2 Solid Ways to Mitigate Risk with Credit Spreads

hey students traders from around the world my name is Jeremy Alexander Newsome on the CEO of her life trading welcome to the video on how to mitigate risk with credit spreads I'm assuming if you're watching this video you know a little bit about what credit spreads are I'm not going to go massively into detail in this particular class about what a credit spread is if you want to know a little bit more information about credit spreads hop over to our mastery page real life trading comm forward slash master or forward slash and these classes are the mastery classes so it's a little bit more advanced classes they are obviously free like everything else on the website and you can simply click on the video watch little about credit spreads to understand what a credit spread is and how it works but just to understand the reason people do credit spreads is because a credit spread is a high numerical percentage win strategy it's a mathematically percentage based strategy in the equity world and what you do on a credit spread is you pretty much ask yourself one question when you're getting into the trade where do I not want the stock to go that's really what you're asking when you look at a spread where do I not want the stock to go and before you're getting into a spread it's really semi simple even if you're not the most advanced trigger in the world you come up with some support resistance line some pretty common ones so this is Macy's for example and if we zoom out a little bit farther on Macy's you can kind of see that there is a pretty obvious support resistance line on Macy's so the support is fifty five and some change and the resistance was once you know 63 and that's currently playing out as a support right now so old resistance new support so if I were to come here and Macy's and look at this particular chart I would also kind of notice that the stock is making a little bit of higher loads so let's take for example we'll draw a little bit of a line looks like this and we can see that the stock went from here from here from here here's a higher low and it's bouncing so it's making higher highs and higher lows so in this particular situation what do we agree then that Macy's is a little bit more bullish than bearish I think you guys would agree that it is just a hair more bullish than bearish okay great so we have the directional and Macy's number one when doing a credit spread it is very important to do the spread in the direction of the primary and intermediate trends now what is the primary and intermediate trend what a primary trend is a trend that's lasting more than a year so let's look at the last year of Macy's and let's look at a line chart and answer me this question over the last year so let's say February 2004 teams right about here what does it Macy's been doing going up going down and going sideways and if you said well since 2014 the exact same time and you draw a line to 2014 or 2015 today it's obviously going up now it's not going up massively but that is over a 10 percent gain in the stock and very close to 20% actually in the overall gain in the stock so it obviously is going higher so bullish would be the answer so the primary trend is going bullish now the intermediate trend is the last few months so what does it what I mean by the last few months well approximately last seven or eight months you know six or seven months where does the intermediate trend doing and if you're saying the intermediate trend is sideways to bullish I would agree with you there as well and that is really what you want to hear when you're asking the question what is the primary and intermediate trend you want a little bit of sideways action if you're getting a little bit of sideways action this is probably a good trade to do a credit spread on because if you're getting some the sideways action is going to be likely a little boring you're not going to make a lot of money on it quickly and therefore it's probably best to do a credit spread on the trade so when you're looking at a credit you ask the question where do I not want the stock to go so let's look at Macy's and here is the number one rule when doing a credit spread it's very important to do the spread in the director the primary and their main trend the primary and intermediate trend is bullish therefore what type of credit spread would we do we would do what's called a bull put spread and again I'm not going to get too in-depth in this but that is when you sell to open a put then you buy to open a put lower creating a credit in price and the credit is all determined on the bid and the ask of the options that you're using so again you do need to get a little bit of understanding on options you need to understand you know why it's bullish but it most importantly if you practice this virtually it just takes time for this to play out so let me just kind of explain to you what you would do if you look at a credit spread and you ask yourself the question where do I not want this spread to go where would your answer be you guys are welcome to go ahead and answer that personally but go ahead just say it out loud where would you not want this spread to go and if your answer is probably somewhere over here I would agree with you right the stock could you know do this it could do this it could do this you can even come down and do this a little bit but our expectation is since we have this angle of bullishness we have this old resistance new support we have the wick of this candle right here we have this short-term support of this price right here we have four things