On Sunday, besides these handouts, there will a lot of ... · Sell bull put spread (front month...

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Candlestick Secrets for Profiting in Options 2.0Sunday Oct. 14, 2012

On Sunday, besides these handouts, there will a lotof live screen share. So be sure to have a pen andpad ready to take lots of notes!

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Candlestick Secrets for Profiting in Options 2.0

Reaching the Top Levels of Option Trading Success

Live On Line SeminarSunday – October 14

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Break schedule for Sunday

11:15-11:30

1-2 lunch (1:30-2 Steve will answerany candlestick questions)

3:15-3:30 break

4:15 - 4:30

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• Candles and Risk reversals

• Candles for Non Standard Verticals

• Candles for Iron Condors

• Candles for Calendars

• Candles for Diagonals

• Chart Challenges

• Structuring the trade (See how Dave sets uphis trades)

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RiskReversals

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www.nisonoptionsacademy.com

Risk Reversal TradeRisk Reversal Trade

Risk Reversals are one of the most directionally strong option trades.The standard risk reversal can be bullish or bearish:

1. Bullish risk reversal consists of being long (buying) an out-of-the-money call and being short (selling) an out-of-the moneyput, both with the same expiration date.

2. Bearish risk reversal consists of being long (buying) an out-of-the-money put and being short (selling) an out-of-the moneycall, both with the same expiration date.

Due to the unlimited risk of naked short calls and the very largemargin requirements for short calls, we will not be discussingbearish risk reversals

Example of Bullish Risk Reversal(Assuming ABC is trading for $72.50

Short ABC April 70 Put at $2.10Long ABC April 75 Call at $1.80

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Risk Reversal - P & L GraphRisk Reversal - P & L Graph

Buy 1 AAPL 30-day or longer 680 Call (28.33)

Sell 1 AAPL 30-day or longer 670 Put 29.75

BE @ 97

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Risk Reversal DifferencesRisk Reversal Differences

Benefits

• The risk reversal aims to achieve a positionwith a very strong directional bias similar to along call, but ideally can be a credit trade.

• Risk Reversal is similar to buying a long callbut can be placed for less cost.

• Can be a longer term trade by placing thetrade into further expirations than a long call

• Lowers risk since less capital used to enter

• Can benefit from implied volatility decreases

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Risk Reversal DifferencesRisk Reversal Differences

Disadvantages

• Need strong directional movement withinexpiration to move outside of risk graphs flatprofit and loss area

• Naked puts don’t allow for black swan eventsso falling windows can result in significantlosses

• Only is profitable in one direction

• Uses a lot of buying power by using nakedoptions

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There are ways to modify the disadvantages of thestandard risk reversal to fit your needs:

• Instead of selling the put naked, you can sell abull put vertical instead thereby reducing themargin requirements and risk

• Instead of selling the put so close to being ATM,we could sell a farther expiration bull put at asupport level

• Selling a bull put at a farther expiration will likelynot provide enough credit to pay for a long callso a ratio can be used to sell more bull puts

Risk Reversal Modifications

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Modified Risk Reversal Steps

1. Identify support and resistance levels

2. Identify a support level you would buy the stock at

3. Find the strike price at or lower than that support level

4. Find the credit for a 2 or 3 strike wide bull put at theabove strike that is in the front month expiration

5. Find the debit for an ATM 40 to 50 delta long call with anexpiration 2 - 3 months from now

6. Compare the credit from the bull put to the debit of thelong call. Look at how many bull puts would have to besold to pay for the long calls debit. Ideally it should beonly 2 bull puts for each long call or 3 maximum

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Modified Risk Reversal

Buy ATM or OTM call 2 or 3 months out

Sell bull put spread (front month expiration)

So we will try to sell a bull put with a shorter expiration inorder to pay for buying a call: Result should be a credit

