Options Trading Q&A
0:00 – 6:36 Identifying the Market
6:36 – 8:10 Great Idea, Not Expressed Right
8:11 – 10:37 Implied Volatility
10:39 – 11:38 Credit side
11:39 – 15:53 Call Options Off the Bottom
15:54 – 21:40 Risk to Reward Ratio (Aarons Question)
21:42 – 25:40 Diagonal vs Vertical Spreads
25:41 – 34:36 Difference of Equity Traders and Options Trader
34:37 – 37:15 Biggest Mistakes with Fast Moving Directions (Options Market)
37:16 – 42:36 Deep in The Money | Greeks | What Causes Implied Volatility to Move Up or Down (Aarons Question)
42:38 – 44:59 Closing Remarks
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 How are you? I’m fantastic, Pete. How are you? I’m actually doing fantastic too. We actually we just finished up one of our equities coaching sessions and even from last Friday into today you know how, like you’ve been trading a long time and you have some deeper insights of what the business really is and whatnot.
We had a, we have our swing trade session every Saturday and I spent the first 40 minutes of the Saturday session before we even got into talking about the swing traders, we were setting up for this week talking about how to mentally handle the current market conditions. Yes. That is some topic.
Yeah, I think that a lot of people, and look, you could certainly understand being excited about trading and being excited about wanting to be in the markets. But the interesting part about that is, your as excited as you can be in the short term. You actually have to think long term, which means you can’t over trade if the market’s tough.
And that’s so hard to get across to somebody who’s super excited about wanting to be involved because they’re like, yeah, I signed up, or I, my account’s ready, or, I learned something, and I want to use it. And then, you’re stepping on the gas and there’s a brick wall.
Six inches in front of your car and there’s no, he is stepping on the gas in the middle of a traffic jam is right. Exactly. Exactly. So, I’ve been spending a ton of time recently. Really helping everybody not lose their sanity during what is, a very stock specific market right now. And that was even before the financial stuff unfolded.
Yeah, absolutely. And this type of choppy environment even before the whole banking issue started. We’ve had a pretty choppy environment. Even though we had a good January, everything pulled back in February and March, and we’ve been chopping around ever since.
And that makes sector and stock selection extremely important. You can’t just rely on your normal usual suspects. If you have a watch list that you look at every week, what you really need to do is create a new watch list every. You need to perform top-down analysis. You have to look at the individual markets specifically.
You have to look at the SPY, you have to look at the NASDAQ, you have to look at the Russell 2000 and the Dow Jones. And then you have to put all that together and say is there any kind of correlation, which there usually is or what we had the last couple of weeks is a disconnect between the NASDAQ and the SPY.
And that is where you get an edge. That is where you start deploying capital in areas where you need to, whether it be on the long side or the short side, and you have to do it at the same time. You have to be comfortable going long and short simultaneously. In different sectors, in, in different parts of the market.
And that’s how you handle a market like this. Whether it be stocks or options in my world, you add volatility to that and you add other strategies on top of that to try to give you the most optimal basket of things to trade. And that’s what you do every single week. I think in this market right now is something that.
Not common when most people are trading in a ripping directional market where there’s good volatility in one particular direction. The, you just touched on something that I think maybe we could even expand on right now is trading both sides of the market when they are talking about correlation and talking about relative strength and relative weakness.
Whether you’re hedging using options on an existing long equity position or if the way you do things where you’re building a portfolio where you’re long and short, and both of those ideas are good in the current market, it’s actually a better market to trade both sides of the market. Right now, we are not even necessarily hedging on the other side.
They’re both good positions. So today we kept talking over and over again that the number of stocks that were weaker today, was probably twice the size of stocks that were strong. But the interesting thing was a lot of them were positive from Friday’s clothes, but they were all negative. from today.
So, they’re all embarrassed trends today. So, we’re actually long certain stocks aggressively and then also shorting stocks that were positive from Friday, but trending down the entire day today. Absolutely. I think the airlines are probably one of them today. So, the point is at, we’re getting across here, is having a structure for identifying the kind of market that you’re in, and that’s then going to.
Which strategy are you using in that market? And right now, trading both sides of the market are actually quite frankly the place to be. Absolutely. And not only that, when you add when you perform that kind of analysis and you’re looking at the divergence, for instance, between the s and p and the NASDAQ, which we’ve had for the last couple of weeks, when I’m, normally markets are correlated, usually, over the, over a very long period of time.
Stock market, whether it be the Dow Jones comparing it to the S&P or the S&P comparing it to the NASDAQ, they’re more or less correlated. But every once in a while, things get disjointed and there’s different reasons for that. And in the case of what happened in this, recently is the banking situation.
Obviously, that’s going to negatively affect the Russell 2000, the Dow Jones and the S&P a little bit worse than NASDAQ obviously. Even before that when you have an inflationary higher interest rate environ. You know what happens is these dividend paying stocks, think in terms of the boring stuff that grandpa likes to buy, right?