that are holding this particular price up now when doing a credit spread it's really oftentimes important to try to find nine things or what I call 9 marks to determine why would I do a credit spread here so I've already come up with four let's go look for a few others and this is where I'm gonna pull out some very simple indicators I'm gonna pull out the 10 20 and 50 X moving average so if I do a credit spread down here ladies and gentlemen would you agree that the credit spread is below both the 10 the 20 and the 50 exponential moving averages and those averages should hold up the price of the stock would you guys agree and I'd say yeah absolutely so that's at least potentially three more checkmarks right you have the 10 the 20 and the 50 acting as a support because the credit spread is below those particular prices if you come over to the long-term moving averages and this is another key aspect long-term moving averages and I call these the 100 to 200 you're going to ask yourself okay where is that well if you're looking at the 60 credit spread here's the 60 spread right here that's below the 100 and the 200 simple moving average so that's another two checkmarks so if you're following me you have this candle you have this sort port you have this trend line you have this you have the 10 20 and 50 and you have the 100 and 200 holding this particular credit spread up at support so you have nine things going in your favor plus a tenth one would be this looks like a Morningstar reversal pattern plus an eleventh one you're taking the credit spread in the direction of the primary and intermediate trend and there's a small little cap action on Macy's which again will provide a little bit of support for the stock so what to do from here well again if you answer the question where do I not want the spread to go you would go ahead and begin to say where's the safest place I can pray place the spread when you're placing a spread when you're placing a spread you want the credit spread to be as far away from the stock price as possible so you really want it quite far away so realistically if you could take the credit spread and do it down here that would be even better but me and you both know you're not going to get any money for that situation that's not going to happen so you want to get as far away as possible but still bringing in a good and your next question now is what's a good premium a good premium is 8% to 18% for less than 3 I'm sorry put less than less than 4 weeks of time that's a good premium there's no real reason to do a credit spread if you're only getting 7% unless the time it's very very little if you get over 18% those are good spreads but if you start getting a little too high that means that you're probably too close to the price action so we'll tell you it we'll talk a little bit about calculating your potential profits in just a little bit but that's a good premium as 8 to 18% for less than 4 weeks of time that's really kind of what you're going for as your goal now if you're wondering what is a good premium for really really short periods of time it's going to be a little bit different because 8 18% spreading high so if you're doing let's say less than 4 days of time the numbers are changing little bit it goes from about 4 percent to about 12% that's the range that you're looking for if you only do four days of time now I will go ahead and just give you guys this the absolute disclaimer that if you are dealing with four days of time you really should be a more active trader you should have the ability to go in look at charts actively follow them pretty much semi every day and be able to keep a close eye on them I would truly suggest if you are interested in weekly credit spreads join the live trading room live trading for even if it's just for a few days or a few months or a few weeks because on Wednesday in the afternoon we have weeklies Wednesday that's where we look for exactly that we look for credit spread expiring you know somewhere between 3 and 10 percent that's kind of our average goal for a weekly sprint it's going to keep that in mind if you really want to do a weekly spread you need to be a little bit of an active trader if you're a stuck at your desk it's gonna be a little bit hard sometimes as a get out of a position if you need to when you need to so just FYI anyway so a good premium for less today for days of time is forward % so let's go look at Macy's really quick here and keep in mind that we're probably to get pretty decent premium because earnings is right around the corner in earnings if you go to trading view calm come over here and we will go to the edit tab I'll let you see it where earnings is that's why I like about trading view it's one of those really cool features is built-in it appears it's the 24th of February so this credit spread will expire before the before earnings announcement which is really really good so if we're coming down here on Macy's and we're saying okay here's the $60 credit spread so we want to do the 60 and we want to sell to open this 60 level so we would sell to open there we go so we would sell to open this particular price and let's say that this is the sell to open 60 to put all right that's trade number one trade number two is you come down here and then you would buy to open the 61 put and that my friends is called a bull put spread your sell to open a put and then you buy open to put below it what that does is it creates a limited risk so your risk is the difference between the two numbers and you determine the two numbers right the two numbers are the strike prices of the option you determine