ll come back to it. But let’s go back to
our current positions and see if any of these need
to be closed because closing positions can adjust your Greeks
just as readily as opening positions can, in most cases. I think that makes sense. Let’s say you prefer that your
portfolio is more bullish, and then you look at
your current positions and you see a bearish
trade that you, for that reason
and others, decide you don’t want that anyway. Closing that out could
increase the bullishness of your portfolio. So let’s zero in on
the profit and loss. Why would I do that? Well, there might
be some positions that are just sort of sitting
there, not doing much. They’re not dramatically
outperforming, they’re not dramatically
underperforming. So they’re not
hitting extremes where it may attract our attention. Does that make sense? Because there might
be different opposing motivations for the management
of an existing trade. Maybe you have one
trade that’s getting very close to a
maximum gain realized, and so you want to just close
that out and truly transition that from an unrealized
gain to a realized gain. There may not be much
more reward potential. On the other hand, you may
have another trade that’s just gone completely
off the rails and we need to get that
out of there, or at least in the trader’s
opinion, it’s time to close that one
up and move on. So let’s look at maybe
the extremes here. Here’s our worst
performing trade, here’s our best
performing trade. So let’s look at Apple. Apple, if you’ll note here, we
bought the $190, sold the $195 call. That is a bull call spread. So if we were to
close that out, we would be removing 7 and 1/2
deltas from the table, right? That would actually be dropping
our delta when our objective is to increase our delta. So already, that’s not
really in alignment with what we’re hoping to do. However, does that mean
that we just leave it there, even if Apple just continues
to pound the account? No, what we might
do is take a look to see if, otherwise, we need
to close this trade out anyway. Let’s see how long
this trade has. OK. So this is 19th
of July contract. So we still have 35 days
left on that contract. Or 34. Whatever the number is let’s
go have a look at the charts and see if this Apple
position has the opportunity to get to where it needs to go. With a $190, $195
bull call spread, we know that we need to be
above that $195 at expiration in order for this to
work out optimally. If you’re not familiar
with that– if you’re like, wow, Cameron, you sort of
stated that pretty quickly. How do I know that for sure? Well, if you need to take
a little bit of a step back and start with
the basics of options, nothing wrong with that. We actually have a class
every Friday morning. It follows this one. It’s called Getting
Started with Options, taught by Barb Armstrong. That starts at 11:00
Eastern Standard Time if you want to
check that one out. I think that would
be very helpful. But let’s go have a look
to see how Apple is doing. We can see right now as we look
at Apple the current market value of Apple is $191. For this trade to
work out optimally, it has 34 days to get to $195. And we need it to be
above there at expiration, so let’s go to
the charts and see if it has a chance to do that. All right. Let’s close out all of these
drawings and just have a look. So Apple’s having a
bit of a rough day. Yesterday, if you’ll
notice, it was right where we needed it to be. It was up close to $197. It’s taken a bit of a step back. But if our overall technical
assumption for the markets is recovery, might
this turn and get right back up to where it
was as recently as yesterday? It could. So an options trader may look
at this and say, you know what? I’m trying to increase my delta. This already has positive
delta, so closing it out wouldn’t be
accomplishing that goal. And my technical
convictions may be that this still
has a good chance to do exactly what
it needs to do. Let’s leave that one alone. Let’s move on, though,
and have a look at this option or this
trade that seems to be– at least right now it’s
generating the largest profit. That doesn’t necessarily mean
it’s performing the best. It may be that we have
a larger position there, and even a smaller
percentage increase has resulted in a larger
bottom line dollar return. But let’s look at Netflix
and see what we have here. Now, Netflix, we sold a $350
put and then bought a $365 put. What is that? Oh, actually, and they’re
separated by time. That’s an important point. So we have a long-term put
with a shorter term put that we’ve sold against that. What is this? This is known as
a diagonal spread because they’re separated
in time and price. So if you were plotting
that on a chart, that would give you an
intersection that is diagonal, if you can understand that. And if you didn’t follow