The stuff that has a nice dividend yield, the stuff that’s relatively safe, we’re talking about like the Proctor and Gambles and the consumer dis, the consumer defensive names. Those names, you would think they do well in, in an inflationary environment, but they actually, when people are searching for yield, you got treasuries giving you 4%.
Why would you buy. Proctor and gamble when you’re lower on the capital structure. And then even high yield bonds and stuff like that, you could throw that into the mix. So basically, what we’re saying is, NASDAQ has outperformed because when people are looking for trading ideas, when people are looking for growth opportunities, the NASDAQ was the only game in town.
And that’s one of the reasons why I personally think, not that, my opinion’s just one of many, but I think that, that’s why the NASDAQ has shot up. and that could actually that could actually, basically, Caused the disparity to last a little while, but I think eventually that rubber band snaps, we only have technology and communications are the top sectors, right?
Everything else is fairly neutral to weak. So, stock picking and sector picking, like what you said is so important right now. And then when it comes to options, being able to go long and short at the same time in a portfolio. And on top of that, picking what strategy you want. If volatility increase. You want to be more on the credit side.
When volatility decreases, you want to be more on the debit side. When you’re in this choppy environment, you have to do other strategies that, we teach all this in our classes, obviously, but it’s something that’s very important cause you could have a great idea and if you don’t express it the right way it could hurt you.
And that’s, can you gimme an example of that? A great idea did not express the right way. That’s an interesting way. I’ll give you a perfect example right now. If you ever want to share your screen. John, you can share your screen. Oh yeah, I put I put this trade on today. It’s FRC and let me just I’m just going to pull it up really quick before I share my screen.
FRC is basically a regional bank. It’s called First Republic Bank. I don’t know much about it. Let me just share this screen with you here. Let me share screen two with you. It’s just my think or swim, but I’m going to, Give me one second here. I’m just going to move this over here. Can you guys oh, wait, let me share it.
There we go. Can you see this little box here now? Yes. Okay, cool. This thing got absolutely destroyed as you can see, right? With all the other regional banks and everything else, right? But basically, the implied volatility on this right now, look at how it leveled off actually. So, it was up 11%.
Which, it’s a $13 stock, so it does move around quite a bit, especially this, this used to be just a few short weeks ago. This is $117 stock, right? Yeah. So if you think that it’s going to survive, if you think that maybe it’s going to level off here, $13, $12 or something like that, let me just show you an opportunity here that I looked at on if you just go to, The option chain here.
I just want to show you how extreme this is, and this is a very extreme example. This might not be for everybody’s stomach, but if you look over here to the right-hand column, look at the implied volatility on this. It’s in the 300% range. Wow. Okay. So that’s an extreme example of extreme volatility. In a difficult situation.
John, can we just slow down there for one second because we might have some people that are now maybe watch the replay. What is the, what is a normal implied volatility and why is that 300 so stream? Yeah, so quote unquote, normal it really depends on the stock. Obviously something like Tesla that tends to be a little more volatile and news driven right will, will tend to have a higher implied volatility and a, normal.
Implied volatility, then let’s say something like General Motors or full water or something like that. So really normal depends on how the stock trades normally. But usually, I would say normal for a typical stock is probably somewhere between, anywhere from 20% to 50%. Wow.
Now, if there’s earnings that, as you go into earning season, you’ll get implied volatility going into 80% or 70%, or those type of areas. But it really depends on the, let me give you an example. I’m going to, I’ll pop in Tesla really quick and I’ll show you the difference.
So, Tesla is, right now? Yeah, around 70, 65, 70%. And if you look at General Motors, just as a comparison, so we’re talking about, it’s in the 40 range, so that’s a normal implied volatility. Now, if you pick something really boring, I’m trying to think like a utility company or something like that.
So is a utility, it’s, you could see it’s here, it’s 22%, 24%. So it really depends on the stock’s personality. Obviously 200% to 300% is completely out of control. And that’s something you want to take advantage of, and you are certainly. So, to get back to your question on strategy selection, the last thing you want to do when volatility is so high is a buyer of an option.
Because this thing would have to move this particular stock would have to move probably 20%, 30% for you to make any money whatsoever. So, in an example like that, what you really want to do is a more of a credit strategy for FRC. And that’s what I did in the Discord channel today.
So, we did a simple bull put spread where all you’re really betting is that the stock doesn’t go any lower really. So, you’re doing it slightly out of the money where its trading at $13 or so, and you’re basically saying, you know what, as long as it stays above $12 and a half or so, I’m good.
It doesn’t have to go; it doesn’t have to go skyrocketing up. It just has to basically either stay where it is and go a little higher, which would be great. Or it could even go a little lower. And again, you’ll still make money from something like. And the reward to risk was, it was about a two to one reward to risk ratio, which is a pretty, which is a pretty good reward to risk ratio for a credit trade, especially.
How long how long is that trade play self out? On the credit side, when you’re doing, when you’re a seller of an option, theta is not linear. That’s basically the time decay in an option that’s, it’s called theta. It’s one of the Greeks you’ll learn in my classes. If you’re not familiar with what theta is in our everyday lives we have, 24 hours in a day.