Buy 1 XYZ 2 to 3 month expiration 95 Call @ 3.50Sell 2 - 3 XYZ 30-day or less 85 Put @ 2.75Buy 2 - 3 XYZ 30-day or less 75 Put @ .75Max Risk is bull puts risk (85 – 75 = 10 – 2.75 + .75) = 8Credit to do trade is .50 (2.75 - .75) * 2 – 3.50This is a trade you do not want to hold until expiration:

Maximum Profit = Theoretically unlimited

Breakeven is calculated by adding the credit/debit to the strike prices so 95- .50 = 94.50 and 85 - .50 = 84.50 are the breakeven levels

Concept: Buying a longer term call avoids rapid time decay while a bullput is time decay positive and should decay faster than the long call

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Risk Reversal - P & L Graph

Longer term calls are expensive so use front month

Buy 1 AAPL 30-day long call 705 (5.19)

Sell 2 AAPL 30-day bull put spread 650/640 2.75 * 2

BE @ 97

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Risk Reversal - ExampleExample of a real money trade done with 30,000 contracts

Buy 1 BAC Feb long call 10 (.41)

Sell 1 BAC Feb put naked .39

BE @ 97

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Considerations for choosing strike prices

• The goal of a risk reversal is to put on the tradewith a credit or a small debit

• It’s important to sell the bull put at a strike youbelieve to be strong support

• It’s important to buy a long call at a strike youbelieve will be ITM during it’s expiration

• You have some discretion as to how to structurethe trade but if the trade doesn’t fit a reallystrong bullish setup, do not force the trade.There’s a limited amount of times when this isthe best strategy to use

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Risk Reversal Uses

• Good to use if your view is that IV is high and may fall

• Lessens time decay issues involved with buying outrightcall.

• May be useful to trade earnings or other news events

• If long calls are expensive, offers lower cost (but not lowermargin) possibility

• If you were willing to buy the stock at the short put strikesand could take assignment on the stock

• Can also leg into this spread after a favorable move byselling the bull put first and later buying a long call.

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• Risk Reversals should only be used for thestrongest setups

• The trade should have defined exit points forboth gains and losses

• Sideways movement only benefits the modifiedrisk reversal so exit at resistance or a box range

• Two legs, so extra commissions and two bid askspreads to deal with compared to a long call

• Low implied volatility makes this trade harder toimplement due to low credits from bull puts

Risk Reversal cautions

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Types of Risk Reversals & implementation

Strategy When to Use Implementation

Risk Reversal You have a very strongbullish setup and buyingpower to sell putsnaked. Ideally IV is inthe high end of its yearlyrange

Buy an OTM longcall and sell a OTMput naked in thesame expiration fora credit or a smalldebit

Modified RiskReversal

Chart shows strongdownside support levelto sell a bull put at and astrong bullish setup.Time decay is morebeneficial and lessmargin is required

Buy an OTM longerterm call if possibleand sell a shorterterm bull put OTMfor a credit or asmall debit

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When to use outrights vs. risk reversals

For outrights look for charts with (we are ignoring IV):

Potential move that doesn’t limit profit potential. Thereshould be a really high risk to reward

In a low implied volatility environment, it’s can be morebeneficial to buy options and not create spreads –especially if implied volatility might rise

For outright buys... a big fast move works best but if thetrend isn’t very strong, a risk reversal can benefit fromsideways trends since the time decay will help.

If buying power is a concern, a long call will use less buyingpower than a risk reversal

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VerticalSpreads –Non-Standard

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Vertical Spread ReviewVertical Spread Review

There are 4 types of vertical spreads:

• Bull Put – Credit – Typically placed OTM

• Bear Put - Debit – Typically placed ATM/OTM

• Bull Call - Debit – Typically placed ATM/OTM

• Bear Call - Credit – Typically placed OTM

Example of a Bull Call

Long ABC February 70 Call at $3.10Short ABC February 75 Call at $1.20

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If we wanted to trade verticals in a non-standard way, what could we change ?

• Change the strikes – placing them ITM,OTM, ATM

• Change the expiration – Bear calls andbull puts are typically sold on aweekly/monthly basis but what if a longerexpiration was used?