those values it really is entirely up to you usually mathematically it's more effective just to do the one right below it but it really is kind of up to you so in this example you can do the 60 to 61 you could do the 61 60 you could do the 60 59 the 60 59 is going to be the safest I'll show you why so here's a 60 and here's the 59 and the 62 is right here the 61 is right here and the 60s right here so again the farther away from the price of the stock the safer the credit spread so what is your maximum risk on this particular trade well your maximum risk is going to be one dollar per contract per share that you trade so for example if you do ten contracts on this trade you're risking a thousand dollars so if you're risking if you're doing 20 contracts 20 times 100 shares per contract times a dollar is 2,000 dollars of risk and that's really the math the weight with the way you calculate risk that's the way I calculate risk I'll kind of give you a that formula you can write it down so here's the calculation of risk risk equals difference in strike prices times amount of contracts times 100 equals total margin on hold in account so there's your risk the difference in the strike prices so in this case if it's let's let's just practice it here and let's say we're doing a 65 put a 65 put would be very aggressive to be way way up here so if you sold to open if you sell to open the 65 put notice that now you're selling this put right here how many check marks are you going to get for that put for that particular trade well not many because now you're above the pink line you're above this blue line there's not a lot holding out you might get one maybe two checkmarks it max and you really need to go for nine you need to go for nine levels holding your trade from you know getting in you know getting in trouble so the risk equals the difference in strike price this times the amount of contracts times 100 equals total marg on a holding the account so this is example if you have let's say you do to ten contracts what is the risk on this particular credit spread go the difference between the two numbers is six okay so six times the amount of contracts is ten so that's 60 times 100 is six thousand so you have a six thousand dollar margin on hold in your account so let's go ahead and drop it back down here to where it is the most safe sell to open a sixty foot and buy to open the 59 foot we're going to come over here to the option chain see how much premium that would be so you always sell at the bid and notice that we could only get the next one down as the fifty seven fifty so notice that you always sell up the bid which is going to be eight cents in this case and this is eight cents so we're not actually going to make any money at all for this particular credit spread there is some money that we can make and I'll show you you know you could do a limit a limit credit at some point but what I'm going to do is we're going to assume for the sake of discussion by to open now try to find another one in a second by open the 57-foot we're going to assume for the sake of discussion that there is some money in this script the difference between the two numbers is 2.5 okay times the amount of contracts and times 100 equals total marjan holding the account well that's how you get into the spread now you're watching this particular video because you want to know how to mitigate risk on a credit spread so let me give you my particular formula this is the way I do it this is the way I've done it for a few years now and it works in my opinion very well at some point it just all comes down to knowing where and when to exit or unravel your particular credit sprint I'll talk about the difference in just a few moments so here's how I do and here's how I define risk for my credit spreads I take an account let's say my account is $30,000 and divide that into four I take a fourth out of that so I allow only 25% of my account at any one given time to be involved in credit spreads so if you take 3,000 and you take a quarter of that 30,000 divided by four equals 7500 7,500 that means this is the total amount of money that I'm willing to use on credit spreads 7,500 from there what I do is I take this number again and I divide it into four because that's usually how many credits for as I place a month somewhere anywhere between four and six so I take 7,500 I divide that by four and I'll come up with 1875 okay so divide that by four equals 1875 that my friend is the maximum amount of margin to be placed on one given credit spread 1875 now in doing so mathematically with credit spreads you win 70 to 80% of the time and if you find a credit spread between 8 and 18% you can do really really well for about seven or eight trades it's the trade that goes against you is the hard part because your goal in a credit spread your main goal when you are in quote-unquote trouble is to not lose your forth of margin that is your goal when you're dealing with a credit spread so in Macy's for example we only have eighteen hundred and seventy-five dollars that we could devote to this particular credit spread so if we only have eighteen seventy-five that we can devote to this particular spread remember you calculate margin by the difference in the number which is two dollars and fifty cents so what you can do in this particular instance is take your margin 18.75 you take 2.5 which is the difference between these two numbers you divide out I'm sorry you multiplied times 100 which is the amount of shares per contract and you come up in the situation with 2.5 2.5 table math 250 ok 2.5 times 100 is 250 dollars so from there