Seven days in a week, everything is linear. In option world it doesn’t work that way. So, the last 30 days, theta falls off a cliff. And when you’re a seller of an option, you want to take advantage of that situation. To answer your question, in a situation like this where volatility is high, you’re expecting volatility to contract.
And to somewhat normalize and if that happens, you want it to happen fairly quickly. So, in this example as you can see here, this was out to April 23rd. You don’t want to go out more than a month. So, I chose the 12 and a half puts and I protected myself with the 10 and a half puts, which basically means if it goes below 10 and a half, I have protection.
When and how would you think about the news last week in SQ and Coin? Coin Had the wells notice had a monster move to the downside. SQ got hit with the short seller and a whole bunch of other language. I don’t like to use the word Freud, but that was the whole conversation. I’m not saying anything along those lines but.
Is there a trade there? Because like we get a lot of people like, I want to bottom fish this thing with call options because it can’t go down any further. What would you say to somebody who’s thinking about that kind of a. The first thing you have to do always when you’re buying any option, right?
Regardless of whether it’s long-term or that’s more of a short-term play, it’s more headlines driven. Whenever you decide to buy an option, you should always be aware. You should always be acutely aware of a couple of things. Number one, what are you paying for it? I know that sounds common sense, right?
But if the implied volatility is exceptionally high, Guess what? You are overpaying for that option. So, you have to be very aware of what your breakeven is. So, if you’re paying $5 above the current price, if you’re paying a $5 premium for an at the money option, for instance, your breakeven is the current price plus $5.
So, you always have to think to yourself, for me to make any money whatsoever, the stock has to do X. Right? And that’s sometimes, in the heat of the moment, you forget that, and you just slap on trades. And like you mentioned earlier, some people that are new to trading.
They’re so anxious and so excited, they see an opportunity. They just want to jump in. And what they’re doing is they’re jumping into a three-foot pool with a diving board, and they’re hitting their head. And that’s what happens to new traders. They get excited and they don’t put their traits together in an intelligent way.
And that’s what we teach in our classes. How to, we, I have a six-step process before I place any order, whether it’s a short-term trade that I’m going to be in for a couple of minutes. Or if it’s going to be a trade that’s going to be in for, several hours or several days or months. I have a six-step process that I follow.
And that’s something that, it doesn’t matter what the duration is of the trade, I have to answer those questions and figure out what I’m doing in order to place the trade. So in the case of Square, my first question would be what’s the implied volatility? What am I paying now?
It might’ve, this was a couple of days ago, the news. So, this might actually not be this might not be something that the, I’m sure the numbers today are very different from what they were on Thursday. Exactly. So, we’ll take a look. Yeah, the implied volatility is still pretty elevated. There are more calls to puts, which means that, this is just a snapshot of the overall option market of Square.
It’s basically seen as more buyers than sellers. So, I just try to look at the big picture first and see what’s going on. But obviously, this happened a while ago, so we have to take a look here. Like when it gaps down here, we could probably let me just go here to the five minutes, and if I go back to like, when this happened one of the, one of the things if let’s say I was day trading this, right?
I’m going to keep this really simple for you guys, and I’m not going to show you too much here because there’s a lot more that goes into this. When you put together a trade, sometimes keeping things simple makes sense. And what you want to do when you’re putting something like this together is just look at this and say can I make money on the upside of the downside?
And right now, it looks like it had an initial pop after the bad news happened, and then it leveled, it kind of leveled off and flatlined again. So, this is something maybe you could have day traded it for the first hour. If you look at this pop here one of the, just one metric that I use is VWAP. It’s one of my favorite metrics. I used to be an institutional trader, and VWAP was an extremely important, intraday indicator that we would use because it shows you what the big boys and girls are doing. It shows you the what the institutions are doing. So, I just put VWAP on my chart, as you can see on the opening drive here.
The first couple of minutes it flatlined, but then it broke away from VWAP. You could see that right here. So, my first entry point, I would never go long anything unless it breaks, unless it breaks VWAP, just as a general rule in the options market, assuming I want to just by straight falls, I would’ve to see what the implied volatility is that day.
But to be honest with you, if the vol is too high, I would probably look more towards the credit side. I would look to try to do something on the sales side, on the short side, where I’m selling puts or selling calls. Obviously with protect. So, I’ll do some sort of credit spread or something like that.
Aaron’s actually asking a question based on something you said before. How do you know the risk reward ratio in an options trade? So what I’ll do is that’s a very good question and what I’ll do is I always look at like the peak reward. And then, I know what my risk is because I just basically, so I’ll start with the risk first.
Cuz risk should, you should always start with first how much can I possibly lose in this trade? That’s the, that’s one of the first questions you should ask. Forgetting about how much money you’re gonna make right away. What you wanna do is develop and we do this in our class. We talk about risk management and how to develop your trading plan and how to develop what your typical risk unit is.