that logic, that’s OK. That’s just called
a diagonal spread. But this one has a bearish bias. Let’s see. It has a longer
term bearish bias, but the delta right
now is fairly neutral. So we actually may consider,
even if we closed out the whole TRADE it
wouldn’t necessarily have a very large delta
impact one way or the other. So this one you could
look at and see, do I need to take it off? It’s not going to make
a big deal to our delta. It would have a big negative
impact on our theta, but it would also bring
that vega right on down. That’s actually
contributing right there– that could reverse course
entirely for theta if that’s what we wanted to do. It’s not what we want to do. And vega– that would
bring it down to, boy, negative territory. But Let’s have a look at Netflix. With this trade, what
we’d really like to see is this head on down,
but we’re looking to see this put
expire worthless. When you have a put,
when you’ve sold a put, someone has the right to sell
shares to you for $350, right? In this case, we sold at
$350, so someone has a right to sell shares to us for
$350, even if they’re worth less than that. So we’re hoping the stock
doesn’t get below $350. Look where it is. It’s at $340. This contract, though– this is
coming right up on expiration. Assignment risk
is high right now. It’s comparatively high. Maybe we need to close
out that short put. If we do that, that is
going to sting our delta, it’s going to sting
our theta, and it’s going to load up on more vega. But sometimes a
trader might need to do what they
need to do, right? If you’re concerned
about assignment risk, if you don’t think
the stock is going to rally back up
above that price, that assignment risk is real. And I’m almost tempted
just to leave it alone just so we can learn a
lesson for next week. But for now, I think
what we may do– just trying to make an
executive decision here. We could even
consider rolling this. Now, that obviously entails
more transaction fees, getting out of one strike
into another strike. How about we do that? We haven’t done that before. Let’s roll this. Let’s roll this out
and let’s roll it down. Out meaning not to the 21st of
June, but further out in time; and down meaning we’re not
going to keep this same strike, but we’re going to move
it to a lower strike. So let’s right click on
Netflix, create a closing order. We could close out
the entire diagonal, or we could buy
back that short put, or we could sell that long. Let’s actually create
a rolling order. And which one was that? Yeah. Buy the– you know what? I want to do this– I’m trying to decide. I think this one, we want
to give this a little bit more time. What are we today? Yeah. That expires next– we’re
going to have one opportunity. Remind me to look at Netflix. I’m going to leave
this until next week so we can talk through
the logic of this trade because I think this one needs
a little bit more explanation. Now, we’re making a
decision here, though, to keep a short position
that is in the money and it’s close to expiration
or only a week out. What does that do
to assignment risk? That dials out
assignment risk up. So in real life, it’s
a bit of a gamble here. Just because a
contract is in money doesn’t necessarily mean
it’s going to be assigned, but I want to make you
aware that that’s the case. But we’re going to have
one last chance to talk about exiting this position. Let’s leave it for next week. All right. So the final thing
we might look at is just something
that is, right now, in alignment with our Greeks. Instead of just
looking at performance, we can look at Greeks. And if we wanted to
increase our delta, we could close out something
with a negative delta. That’s our Microsoft position. If we wanted to increase
theta, where you close out something with a
negative theta, that would be something
more like Facebook. And then finally, to
decrease our vega, we could look at closing out
something with a positive vega, and that could be any of these. Right now, it doesn’t look like
anything’s aligning with that, but I just wanted to
point out that that’s something that could cause
you to scrutinize an existing position a little more closely. But, of course, just
look at those positions. See if they’re doing what
you would hope they’d do. If in a trader’s
judgment the trade needs to be dealt
with, regardless of ongoing expectations,
then we deal with it, right? But let’s go add a new trade. So now let’s go back into it. And we were just about to
have a look at their options, so let’s move back
to that option chain. I’m going to scroll down. And what I’m looking for here– and I know that
some of you veterans probably have a
habit of doing this– is that when you find
a stock and the chart seems to fit your
outlook or maybe you have a fundamental