• Widen/Narrow the spread

Different Verticals

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Non-Standard vertical - TimeNon-Standard vertical - Time

Changing Expiration

• Modify verticals to fit your view morespecifically – If you’re bullish for the next 3months should you sell a bull put each monththe next 3 months or sell a 3 month to expirybull put now?

• Potentially less time intensive to manage

• Can benefit more from implied volatilitychanges depending on how the trade isstructured

• Less commissions

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Non-Standard vertical - TimeNon-Standard vertical - Time

Example

• Modify verticals to fit your view morespecifically – If you’re bullish for the next 3months should you sell a bull put each monththe next 3 months or sell a 3 month to expirybull put now?

• Potentially less time intensive to manage

• Can benefit more from implied volatilitychanges depending on how the trade isstructured

• Less commissions

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Long term bull put exampleLet’s have an AAPLes to AAPLes comparison

One 5% OTM bull put was sold on 5/21/12 for 3.60 on the first day afteroptions expiration with the 3 month expiration

One 5% OTM bull put was sold on 5/21/12 for 2.17 on the first day afteroptions expiration for the front month expiration



Overall, 3 similar trades over the same time period took in more premiumoverall but the long term trade could have been likely closed early

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Non-Standard vertical - StrikeNon-Standard vertical - Strike

Changing Strikes – ITM, OTM, ATM• If you want to spend less time managing trades, put a

trade on and only modify it before expiry if it hit acertain price. Consider selling a bull call ITM

• If you’re willing to buy a stock and it’s trading at a 52week low plus it just formed a hammer, you could sellan ATM bull put if you were willing to take assignment

• If you’re considering buying a bull call spread ATM orOTM but you’d prefer to be short rather than longimplied volatility and the spread is expensive, youcould sell a bull put ITM at the same strikes for acredit.

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Non-Standard Vertical - Strike

Example

• If you’re bullish on a stock and think it will goback to resistance in the next 2 months butyou’re less certain if it’ll make it there thismonth or next so a bull call is less appealingsince they require a strong move byexpiration. What if a bull put could be soldITM with the short and long legs both beingITM ?

• If you’re willing to sell a OTM bull put, youshould be willing to sell an ITM bull call withthe same strikes since they’re the same trade

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ITM Vertical exampleFor the example below, SPY had a bullish engulfing candle on 6/5/12

followed by a rising window on 6/6/12. If a bullish trade was placed on6/6/12 with the short leg at resistance you can:

Buy a call spread 45 days out with the long call ATM at 132 and theshort call at resistance at 136

Sell an ITM bull put with the long put at 132 and the short put at 136

Both these trades have the same risk graph but the put spread wouldbring in a greater credit than the debit of the call spread – Why?

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ITM Vertical Uses

• Good to use if your view is that IV is high and may fall

• Requires a very bullish setup

• Time decay can be favorable to an ITM vertical but not anATM or OTM bull call

• The higher credit above the amount of the equivalenttrades debit will lessen the risk of a trade.

• More important for market to rally with an ITM bull putspread but less important for a bull call spread

• Can also leg into this spread after a favorable moveselling the short option first and later buying a long leg

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• You really want the short leg to expire OTM atexpiration so technical analysis is key to howwell this trade will work

• Be aware of any upcoming dividends since ITMshort options – especially calls are subject toearly exercise risk. If the extrinsic value of ashort option is less than the amount of thedividend, assignment is likely

• A steady trend is more favorable to this tradesince rising/falling windows can cause significantchanges to ITM options

ITM Vertical Cautions

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Non-Standard Verticals & implementation


Long Term BullPut

You have a strongsupport level or want tobe in a trade longerterm. Implied volatilitybeing high and decliningis an additional benefit

Sell a 2 to 3 monthout bull put OTM ata strong supportlevel

ITM Bull Put Chart shows strongbullish setup but notsure when it will go upso a bull call isn’tpreferred. Impliedvolatility being high isan additional benefit

Sell a 45 to 60 day(however long youthink the move willtake) put with thelong ATM and theshort at resistance