I call them units. It’s like a little nickname I like to use. Instead of saying, how much money am I willing to risk for trade, I call it a unit. So basically my maximum unit, let’s say, is $500 per trade based on the account size. based on the number of trades I take on any given time, I’m willing to put in harm’s way, $500 per idea, let’s call it.
Once I’ve established my risk unit based on, based on my account size and my trading plan then I put together, okay, how many contracts should I buy? I generally hold onto things for longer. Some traders punch out of a trade if they lose 20% of the premium. I generally stay in my trades longer cuz I generally do spread trades like vertical spreads, for instance or diagonal spreads.
, I’ll sit in something and lose 50% of the premium and be willing to sit through that pain knowing that I have something sold against it, knowing that I have to find risk. So that being said, if I’m willing to lose 50% of my premium and I have a $500 unit, then I’m willing to buy a thousand dollars worth of something.
That’s how I back into that number. So that’s my risk. That’s how I figure out the risk. The risk reward should at least be two to one. So if I’m willing to risk $500, I want to try to be shooting for at least a thousand dollars. So what I’ll do is I’ll go to think or swim. And when I put together a trade, there is this nifty little analyze tab here that basically tells you what your risk reward is.
So if you go here and let me see if I could just throw something on really quick. I don’t know if it’ll let me on this one. Let me see if it, let me see if it lets me analyze this. It only lets me analyze the closing trade. Let me see if I could do something on a field trade here. So here earlier is the one.
Yeah, I did. I did. Oh, here it is. So this is this is the actual credit trade I was just talking about. So I’m gonna go ahead and analyze this trade. And as you can see here, it gives you a little bit of a risk reward profile. So up here. Is where I would have my total. Let me just go here and I’m gonna lower the number of contracts because that’s gonna throw off the numbers.
And basically right here is my total risk. My total risk is $90. I’m sorry, that’s my reward. My total reward is $90. And down here, as you can see, my risk is $110. Now that is with no stop. Right now, keep in mind it’s a credit trade. So I’m putting $110 in harm’s way and I’m taking in the $90 credit.
That’s if I have no stop whatsoever. Right now, that’s not how I work. I would basically not allow the premium to expand more than 50% or 60% because I want to keep that two to one reward to risk ratio. Okay? Now it’s easier to see it when you do a debit trade when you go here. Let me just go to the next one.
I’m gonna go to FedEx. This is a debit trade. It’s green. This is a typical vertical spread. I’m gonna go ahead and analyze this one next. And basically, let me get rid of this and go here. I’m gonna knock this down to one contract so you can see. And basically what I’m doing here is I’m getting $929 if FedEx goes all the way up to $235 at expiration and this short leg expires worthless, the two 20 s and the expiring 2 35 s will give you a total reward.
Of $929. So it calculates your maximum reward. My maximum risk in this trade is only about $500 in change. I think it was actually less when I actually executed the trade. I think it was around in the high fours, but basically that’s with no stock by the way. So it’s basically a two to one without even placing a stop at all.
So in a situation like that’s a pretty good reward to risk profile because if you do a 50% stop, you’re looking at closer to a three to one or a four to one reward to risk. So that’s how I calculate it. Obviously, if it reaches the target sooner, you’re not gonna collect that full $900 because theta hasn’t decayed yet, so you can’t anticipate.
That’s the best case scenario. Obviously, if the, if FedEx was to shoot up to 2 35 tomorrow, I’d be in a profitable trade. It would be great, but if I wouldn’t make the full $900, I would have to make an adjustment. So we talk about adjustments in our class too, because if something like that would happen, I would turn it into a ratio back spread.
I would add another call option to it. Because when you have equity premium in your, when you have equity in your trade, when it’s actually working, it’s easier to put on risk, and that’s when you start stepping on the gas pedal. And that’s another thing new traders are afraid to do when they’re in a winning trade, they freeze up and they try to take the money too fast, right?
If I was in a situation like that and FedEx was to go all the way to 235, tomorrow I’m going to buy another call auction, and that’ll gimme a two to one ratio instead of a completely covered vertical trade. So, there’s so many things you could do with options. And that’s why the proper education, the proper training is so important because most people, all they do is put some costs and that’s why they get frustrated.
They don’t realize a, what they’re paying or what, how many of the strategies are out there or when to use what strategy. That separates the novices from the professionals. And that’s how they, the professionals always seem to get ahead because they know what to put on and. John, you mentioned a couple of times diagonal versus vertical.
Can you explain what that, the differe. Absolutely. So what in front of you is a vertical spread. And the reason why it’s a vertical is if you look down here I think you all could see this. You see the same expiration date, right? April 21st. So basically you’re capping your game. So FedEx is trading at around one at around $220.
Let’s say I bought an at the money call option out almost a month, and what I did was I looked at the chart and I said to myself, I don’t think it’s going to go past. 235. So, what I did was I lowered the cost of my trade by selling something against my main leg or my anchor leg, which is the 220-call option.
So, I’m long, it’s a bullish trade. I’m essentially putting on a long call option at two 20, but I’m saying I don’t think it’s going to get past 235. So, what I’m going to do is I’m going to collect a credit, which is what I’m doing here. I’m selling these 235s causing my net trade to be a lot cheaper. If you go to the option chain on FedEx, you’ll see what I’m talking about.