expectation for the stock that fits your outlook and you’re
planning an options trade and you bring up the options
chain, where do your eyes maybe go first? An options trader might
look at that options chain and look at that
spread between the bid price and the ask price. And if there’s a big
distance between the two, for some traders, that
may be a deal breaker because that can
represent frictional costs of doing business with options. When you see a wide spread
between the bid price and the ask price, that
represents, theoretically, the amount– and since
this is paperMoney, that why I’m talking
about theoretically– the amount that’s going
to the market maker. So this is fairly wide spreads. You’ll see spreads that
are narrow in this. You’ll certainly see spreads
that are wider than this. But for today’s
discussion, I’m going to go ahead with Intuit,
although, obviously, some traders might say,
yeah, I’d prefer maybe a little bit narrower spread. So now let’s construct a trade
that will accomplish our three objectives. And I said add bullish, so
that’s buy a call, sell a put. We’re going to sell
a put because we also want to add a short position
to increase our theta, add a short position to
decrease our Vega exposure. So let’s look at maybe
selling a put here and using the Greeks as a guide. What if we were to sell,
let’s say, this 36 delta put? So let’s do our example trade. We’re doing a short put spread
or a short put vertical. First part of the trade,
we’re going to sell the– looks like the 19th
of July, $250 put, and that’s trading for
between $520 and $560. Let’s assume that we
get a fill at $540. We obviously don’t
know until that fills. If we’re going to
sell that $540 put, that creates a credit of $540. Obviously, that creates
an obligation on our part. Someone has the right to
sell shares to us for $250. If they’re worth less
than $250, that trader then has an incentive
to assign and cause us to buy those shares
for $250, right? Right now, though, the
shares are worth $256, and the further away
they get from where we are right now, the better
we feel about the trade, and less likely it is that
the other trader will require that we buy those shares. Now, that’s just, right
now, a naked obligation, if we were to just sell
that put and either cover it with cash or just
leverage it with margin. Instead, we’re going to buy a
position to define that risk. Now, technically even a cash
secured put has defined risk. Stock can only go to zero. So even if you have
to buy it for $250, it can’t get worse than zero. But let’s, for our example
today, buy the $240 put. So the July $240 put. Looks like that’s going to
cost us between $2.70 and $3. Let’s call it $2.85. Now, that gives us the
right– if we happen to wind up getting stuck
with the shares at $250, we know at the
worst case scenario, we have the contractual
right to sell those same shares for $240. So it limits the risk
of the trade to $10 and it generates a net credit. So what is the maximum
gain of this trade? Well, the maximum gain
is your net credit here. If we’ve been paid
a premium of $540 but we’ve spent $2.85,
effectively, of that, that leaves us with $2.55. That’s your maximum gain. Let’s scroll down a little bit. What’s the max
loss of the trade? Well, it’s a $10 wide spread. It generated a credit of
$2.55, so that leaves us with a max loss of $7.45. So now, since that’s the best
case outcome and the worst case outcome for this trade,
let’s look at what this does for our Greeks. And maybe what I’ll do
is do this longhand, and then I’ll show you the
shorter version of this. Let’s look at our delta impact. Remember that if we’re
buying an option, we can just use the
Greeks as displayed. If we’re selling an option,
we have to reverse it. So here’s what
I’m talking about. With this $250 put that we’ve
sold, it has a delta of $0.36. It’s displayed as
a negative delta. So if we were to buy that put,
it would decrease our delta by $0.36 or it would introduce
a negative delta of $0.36 to our account because
it’s a bearish trade. But we’re not buying this. We’re selling it. We’re creating a
bullish trade, so we need to reverse this delta. So this would give us a
positive delta of $0.36. Actually, before I
move on with that, let’s add the
[? DL Long Lake. ?] Now, we are buying this
one, so we just use the Greeks as displayed. So that one carries
a negative 21 delta. What’s the net delta
impact to our portfolio? That’s a positive 15 delta. And I’m not going to
put a dollar sign there. We’ll just call it positive 15. What about theta? Our theta here, we’re seeing a
negative 10, but we’re selling. So we reverse that. That’s a positive 10 theta. And with our long contract,
that’s a minus 9 theta. So we’re left with a positive–
it’s a net positive– not a very big one– of $0.01 or a positive
theta gain of 1. Now, you might not