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Iron CondorSpreadsCombining Bear CallVerticals &Bull Put Verticals

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Vertical Spread ReviewVertical Spread Review

Vertical spreads can be debit spreads (bear put, bull call) or creditspreads (bull put, bear call). An iron condors is two credit spreads:

1. Bear Call –Have two different strikes with the same expirationperiod for both strikes. The long option has a higher strike andthe short option is at a lower strike closer to ATM than long

2. Bull Put– Have two different strikes with the same expirationperiod for both strikes. The short option has a higher strike andthe long option is at a lower strike closer to ATM than long

Example with ABC at 60

Long ABC February 75 Call at $1.20Short ABC April 70 Call at $3.10Short ABC April 50 Put at $3.10Long ABC February 45 Put at $1.20

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Iron Condor DifferencesIron Condor Differences

Benefits

• One of the few trades that can be profitable inall directional movements – up, down andsideways

• Offers a wide profit and loss area on a risk graph

• Can be an income trade by repeating the tradeover time if the short options expire

• Higher probability of success

• One of the verticals is going to expire worthless

• Can benefit from implied volatility decreases

• Best used in box ranges

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Iron Condor DifferencesIron Condor Differences

Disadvantages• Higher commission costs

• Poor risk to reward due to higher risk and lowercredit

• Requires more careful management and typicallymore time than other spread trades since eachvertical could go ITM before expiration

• In a low implied volatility environment, moredifficult to sell credit spreads farther away fromATM

• Potential risk of assignment if the short optiongoes ITM. If the short leg goes ITM, it can losemore money than the long can make

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Iron Condors

Identifying support and resistance is key to this tradeAll option strikes have the same expiration – near monthAll option strikes are placed OTMSell calls and puts closer to ATM than the long optionsBuy calls and puts 1 or 2 strikes farther OTM than shorts

Buy 1 XYZ 30-day 100 Call @ .50Sell 1 XYZ 30-day 90 Call @ 1.25Sell 1 XYZ 30-day 70 Put @ 1.25Buy 1 XYZ 30-day 60 Put @ .50Max Risk is the width of the widest spread – credit100 – 90 -.50 + 1.25 + 1.25 - .50 = 8.50

At expiration:

Maximum Profit = Credits received from both credit trades

Upper Breakeven = Highest Strike - Risk of Trade

Lower Breakeven = Lowest Strike + Risk of Trade

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Iron Condor - P & L GraphBuy 1 XYZ 30-day or less 230 Call (.15)

Sell 1 XYZ 30-day or less 220 Call .85

Sell 1 XYZ 30-day or less 200 Put .95

Buy 1 XYZ 30-day or less 190 Put (.13)

BE @ 97

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Considerations for choosing strike prices

The short call option strike should ideally be one or tworesistance levels away from the ATM price

The short put option strike should ideally be one or tworesistance levels away from the ATM price

A minimum credit to fit your commissions should be established –probably around 10% for each vertical

Stock is at in a box range or has recently established support andresistance with 45 being the middle of the box range withresistance at 50 and 40 being support

•Sell 50 call (or farther out strike) in front month•Buy 52.50 or 55 strike call to hedge the short call•Sell 40 put (or farther out strike) in front month•Buy 37.50 or 35 strike call to hedge the short put

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Iron Condor Uses

• Good to use if your view is range bound until optionsexpiry

• Creates two trades that benefit from time decay

• One of the trades will be profitable since the underlyingcan only expire at one price

• High implied volatility that declines is beneficial

• Can create income if successfully traded consistently

• Can also leg into this spread by selling one of the verticalsfirst by either selling the bear call first on a rollover or bullput after a bounce off of support

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• The risk to reward on this trade is typically poor.It’s really relying more on probabilities

• The short options have to stay out of the moneysince if it expires ITM the trade can potentiallylose more than the credits received

• Both verticals should be checked to see whattheir credits are to be sure it’s worth selling. Ifonly one vertical makes sense, only do that one