if you have 250 dollars that is pretty much the amount of contracts that you can take on this particular spread and staying under 1875 so if you take 1875 and divide it out by 2,500 you can do 7.5 contracts per leg or you know 7 or 8 contracts your call 7 or 8 because it's sitting this is right and a half right in the halfway point because if you did 10 contracts how much would your margin on hold be let's answer that question 10 contracts well difference in the two number is 2.5 2.5 times 100 is 250 times 10 is 2500 so you are risking now more than your allotted figure in your account then making sense so far perfect perfect perfect so this is how I define my risk for my credit spreads my quote unquote are my risk unit is this figure which is pretty much an eighth of your account now yes I agree that an eighth of your entire account is a little bit high I realize that but with credit spreads it's not a directional trade credit spreads are a probability based numerical based strategy and bottom line you are supposed to win more than you lose and the ones that you do lose you really again your goal is to not lose this entire amount that is your goal because let's just say for example that you win a 10 percent which as I mentioned is a very reasonable figure you win 10 percent of this figure 9 times and on the 10th time you lose it all let me show you the numbers behind that 187 is 10% of 1800 so 187 times nine dollars is 1683 - your commission so if on the tenth time you lose that entire figure you're going to actually be down in your account not good well let's say on the tenth time you only lose half of 1875 half of 1875 is 937 dollars that means if you do 9 out of 10 trades correctly which is entirely possible by the way I do it very often 9 out of 10 credit spreads 9 go my favor one doesn't if you can mitigate the risk on the 10th 1/2 less than your entire margin you can make money on this strategy consistently month after month year after year you just have to learn how to mitigate your risk and trade your plan ok so again if you lose just half of your margins on the temple and that's 937 dollar loss and you can see you made about $700 after Commission you made about 600 bucks and some change which 600 bucks on a thirty thousand dollar account is 2 percent gain in a month if you do this in a month ten spreads in one month it's really not that bad that's not too shabby so again I really another realistic goal is instead of 10% wins let's say you're getting it around to my preferred if you're doing a 2 2 to 3 week or four weeks spread you know somewhere between 12 and 13 so let's just say you're doing 12% okay 1875 times point 1 2 is $225 times 9 that's now 2,000 $25.00 and let's say again on the 10th spread because you will lose on credit spreads I'm telling you right now there will be a trade you will lose on that's why I'm making you this video if you do 9 trades and you make 12% on those trades you'll make of your account 3,000 account you'll make 2,000 $25 and again if you still have that 1 loss what you will have if you mitigate that law - less than your entire margin you'll make money on this account or you'll make money on the straight and same thing goes if you do do all nine trades at about 12% return and you do blowout you lose the entire margin which is very difficult by the way but if you lose the entire margin on the tenth trade you still at the entire month would be about breakeven you wouldn't lose you wouldn't make maybe after Commission's you might lose a little bit but you would not have blown out your account which I have seen happen way more time as I would like to so ladies and gent is all about controlling your risk in credit spreads so this is exactly how you do it you come up with your unit this is a risk unit so that's using eight of your account is how much you're going to give on any given spread then from there you come up with where the trade concerns you that's step one so step one and risk mitigation come up with where the trade concerns you okay well what the heck does that mean well let's say that Macy comes down to here tomorrow are you afraid are you concerned at all and you shouldn't be what if tomorrow Macy's comes down and closes right here and you get a big black bearish candle are you now concerned well probably a little bit okay why well because it closed below this trendline it closed below this support line and it closed below the wick of this candle that means it took out three of your checkmarks and pretty much one fail swoop so on a particular credit spread what I do is I always come up with my one place where I will look at the spread unless the spread gets down there I literally will not even look at it I won't even worry about I won't even open up my account to take a peek at it so in this scenario in step one I would literally write in I will not even look at spread unless Macy's closes below and I'll find out this price 62 on the daily chart that's what I call my you know my concern line I don't know what it's called but it's just that's the price that unless Macy's close below 62 I'm not worried about this why because that's where the trade has begun to go against you that's where this trades breaking down a little bit right ask yourself where would I go bearish on Macy's where would I go more bearish than bullish and if you say to yourself alright I'm looking at the chart and you know what if we closed below here I would go bearish on this trade if you say that and you can find that area that's a really really good point at a really good price for you to say oh okay well if I would go bearish there then I