think that’s a lot. We’re going to talk about how
we might switch up this trade. A few different
variations on this theme. Pardon me. Now, finally, our vega. What’s the vega impact of
this short put vertical? Well, we’re selling this
contract, so that’s a minus 30, but buying the $240. So we’re going to use
that one as displayed. That’s a plus 23. So our net vega impact
is a minus 0.07. So if we were to go
ahead with one contract, we would have a
positive 15 delta. That’s an increase in our delta. That’s what we wanted. We’d have a positive theta
increasing that time exposure. That’s what we wanted. And we would be
reducing our vega. That’s also what we wanted. So that’s three for
three, if we align those with our
objectives for the day– increase delta, increase
theta, decrease vega. Now, what if– oh,
and by the way, do you have to do this
longhand every time? Not necessarily. What you can do here is once
you’ve identified your strike pair for the creation
of your vertical, come up here to your spread,
change that to vertical, and then look– there’s our $240, $250
vertical, and there’s our 15 delta, our theta. The markets are open with
a little bit of rounding. It’s shifted a little bit. But there are those
Greeks’ impacts. And since we’re
selling this vertical, we would say, OK, plus 15,
plus 1 or 2, and then minus 7. That’s exactly what
we calculated here. But what if we wanted more? What are some things
that an options trader might do if they wanted
to have a greater impact on their Greeks
with their new position? Number one, they can obviously
do multiple contracts. Now, multiple contracts is
going to have a stronger delta impact, a stronger theta impact,
a stronger vega impact, which is theoretically good,
but just be aware, that also dials up, yes, the
reward potential of trade, but also the risk. So a trader would want to
make sure they’re still within their own
risk tolerances. So for this trade, for example,
if we did one contract, we’d be risking about $745. If we did two contracts,
we’re at $1,500. If you do three contracts,
you’re about $2,200, and so on. So yes, you’re
multiplying your delta, but you’re also
multiplying your risk. I don’t to emphasize
only the risk. Obviously, the reward is
multiplying at the same time. So if you’re
comfortable with that, if an investor’s comfortable
with that, that’s OK. All right. What about– pardon me. Boy, my throat– I don’t know what it is. Mornings tend to do this to me. So my apologies if
that’s a distraction. I don’t think it is. What’s another thing
that we could do? Well, did we have to choose
the strikes that we did? Let’s come back to single
and examine this again. Let’s call this sample
trade A, and I’m going to compare that to maybe– let’s copy this– and do example
trade B. It’s still a short put spread. It’s going to have the same
general impact on the Greeks. But instead of maybe
going for the $250, $240, let’s say, example put spread,
we’re going to go wider. So what do I mean by that? Well, let’s say we’re
buying the $250. So we haven’t affected the
probability of maximum gain here. We still need the stock just
to be above $250 at expiration. But let’s look at maybe
widening that spread and maybe going for the $240. When you do that, that’s a less
expensive put that leaves you with a larger net credit. It also reduces the
maximum loss of the trade. Oh, you know what? I almost put in the
wrong number there. There we go. I’m going to call that $6. What’s it doing for our Greeks? Oh, you know what? This is what happens when
you try to multitask. I’m sitting here in the back
of my mind saying, no, no, no. I’m forgetting something here. I’m trying to type
everything at once. Does not reduce the risk. Someone’s being nice to me. You veterans, you’re being nice. I appreciate that. But you can feel free to
call out your instructor if you think you see me
making a mistake with my math. My options trader instincts
are saying, hold on. You’re talking and doing
numbers at the same time. You’re missing something. What did I miss? I want to leave it to you. Here’s what happened. When you increase the width
of the spread, obviously, we no longer have
a $10 exposure, we have a $20 exposure. So what is your maximum loss? There. OK. So, yeah, your
maximum gain went up. You probably heard my
hesitation in my voice. I was like, no, the
risk does not go down. So that’s where I had to
pause, revisit my math. Yeah, our risk goes up. So we want to be aware of that. But what’s happened
with our Greeks? Let’s have a look at them. So now if we do this longhand,
we still have, essentially, the same delta for
the short contract, but we have more modest
Greeks for that long contract. Instead of 21, we have 12. Instead of on the
theta 9, just a 7. And then finally, instead of
23, we have 16 on the vega. So for our delta, we