If I go here to the 21st and the 220 call options right here are $735 by $755, I only paid 500 and something dollars for my trade. And the reason why is because I went ahead, and I sold these. These 235s right here, I sold these for about $2 against my debit. So, it was a large debit, subtracting a credit, which gives me a $500 trade that I’m paying instead of a $700 trade.
That’s the trade off by the way. You’re giving up your upside. Anything over $235, I’m not gonna. I’m capping my upside, and basically what I’m doing then is I’m saying, okay, I’m making my trade cheaper. So the risk reward profile looks pretty good that way. Now, a diagonal spread takes both worlds together and says, you know what?
I’m going to test drive my call option. I’m not going to cap my gain all the way. I’m only going to cap my gain for a couple of weeks. So what I could have done, instead of, let’s say, selecting April 21st and let’s say selling these 235 call options and taking in $2, what I could do instead is still buy the April 21st, 220 calls.
The main leg is not going to change. Usually I’m still long, I’m still bullish, but a diagonal spread is slightly more aggressive. What you’re saying is, I think FedEx is going to go a little bit higher. But it’s going to stop at 235 and break out after a couple of weeks. So, I’m giving myself more upside potential.
And what I’ll do is I’ll say, you know what? Maybe Fed, maybe I’ll go to April 14th. And sell the and sell the 2 35 s. Now, if you’ll notice the price is cheaper because it’s less time, right? So I’m only taking, instead of taking in a $2 credit, I’m only taking in a dollar 30 credit, right? But here’s the beautiful part about this.
After April 14th expires, all I’m left with is a long call. So, I essentially test drove my whole trade for two weeks. I said to myself, I think it’s going to gradually increase and I’m going to see if it goes above 235 by April 14th. If it does, I’m going to stay in this trade until April 21st. I’m just going to keep the long call.
Maybe I’ll even buy another call if it’s really, if it’s really aggressively moving higher. I’ll still collect that credit, by the way, on April four, So the worst-case scenario, and this isn’t a bad problem to have, is it blows through your shorts leg too early. So, if I wake up tomorrow morning and FedEx is at 235, I’m not, yeah.
If it’s, if it blows past my, my, my short leg I make maybe 15, 20% on my trade. , that sounds like a really bad thing, right? Yeah. In a week, right? Terrible situation, right? So I would just move on to something else in a situation like that. So that’s a mildly aggressive so it’s so that, that’s a slightly more aggressive strategy because you’re allowing for more upside.
That’s the main difference between a diagonal and a vertical. I think something that’s very interesting and the difference between equity traders and options traders is that equity traders focus a lot on the. And it seems like options traders are really thinking through the end of the trade and how they plan to get there.
And I think it’d be really, it’s really interesting if you can combine the two of those in a way where you get the best of both worlds where you get leverage and you’re thinking through the trade to the end. It’s something that’s always fascinating to me about options where you are constantly, thinking about the time to expiration, where in the equity trading world, it’s more about the price versus how fast it gets there.
It’s a, it’s really fascinating. It really, it just gives you more avenues to potentially profit. I joke around, I say horseshoe and hand grenades, right? So your entry doesn’t have to be perfect, right? Especially if you have a one or two week horizon on your trade, you’re not.
You’re not anxious to jump in. You’re just watching. Sometimes, if things are not as liquid, you might have to place a limit order and wait to get filled. So your entry isn’t always perfect, but it’s okay because you’re waiting, you have several weeks or several days for your trade to play out and what you’re doing during that time.
You’re making, you could make some adjustments. Like I said if April 14th starts to come around, for instance, and FedEx is starting to go sideways, it’s not really doing what I think it’s gonna do. I could abandon the trade for a small game, right? Or if it’s looking like it wants to break out I could close out the short leg early and just leave the straight call.
Or I could turn it into a ratio trade and just buy another call. There’s so many things you can do. And that’s the beautiful thing about options, trades, just picking the right, expirations the right strategy. And what you’re doing is you’re doing it in context of an entire basket. You’re not just, you’re not just betting on one name.
You’re not going to bed at night worrying, oh my God, what’s gonna happen with Square tomorrow? Or what’s gonna happen with Coinbase? Or what you’re doing is you’re creating this portfolio basically for not a lot of money for limited capital. Because you’re long and short at the same time it’s very hard to really hurt yourself, unless you overtrade or unless you have too much in one name or something like that.
It’s a lot easier to sleep at night, believe it or not, when you have multiple trades on at once, because people have criti, people have Said that to me. How can you sleep at night if you have 20 or 30 things going on? To me, I wouldn’t be able to sleep if I didn’t have 20 or 30 things going on, because that means I’m worrying about one thing too much.