• Exit points for each vertical should be chosenand strictly followed should the trade be at a loss

• The credit is almost never a reason to enter

• Avoid surprises – no earnings should be coming

Iron Condor Cautions

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• Iron condors are typically shown as marketneutral trades but it is possible to bias one“wing” i.e. vertical making up the iron condor

• One of the verticals can be placed closer tobeing ATM than the other vertical i.e. if ABC isat 80 selling a 90/85/70/65 iron is more bearish

• One of the verticals can be wider than the othervertical i.e. if ABC is at 80 selling a 90/85/75/65iron is more slightly more bullish. In this case$10 in margin will be withheld since the wider ofthe two verticals is how margin is usuallydetermined but it can vary with brokers

Iron Condor Customizations

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When to use Calendars vs. irons

For calendars look for charts that (we are ignoring IV):

Typically don’t stay in a box range for long and typicallytrend

Less confidence that support or resistance will hold butmore confident that price will eventually hit the short strikeprice to maximize the calendars profitability

Have a lot of rising or falling windows. A volatile priceenvironment like this typically is less favorable to ironcondors

Provide a likely target that the calendar can reach. Ironcondors don’t have targets but want to stay away from theshort strikes.

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CalendarDebitSpreadsCall Calendars &Put Calendars

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Calendar StructureCalendar Structure

A calendar spread consists of all calls or all puts so there are putcalendars and call calendars

Calendars are often the least directionally sensitive spread strategy so itis primarily profitable based on time decay:

Example

- Buy a 90 dayor greaterexpiration Callfor $3.10- Sell 30 day orless expirationcall $1.20

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Calendar StructureCalendar Structure

It’s possible to sell a calendar spread but due to the unlimited risk ofnaked short calls, we will be discussing long put and call calendars only

•Both the short and long legs use the same strike but have differentexpirations which is where the name calendar spread comes from

•While time decay is a primary benefit to long calendars, a rise in impliedvolatility would also be beneficial

•Calendars are typically opened and closed as a combined spread tradebut the legs of the spread can be opened and closed individually

•Calendars are an “open ended” spread – meaning that multiple shortoptions can be sold against the long option over time since the long legin the calendar has a longer expiry so it’s important to keep track of thecost basis of a calendar in order to ensure profitability

•The goal of a calendar is for the short leg to expire and provide enoughcredit to compensate for the smaller time decay in the long option. Thelong can also benefit from directional movement

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Calendar DifferencesCalendar Differences

Benefits

• Can benefit from two directional movements– up and sideways for call calendars

– down and sideways for put calendars

• Offer a fairly wide profit and loss area on arisk graph

• Can be a longer term trade by allowing forthe trade to be repeated for multipleexpirations if the short option expires


• Can benefit from implied volatility increases

• Can choose to exit trade multiple ways

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Calendar DifferencesCalendar Differences

Disadvantages• High Cost

• Less Certainty of potential profitability since theamount of premium that will be received when sellingshort options against the long in the future is uncertain

• Requires more careful management and typicallymore time to manage than other spread trades

• Long leg is susceptible to volatility crush – If the longoption is bought at periods of high IV and IV goesdown over time, the long may lose more money thanthe shorts take in in premium

• Potential risk of assignment if the short option goesITM. If the short leg goes ITM it can lose more moneythan the long can make

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Considerations for choosing strike prices in Calendars

Calendars are not a very strongly directional tradesince the strikes are the same so the strike chosengives the trade it’s directional strength.

Short options are typically placed OTM to avoid anearly assignment risk

Call Calendar Example:Stock is at support area @ 45 with resistance at 50•Buy 50 call 90 days or longer to expiration•Sell 50 call in front month or weekly (to lessencost of trade and the stock will likely slow down atresistance

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Call Calendar

Buy OTM 95 strike call 3 or more months out

Sell OTM 95 strike call (front month or weekly)Which of these two strikes will be more worth more?