wind up with a net. In this case, 24 delta. With our theta, we
wind up with a net 3. And finally, our vega, we wind
up with a net 14 negative. So a more pronounced
and actually, in some ways, a much more
pronounced Greeks impact. But what’s the trade-off? There’s always a trade-off. What’s the trade-off? Larger Greeks impact–
we didn’t have to dial up the
number of contracts, but we did still wind
up with a larger risk. There we go. So what a trader needs to do
is a trader just weighs, well, is it worth the larger
move toward my Greeks goals to take on that additional risk? So that’s sample trade B,
where you have a wider spread. Or you can do a combination. There’s a third
potential option. What if we went wider and
we did more contracts? That’s dialing up that
Greeks impact again. Now, the final
thing that we could do that we don’t have
time to investigate is, well, you could just do any
number of other combinations. Now, you can calculate these
manually, as I’ve done here, or you can pop up
here, change the spread from single to vertical. If you start to go more
than one strike wide, you might have to
come up to Spread, and instead of going
just to vertical, which only looks at each strike
width the one next to it, you come down to Deep and Wide. And this is where you
can go with one strike compared to the next one
or one strike compared to a strike that’s two away. So if I go to One Month, Two
Strikes, I can go to Vertical and find, now, my $250, $230. So when you choose that
One Month, Two Strike, or One Month, Three
Strike, it starts to pair up each strike
with not the next one, but the one after that, or
skipping over two, and so on. And then that just shows
you your net Greeks impact. So here’s what we calculated. $0.24. Here’s what the system
right now is doing. $0.25. That’s because there’s a little
bit of rounding in there, but that’s the same. $0.03 versus $0.04,
$0.14 versus $0.15. When we’re calculating our
Greeks’ impact, until the order is executed, we don’t
know exactly what we’re going to get anyway. But let’s go ahead with a trade. Which one of these should we do? We could do trade
A, which is just a single contract with
a narrower spread; we could do trade B, which
is multiple contracts with a narrower
spread; trade C would be single contract
with a wider spread; trade D might be multiple
contracts with a wider spread. Obviously, the more
contracts and the wider the spread, the greater
the risk on the trade. And, obviously,
the more contracts overall we do, the greater
the transaction fees. For today’s
discussion, let’s keep it consistent with what
we’ve done in past classes. We’ve been doing around
$2,000 or $3,000 on the trade. So if we were to
look at– let’s say we went for trade B. That
would be a $1,600 risk. If we did two contracts, that
would be about a $3,200 risk, setting the
transaction fees aside. I think for today’s discussion,
I’m going to do that. We have $230, $250 right there. I’m going to click on the bid
price to create our sell order and we’re to dial this
down to just two contracts. There we go. That’s around that $4 credit. Right now, it’s
calculating at $3.95. We’re going to put that
in as a limit order. Anytime you put in a
limit order, obviously, there’s a risk you
might not get filled. But let’s click
Confirm and Send. All right. So we’re going to sell
those two verticals. Maximum profit about $800,
maximum loss about $3,200. There are our transaction fees. Let’s send that off and
see if we get a quick fill, and then let’s look to
see what our Greeks did. Looks like that
order’s just working. Let’s go to our monitor tab. Whenever you put in an order
that hasn’t filled yet, it’s going to sit right up here
under working orders, where you’ll also see it
displayed right here. While that’s happening,
I’m just going to right click on this
vertical, Cancel and Replace It. And it might fill
as we’re doing this. I’m just going to dial down
the credit requirement. Let’s take that maybe down to
[? $390. ?] What we’re trying to do here is increase the
likelihood of a more rapid fill so I can finish the
logic of this discussion. Obviously, we’re surrendering
some profit potential in doing that and
also increasing the risk of the
trade a little bit. But let’s confirm
and send this order. See, our profit potential
has dropped from $790 to $780 if we fill at that price. The loss potential– so
our profit went down, loss potential went up. Transaction fees are the same. Let’s send that off. Cancel that vertical. What’s happening here is
we’ve got a fairly wide spread between the bid price
and the ask price, and there may not be any
trading activity happening in real life, so it’s taking
a little bit longer for this to fill on paperMoney. But it just filled. I think we actually got it. Did we get it for [?