I’m worrying about one name or one sector. So this way of trading to me has always, it’s always helped me with consistency. It’s always been just the way I do things and it’s worked. It’s worked over time. That’s for. I’m a big believer in that as well. When I first started trading, I we were taught to trade size and select stocks, but then as I got more experience, and you really understand the definition of how an edge plays out, it’s actually easier to manage a portfolio of positions than it is to just manage one where your heart’s going up and down with every beat of that stock, as opposed to you’re managing the aggregate and you’re actually speeding up the time with which your edge can play itself out because you’re actually rolling.
I don’t, it’s not the right way to put it, but you’re rolling the dice more on good ideas. So you’re actually accelerating how fast your edge actually works on multiple positions. A absolutely. And you know what’s great about my strategy is this, like for one thing, with swing trading options in this basket style, you can obviously day trade stocks at the same time.
So you could file the markets and intraday trade all you want. And you could do that with options as well. I do day trade options. So you mentioned hedging earlier. Sometimes just like everybody you could get, it’s very easy to get caught off sides. I might wake up on Monday morning and say, you know what?
I’m bearish this week. The stock markets are below their moving averages. I’m going to position my portfolio where, let’s say if I have 10 stocks, if I have 10 options, right? I would say eight of them are bears and two of them are bulls, right? So I’m mostly bearish. And then Tuesday or Wednesday might roll around and all of a sudden thing might turn around and all of a sudden, I feel like I’m caught offsides.
And that does happen sometimes. So, the way to fix that is very easy. All you have to do; you don’t have to sit there and sift through your watch list. All you have to do is go long, SPY, or QQQ call options. With a certain size and you could day trade those while you are, while you’re swing trading your basket, while you’re adjusting your basket and making it more in line with what the market is giving you.
You can day trade in order to hedge, which is something I do quite frequently. I think it’s fascinating to hear a professional trader. Speak about the natural progression of adjusting trades based on the way the market’s unfolding, as opposed to the mindset of a lot of new people who are just learning, trading however long that happens to be, where they think that it’s an absolute.
In other words, I put the trade on, therefore it should work. And professional traders don’t think that way. Professional traders are like, there’s all that information before I put the trade on, and then after I put it on, I have to make a whole bunch of new decisions. And I think it’s that second set of decisions that a lot of traders just don’t even consider, quite frankly.
Yeah. And they make trading much more harder than it has to be where it’s just adjustments and not necessarily being right or. You have to trade what’s in front of you, not what you think at a cocktail party. That’s what I tell people. It is one thing to, I, we could sit here and talk about interest rates and inflation and is there gonna be a recession or how long is the recession gonna last?
And we could go on and on and have wonderful topics. And I talked to a lot of smart people. and everybody has an opinion, and it’s very easy to get caught up in that, especially if you’re a new trader and you’re a little unsure of yourself. You’re obviously, your confidence isn’t there yet.
It’s very easy to kinda latch onto someone’s opinion and to try to, like you said, come up with a formulate a theory or formulate a direction. , what I tell people, and I made this video about a month ago, it’s it was like a funny video. I meant it to be funny, but it’s true.
You, in this market, you shouldn’t be a bull or a bear. You should be a jellyfish where you move. As the market moves, you change your portfolio as in, in real time as it’s unfolding in front of you. So right now the Nasdaq is outperforming the s and p, but today that wasn’t the case.
So if tomorrow I wake up and the Nasdaq is down 1% and the s and p is up two. That means that the broad market is trying to catch up with the nasdaq, which means I need to make some serious changes to my portfolio, and I’m gonna do that by basically going long S P Y and I W M in the options market while I come up with bullish ideas.
I’m not gonna rush, I’m not gonna freak out. I’m gonna just adjust my overall risk, my overall portfolio, and then start making changes as it comes along. We actually saw a little bit of that today on the equity side, where we started to see energy. And financials actually catch a little bit of a bid today while technology was actually negative.
So that was actually something we’re talking about today, as well as how fast. People are saying how fast rotation’s happening, but it’s really not happening fast. You just need, you need a measurement. You need a way of determining is it still valid or is it changing? And once you have that kind of line in the sand, it’s easy to tell if it’s still valid or if it’s not, or if it’s changing.
But one thing we did pick up on today is energy is starting to share some heavier volume on the bullish side, despite the fact that they are bearish for probably the last six to eight weeks. So that might be something that’s seeing a different order flow unfolding, absolutely. I was I was expecting a balance in the energy sector.
It happened, a started to happen a little bit last week, like you mentioned. So I actually I shorted into that. So I’m actually getting hurt on one of my positions right now because of, because it’s continuing to grind higher. But that’s the kind of thing we make adjustments. I might. If I look at the overall chart and think that it might be something you should short into in the long term, cuz the long term, the long term outlook on, on, on the chart still looks bearish.
But yeah, that could, that the bounces could last for quite some time. So it also depends on your timeframe. When we talk about putting trades together, I mentioned six steps. One of the steps, one of the most important steps in that six step process is timeframe. How long do you plan on being in this trade?
Do you plan on being it for a day or do you plan on being in a longer term situation? It’s not wrong where you could be bullish and bearish on the same thing depending on your timeframe. And that’s something I think new traders get confused about also. Like the perfect example is with the banks all this chaos that’s going on with the banks.