So we will be buying the more expensive farther expirationstrike call - and selling the front month call: Result is netcost to you - hence a debit call spread

Buy 1 XYZ 90-day or longer 95 Call @ 3.50Sell 1 XYZ 30-day 95 Call @ .75Max Risk is Net Debit (2.75)At expiration:

Maximum Profit = Net Debit (2.75) plus any future short options sold

Breakevens for the downside and upside can’t be done in a single equation. Delta andimplied volatility are the primary inputs. Use a risk graph tool.

Breakevens also change as more short options are sold.

Concept: Buy a longer term call to benefit from a longer termmove but give up profit potential to lower risk

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Call Calendar - P & L Graph

Buy 1 XYZ 109-day or longer 65 Call (2.55)

Sell 1 XYZ 18-day 65 Call .85

BE @ 97

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Call Calendar Uses

• Good to use if your view is that IV is low and may rise


• Calendars work best in a slightly bullish trend to benefitfrom time decay.

• If in a bullish environment but not one bullish enough tobenefit from buying a long call or bull call

• More important for market to rally than with bull putspread but less important than a bull call spread

• Can also leg into this spread after a favorable movebuying the long option first and later selling a short call.

• Can trade during box ranges

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• Selling a call helps lessen cost of outright trade, buttrade has capped upside potential

• The short call sold can potentially lose more than thelong option can gain since the short option can changein value faster

• The short call premium should be at least 10% or moreof the cost of the long option to ensure that it’s worthselling.

• Implied volatility decreases can lessen the value of thelong option more than short premium can cover it.

• Upcoming dividends could cause early assignment

• When selling a call, check that there is enough premiumreceived so that it’s worth selling

Call Calendar Cautions

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Put Calendar

Buy OTM 95 strike put 3 or more months out

Sell OTM 95 strike put (front month or weekly)Which of these two strikes will be more worth more?

So we will be buying the more expensive farther expirationstrike put - and selling the front month put: Result is netcost to you - hence a debit put spread

Buy 1 XYZ 90-day or longer 95 put @ 3.50Sell 1 XYZ 30-day 95 put @ .75Max Risk is Net Debit (2.75)At expiration:

Maximum Profit = Net Debit (2.75) plus any future short options sold

Breakevens for the downside and upside can’t be done in a single equation. Delta andimplied volatility are the primary inputs. Use a risk graph tool.

Breakevens also change as more short options are sold.

Concept: Buy a longer term put to benefit from a longer termmove but give up profit potential to lower risk

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Put Calendar - P & L Graph

Buy 1 XYZ 109-day or longer 62.50 Put (2.40)

Sell 1 XYZ 18-day 62.55 Put .47

BE @ 97

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Put Calendar Uses


• Lessens time decay issues involved with buying outrightput.

• Calendars work best in a slightly bearish trend but canbenefit from bearish moves if far enough OTM.

• If in a bearish environment but not one bearish enough tobenefit from buying a long put or bear put

• Can be used as a hedge for a long position

• Can also leg into this spread after a favorable movebuying the long option first and later selling a short put.

• Can trade during box ranges

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• Selling a put helps lessen cost of a long put, but tradehas capped downside potential – which could move fast

• The short put sold can potentially lose more than thelong option can gain since the short option can changein value faster

• The short put premium should be at least 10% or moreof the cost of the long option to ensure that it’s worthselling.

• Implied volatility decreases can lessen the value of thelong option more than short premium can cover it.

• Upcoming dividends could cause early assignment

• Rapidly moving environments like a falling window cancause the short option to go ITM causing losses

Put Calendar Cautions

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Types of Calendars & implementation


Put Calendar You have a slightlybearish/stagnant trendor want to hedge somedownside risk. Ideal fora longer term trade withflexibility to changestrikes later

Buy a OTM longerterm put and sell aOTM shorter termput with a lowerstrike and shorterexpiration at asupport level

Call Calendar You have a slightlybullish/stagnant trend orwant to hedge someupside risk. As a longerterm trade with flexibilityto change strikes later

Buy a OTM longerterm call and sell aOTM shorter termcall with a higherstrike and shorterexpiration at aresistance level