$390. ?] I think so. All right. But let’s now revisit
our account Greeks. When we started off– let me pop back up here– we were looking to
increase our delta. It was at $12.44. What is it after that trade? We’re now at $16.51. So we accomplished
objective number one. We are now more bullish. So if the next week
brings bullishness, we’re in a better position
to theoretically benefit from that. Objective number two was
to increase our theta. We were at $12.89,
we’re now at $20.50. So just the passage of time. We now theoretically
stand to benefit to a greater degree than that– from that, assuming our other
variables held constant. Yeah, that was it, Matthew. Low volume on [? INTU. ?]
That’s what I suspect was causing a bit of
a lag there in getting this paperMoney order filled. Also, that is what
can contribute to the wider spread
between the bid price and the ask price
on these contracts. But finally, our vega. We had a vega of 32. There’s our greatest impact. That’s the greatest
degree of impact. Our vega has been dialed
almost down to neutrality. So with that volatility
wandering around sideways, if it were to drop,
well, that might sting the account a little bit. If it were to rise, that
might help a little bit. At least theoretically, right? And, of course, until
things are wrapped up, we don’t have a realized gain
or realized loss, anyway. Next time, though, class, this
is going to be interesting. Let’s take a look at Netflix
and discuss rolling out that short contract. Anytime you talk
about rolling out, obviously, that increases
the potential effect of transaction fees. But we want to weigh
that and other variables in that discussion. So I’m looking forward to that. But it’s time for
me to set you loose. We’ve accomplished
our objectives. We looked at our current
portfolio biases and we weighed that against our
market expectations, and then we realigned those
biases by seeing if we needed to close out anything–
decided not to– and how we might do that
by adding new positions. And we even looked at
different combinations. How could we increase the
intended impact on our Greeks through different variations
on the same theme, on the same strategy? So now when you go to
open your portfolio, this is what I would want
you to walk away with– if you look at your
paperMoney portfolio and your Greeks are all out
of whack with what you expect the market to do, you now
have a point by point process that might be employed
to realign things. All right, Ken, thank you. I appreciate those comments. Class, if you could
do me a favor– I just now am going to push
out a survey link in the chats. There it is. Click the link while
the session is live. That will allow you to fill out
a five multiple choice question survey super quick. But we just take
that data, and it helps us improve our webcasts. So if you could do
that, that’d be great. But I’m going to be setting you
loose with a quick reminder– this may take some repetition. So if you need some
practice with this, here’s what I suggest you do. Go to your own
paperMoney, make sure that this box is checked
that says Beta Weighting, and then weight that
against an index that you think is appropriate
for that paperMoney portfolio– SPX or one of the others. And then see if you can– before you put on
a trade, see if you can calculate for yourself
what the Greek impact might be. And if you can start
to connect those dots, then you’ve really taken
away from these lessons what I hope you could. All right. Thank you, Robert. I appreciate that. Everybody, thanks
for joining me today. Looking forward to next week. That discussion of
Netflix, I think, is going to be very interesting. We’re just going to take another
look at what our portfolio is doing, see how we might
continue to customize that to remain in alignment
with our market expectations going forward. Coming up next, as I’ve already
mentioned, is Barb Armstrong. We’re going take a
little bit of a break. 11 o’clock Eastern
Standard Time, Barb Armstrong kicks off
her 30 minute discussion of Getting Started With Options. That’s a great dovetail
discussion for this class. We go at kind of an
advanced level early Friday morning, take it back to
basics a little bit later in the morning. Thanks for joining
me, everybody. Here’s a quick reminder
of the risks associated with your investing. We did use real examples
in today’s discussion. It’s not a recommendation or
endorsement of those securities or strategies, and the
usage of a stop order is not a guarantee you’ll buy
or sell at a specific price. Everybody, have a great weekend. If you’d like to join me for my
fundamental review of the stock and options market, you can come
have a look at the Options Week In Review. That starts at 3:30
Eastern Standard Time. We’ll also take another
look at the charts again. But whenever I see you again,
until that moment arrives, I want to wish you
the very best of luck. Happy investing. Bye. [MUSIC PLAYING]

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