My first gut reaction when the first thing happened was I had a short position on State Street and I had a short position on, I think one of, one of the other smaller banks. So I made money on the short side, but then once it leveled off, I’m saying to myself it levels, What’s gonna outperform, the high, the higher quality banks, which kind of got dragged down with the entire market, will probably bounce back faster than some of the regional banks.
So your state streets, your northern trust, your Goldman Sachs, your JP Morgans, that’s something where you could look on the bullish side and sure enough, today those stocks rebounded. But it’s a matter of, it’s a matter of patience and it’s a matter of coming up with your plan ahead of time.
And it’s really, I. and then you can put together with the strategies you want. What do you think are the biggest mistakes that are made in the kind of where we’re seeing like these volatile fast moves in both directions? As far as time, like you mentioned theta before, what do you think inexperienced traders do incorrectly as far as either buying time or selling time?
Oh, in the options market? Yeah. Specifically. So it’s the typical mistakes option traders make when they’re first starting out is they don’t allow themselves enough. That’s probably the number one thing. Keep in mind, time is your enemy whenever you buy an option, because every day that you sit on an option, it’s like you’re buying an ice cube.
Your ice cube is melting away every day. Now when you buy a stock, that’s not the case. And that’s where the transition, that’s where sometimes the transition, some options traders get hurt is if you buy, let’s say a hundred shares of IBM and IBM M stays at the same price for a year, you’re not losing any.
Your stock is still there and it hasn’t moved. But when you buy an option, you’re losing theta decay every single day. So the biggest mistake I think option traders make is they don’t allow enough time. If your timeframe for a trade to reach your target is one week, you should not be buying one week options.
you need to be going out further. And that’s what we talk about. We talk about putting those rules together in our classes. Another thing is if, we had a situation this week with the banks, for instance K B E, which is the regional bank, E T F, that’s something I went long on last week.
And the biggest problem with that is you don’t know when they’re gonna stabilize and when they’re gonna go higher. You know that maybe K B E got under punished because. That represents 70 to 80 regional banks. Obviously some of them are in worse shape than others, but the whole index went down, the whole ETF went down.
Because of what was happening. So I saw that as a long-term opportunity. But when you’re coming up with a timeframe and the timeframe is a question mark, you need to select an option strategy that’s gonna take you out as far as possible. And so you gotta adjust. You gotta make these. These these expiration date decisions in real time.
And that’s, I think, something a lot of new option traders overlook. The second thing people overlook is what strike price to pick. A lot of new traders, what they’ll do is they’ll pick out of the money options because they’ll pop the most, if you’re right. If you pick something that has a very low delta, which is a rough probability of it expiring in the money and it just basically means you’re buying a low quality option.
You’re basically saying you’re giving yourself a high risk, high reward, low probability trade. That’s not the way a professional trader usually likes to trade. Most traders want to trade, high probability, maybe even low reward but low risk, right? So you always have to decide what you want to do, and those are the two mistakes I find most option traders make time and the incorrect strike.
Aaron’s got a question in there about deepen the money calls. Yes. So deepen the money calls. Basically, I don’t know if I can see the question. Let’s see. He’s just asking in general, like what’s just posted it in the chat. Yeah, so basically let me just go here and look at it. Bear with me one second.
Deep in the money calls is an equity. The more in the money you go, the more the option’s going to behave. Like the equity. So, think in terms of delta being, roughly the dollar, the dollar moves of a dollar price move in the underlying stock.
So, if something has a delta of 80, it moves 80 cents for every dollar move in the underlying. So, what you’re giving up when you’re going deep in the money is you’re giving up a little bit of volatility. and you’re giving up. And you might want to do that. You might want to go deep in the money because you don’t want the option to swing that much.
And you also think that the option is going to gradually increase. So if you buy a deep in the money call option what you’re doing is you’re saying that I’m bullish on the stock. I think it’s gonna go higher, but I don’t want to take advantage of volatil. That’s basically what you’re doing.
So it’s a more conservative way to do it. And it actually gives you a more equity-like performance if you go very deep in the money what you’re giving away and what you’re giving up. Unfortunately, when you do that, is volatility. Vega, which is the move or the volatility in the underlying stock compared to the option the Vega is highest at the.
So if you think volatility is low right now and volatility is going to increase when you buy the option you wanna buy an at the money option that allows you to not only take advantage of the acceleration of the stock price, it also allows you to take advantage of the acceleration of volatility. So it’s like adding a second gas pedal.
The trade-off for that obviously is if it goes in the other direction, it’s going to fall faster. So, he is actually got a couple of different questions in there, John. I don’t know if you could see it in the chat. So do options, so right here where it says, does options have a follow formula? Yes. I retyped it.
He typed it in. So, for example, deep in the money call hardly has any time value. That’s not that’s not necessarily true. Is the theta delta gamma established by formula when the option is established? They move around in real time as the underlying price moves. The price of, so the all the Greeks move around, they don’t, they’re not static.