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DiagonalDebitSpreadsBull Call Calendars &Bear Put Calendars

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Spread ReviewSpread Review

Every option spread contains one or two of the basic types of spreadsthat more advanced spreads consist of:

1. Vertical Spreads – Have two different strikes i.e. higher andlower strikes for the bought and sold options hence the nameverticals with the same expiration period for both strikes

2. Calendar Spreads – Have the same strikes for the bought andsold options with two different expiration periods hence thename calendars

What is a diagonal then? It combines a vertical and calendarspread with a spread with different strikes and differentexpirations

Example

Long ABC April 70 Call at $3.10Short ABC February 75 Call at $1.20

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There are 4 types of potential diagonals with namessimilar to the 4 types of vertical spreads:

• Bull Put Calendar

• Bear Put Calendar

• Bull Call Calendar

• Bear Call Calendar

The easiest to manage of these 4 types are the bear putcalendar and bull call calendar so we will discussing thesetwo debit diagonals

Diagonals Background

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Diagonal DifferencesDiagonal Differences

Benefits

• Can benefit from two directional movements– up and sideways or down and sideways

• Offer a fairly wide profit and loss area on arisk graph similar to a calendar spread

• Can be a longer term trade by allowing forthe trade to be repeated into furtherexpirations if the short option expires


• Can benefit from implied volatility increases

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Diagonal DifferencesDiagonal Differences

Disadvantages• High Cost

• Less Certainty of what premium will be received whenselling short options against the long in the future

• Requires more careful management and typicallymore time than other spread trades

• Long leg is susceptible to volatility crunch – If the longoption is bought at periods of high IV and IV goesdown over time, the long may lose more money thanthe shorts take in in premium

• Potential risk of assignment if the short option goesITM. If the short leg goes ITM it can lose more moneythan the long can make

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Bull Call Calendars

Buy ATM lower strike (95) call 3 or more months out

Sell higher strike (100) call (front month expiration)Which of these two strikes will be more worth more?

So we will be buying the more expensive lower strike call -and selling the cheaper call: Result is net cost to you -hence a debit call spread

Buy 1 XYZ 90-day or longer 95 Call @ 3.50Sell 1 XYZ 30-day 100 Call @ .75Max Risk is Net Debit (2.75)

At expiration:

Maximum Profit = Difference in Strike Prices (5) - Net Debit (.75) = $4.25plus any future short option premium sold

Breakeven = Lower Strike (95) + Net Debit (2.75) = 97.75

Concept: Buy a longer term call to stay in a trade for expiration oflong call but give up profit potential

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Bull Call Calendar - P & L Graph

Buy 1 XYZ 90-day or longer 115 Call (7.91)

Sell 1 XYZ 30-day 120 Call 1.50

BE @ 97

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Considerations for choosing strike prices for bull call Calendar

Think of bull call calendar as a long call trade witha lower cost and the ability to continue to lower thecost by selling short calls over time.

Stock is at support area @ 45 with resistance at 50•Buy 45 call 90 days or longer to expiration•Sell 50 call in front month or weekly (to lessencost of trade and thereby reduce the trades risk)

Using resistance:• Higher strike should be resistance area.• Rationale: Max profit (at expiration) when higher

strike price (short) of spread is reached.

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Bull Call Calendar Uses



• Selling calls lessen the cost of a trade.

• More important for market to rally than with bull putspread but less important than a bull call spread

• Can be a good alternative to an outright buy when there isa target move of 5% to 10% so premium on short call isworth selling and you don’t expect to give up too muchupside potential.

• Can also leg into this spread after a favorable movebuying the long option first and later selling a short call.

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• Selling a call helps lessen cost of outright trade,but trade has capped upside potential

• The short call sold can potentially lose morethan the long option can gain since the shortoption can change in value faster

• The short call premium should be at least 10%or more of the cost of the long option to ensurethat it’s worth selling.

• Implied volatility decreases can lessen the valueof the long option more than short premium cancover it.