So all these movements will adjust themselves with the price of the underlying stock. So obviously, you have to know when you want to pull the trigger and when you want to enter. You can’t obviously control what’s going to happen after that. What you do have to do is put together a trade that makes sense based on what you think is going to happen with volatility, whether you’re in a low volatility environment and it’s going to go higher, or if you’re in high volatility and you think it’s going to go lower.
You would put on an entirely different trade. You’d put on a credit trade in something like that. Gamma is a more advanced thing. I don’t want to know if we shouldn’t, I don’t want to jump into like the weeds too much on gamma, but basically gamma is the acceleration of the delta. So, delta is the acceleration, but gamma is the delta of the delta.
Which basically just, it’s a it shows an acceleration of how fast the delta is moving, and that’s something that usually happens around earnings. What is a gamma spike and a gamma squeeze. And as a trader you could take advantage of that on the short side. So they do move in real time. The dynamic, unfortunately.
So you have to just be aware of your risk when you’re getting into the trade. Be aware of what your optimal size is. That’s why I told you like, figuring out what your optimal unit size is. That’s like the very basic, that’s the very beginning step before you get into the different strategies and the Greeks and everything else.
You gotta keep it simple and say how. , how many contracts should I be buying? How many, how many risk, how big is my typical risk unit? Now when you’re doing something more short term, like a, like an earnings player or an intraday trade with options those.
Option trade, you’re gonna move a lot faster than if you go out a couple of months, let’s say. And you gotta take that into consideration. When you’re doing, when I do an earnings play or something a little more risky, what I’ll typically do is I’ll put on a half unit. I’ll say if my risk is a thousand, I’m only gonna put on 500, and I’m gonna see how the trade does, and if the trade starts to accelerate in the right direction, then I’ll throw on my second.
And that’s how I, that’s how I do those shorter term trades. So he says also, what causes the implied volatility number of a stock to go up and down? That’s basically that’s, so the implied volatility is what the perceived movement of the stock is gonna be year over year. So that can be anything that’s usually headline driven, that’s usually earnings driven.
It could be. So implied volatilities of all stocks go up when there’s geopolitical. Something like you, like the war in Ukraine, for instance, or Covid 19. You’ll see volatility of everything shoot through the roof. So, one of the things that we look at is the average two range of a stock.
Usually the average two range of a stock. And the implied volatility go hand in hand. So as a t r increases usually at implied volatility is increasing too. And these are all the gauges that you’re gonna be looking at when you’re putting together an option strategy. It’s not as complicated as you think.
There’s basically a step-by-step process that you go through and it’s fairly straightforward. It just takes a little bit of practice to get through all those steps. But there are rules that, that are designed to help you decide what strategy to use, how to handle implied volatility, if it’s going up or if it’s going down, and what type of option strategy to.
Okay. Hi John. I think we’re gonna call it tonight. That’s a good 45 minutes. For the first one, we’re actually gonna have a couple more of these. This. Awesome. What I wanna do though, is I want to drop in the chat here, and I’ll also email this out to everybody. If anybody wants to find out about joining your bootcamp and getting involved with coaching for you for a couple of weeks to learn this in real time and be able to ask you more custom questions actually based on both the training as well as the markets unfolding.
I know in our community the coaching is actually really where the rubber hits the road and you actually learn how to trade. The actual trading part of it is you should be prepared to make those decisions, but the coaching helps you make better decisions. We actually had a long conversation today both in our Discord community as well as in the coaching about what separates somebody from being profitable from those that two steps forward, two steps back, two steps forward, two steps back, and it really comes down to making better decisions and the best way to make better decisions to ask somebody who’s been there already.
Absolutely. I’ve been doing this both on the institutional side and on the personal side for close to 25 years. And basically I’ve seen all the different market cycles and I think I have that experience to bring to the table. And not only that, just I think what, what really gets overlooked in the education space.
When I on YouTube and I see what’s out there. Just coming up with the right strategy at the right time is something that’s so overlooked. Everyone try, all the gurus talk about, oh, this strategy will always work and blah, blah, blah. You really gotta know what tool to use and when, and that’s, and there’s no shortcuts to that.
That’s where, like you said, the coaching is so important. In the bootcamp, we have four live sessions just like this, where I’m going over a certain topic, you’re free to ask whatever questions you want, and we cover all the different roadblocks and questions that, that students have.
So that to me is invaluable. And then annual members obviously have weekly coaching, which is, which kind of helps them gut check what they’re doing and helps them through the psychological process of this as well. Okay. Awesome. All right, John. We’ll get this replay edited. We’ll get out to everybody tomorrow.
Any follow up questions, we’ll make sure that we have those ready for the next call as well. Awesome. We’ll be doing a live stream soon too, so we’ll actually have some interaction before the market opens as well. We’ll figure out the exact time for that. All right, looking forward to it and hope everybody’s well and happy trading.
We’ll do this again soon. Looking forward to it. Thanks for your time, John, and thanks everybody who attended tonight. Appreciate it. Take care, everybody. Have a good night.