Bull Call Calendar Cautions

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Bear Put Diagonal spreads

Buy ATM higher strike (130) put ~ 90 days to expirySell lower strike (125) put (front month or weekly)

Which of these two strikes will be more worth more?

So will be buying the higher strike more expensive put - andselling the cheaper put: Result is a debit spread

Buy 1 XYZ ~ 90-day 130 put @ 2.45Sell 1 XYZ 17-day 125 put @ .55Max Risk is Net Debit = 1.90

At expiration:

Maximum Profit = Difference in Strike Prices (5) - Net Debit (1.90)= $3.10 plus any future short option premium sold

Breakeven = Lower Strike (130) + Net Debit (1.90) = 131.90

Concept: Buy a longer term put to stay in a trade untilexpiration of long put but give up profit potential

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Bear Put Calendar - P & L graph

Buy 1 SPY 86-day 145 Put @ 4.91

Sell 1 SPY 23-day 140 Put @ .77

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Considerations for choosing strike prices for bear Put calendarspreads

Think of bear put calendar as a long put trade with a lowercost and the ability to continue to lower the cost by sellingshort puts over time.

With the market at resistance area @ 45:Buy a 45 put around 90 days to expirySell a 40 put in the front month or weekly at a support area

Using resistance:• Higher strike put should be resistance.• Rationale: Max profit (at expiration) when underlying

price is at lower strike (short) since the short put wouldexpire worthless and keep entire credit plus allow foradditional selling of short puts and allow for long put gain

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• Selling a put lessens cost of outright trade, butthis limits profit potential

• Spreads reach max profit at the short put strikewhich may occur before expiration

• If expected to move down more than 7-10%, along put may be a more ideal trade

• Two legs, so extra commissions and two bid askspreads to deal with.

• Can be harder to close in a hurry.

Bear put calendar cautions

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Types of diagonals & implementation


Bear PutCalendar

You have a downsidesupport level and targetor want to be in a tradelonger term

Buy a longer termput and sell ashorter term putwith a lower strikeand shorterexpiration.

Bull CallCalendar

Chart shows resistance,but not sure if it willbreak through or want tobe in a trade longerterm

Buy a longer termcall and sell ashorter term callwith a higher strikeand shorterexpiration.

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When to use outrights vs. diagonals

For outrights look for charts with (we are ignoring IV):

Potential move that doesn’t want to limit profit potential aswith a spread.

Higher confidence support (for calls) or resistance (puts)will hold (as compared to diagonal spreads where if I haveless confidence may want to be able to leg out if I switchforecast or directional bias)

For outright buys... a big fast move works best but if thetrend isn’t very strong, a diagonal can benefit from slightlybearish or bullish trends since the time decay will help.

Outrights need room to move while diagonals benefit frombox ranges and clear support/resistance

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Chart Challenge

1) What is the most recent candle signal?2) What support or resistance seems strong here?3) Given what you know about options now, you canchoose a directional trade or non-directional i.e.range-bound trade. Which type would you choose ?4) What is the stop?5) Which option strategy would you do and why ?

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Chart Challenge

1) What is the most recent candle signal?2) What support or resistance seems

strong here?3) Given what you know about optionsnow, you can choose a directional trade ornon-directional i.e. range-bound trade.Which type would you choose ?

4) What prior candle signals can be aguide for how to structure a trade?5) Which option strategy would you doand why ?

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Chart Challenge1) What are the most recent candle signal(s)?2) What support or resistance seems strong here?3) You can choose a directional trade or non-directional i.e. range-bound trade.Which type would you choose ?

4) Where should a stop be placed?5) Which option strategy would you do and why ?

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Chart Challenge1) What is the most recent candle signal?2) What support or resistance seems strong here?3) You can choose a directional trade or somewhat-

directional i.e. profitable up and sideways or down andsideways trade. Which type would you choose ?

4) Where should a stop be placed?5) Which option strategy would you do and why ?

On Sunday, besides these handouts, there will a lot of ... · Sell bull put spread (front month...

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