should really be concerned about my bullish credit spread so you come up with a line where you won't even look at it so unless Macy's closes below 62 you don't even care now let's say it does let's say the Macy's comes down and closes below 62 well that's just simply the prey the price would you begin to look at things now when I say look at things this is the part that takes practice and there's really no way around it and I apologize but this is not a get-rich-quick scheme it this is where you have to understand a little bit about sentiment you have to look at gaps you have to look at the hourly candles you have to look at candles themselves and you have to understand a little bit about the sentiment of the trade now that's where real-life trading and the trading floor comes in is because I take requests from anyone in the live room so if you come into the live room or if you're a student you want me to look at a particular spread and you email it to me look at that way but I take requests so if you're in spread you ever want help with the analysis on it I mean just sign up for the trading floor at some point and just ask us and we'll be happy to help you but the way it works is you do have to kind of understand a little bit about sentiment gaps and candles just do because that's the point that helps you know where you should where you should unravel and what I mean by that is let's say tomorrow morning Macy's opens right here well if you go to real life trading and you go look at gaps what type of gap is that if Macy's opens tomorrow at 62 10 what type of gap is that that is called a gap and go why because the prior candle is white and it is gapping below a support or a pivot line so if you're in a bullish position and the stock creates a gap and go and it opens you're probably going to want to start considering to get out of that position this is the part that comes down to the biggest and the hardest oftentimes to manage is the exit versus the unravel exiting a credit spread is when you buy to close the leg you sold I'll put the option make it more simple buy to close the option you sold and sell to close the option you bought exiting the trade entirely that's what an exit is so ladies and gentlemen let's say that this particular credit spread expires February 20th which it does and Macy's comes down comes down comes down and on the 16th it closes below your price where you now begin to look at the spread okay what do you do well in that case if you have two days left it's probably best just to exit the spread why well credit spreads work with time the more time that passes the more money that you make your goal is for the stock to be as far away as possible from the option that you sold at the date of expiration that's your goal so if you are coming with less and less and less time and the stock starts to get near where you're concerned it's often good just to simply exit that credit spread and mitigate your losses entirely just get out because if you're really really close to expiration and the stock comes into your quote unquote concerned line you won't lose a lot of money mmm the vast majority of the time because a Greek called theta will have already done its job okay so you won't be absolutely hosed on that trade if it's close to expiration you might lose a little but you won't you lose your entire margin in the millage or 'ti of cases okay so exit credit spread is you have initially when you got into this trade sold the 60 put you now go and you buy to close the 60 foot and at the same time you sell the 57 50 foot literally Xing the entire trade removing your risk taking off the table and you're done you're finished it's over trades gone you're protected everything is fine you're good to go call mom eat some crackers have some pretzels watch TV everything is fine now there is a difference between xing and credit spread and unravelling so here's my rules for exiting it's best easiest and less stressful to simply exit a credit spread in the week of expiration if your loss is the same as your gain that is a very very good rule to live by laser only so remember let's say that you were going to make eight your margin on this trade is 1875 okay that's your margin and three days before expiration the stock comes down and it closes below you're concerned line and initially on the trade you're going to make 10% of your margin or $187 now you're at a hundred and a seven dollar loss this ladies and joan is called a 1 to 1 risk to reward ratio you were willing to make $187 now you're down $187 the stock has passed you're concerned line if that's what you want to call it just exit the trade because all you've done is lost the amount that you were going to gain on the trade that's all you've done it's a one to one risk reward ratio and if you can do that on the tenth trade so remember 9 out of 10 trades usually go in your favor and there's that tint that goes against you that's really often times how it happens if you win the first nine and on the tenth one you lose your $187 you're going to make you're going to absolutely crush it that month you're going to do phenomenal you're going to grow your account four or five percent you know mathematically I mean it's a really really good month for you that is right there one of my plans like stick to that very very often it's best easiest and less stressful to simply exit the credit spread in the week of your expiration if your loss is the same as your game and sometimes if it's twice as much as your gain it's still sometimes a good quite a good thing to answer because really what you have to ask yourself is am I willing to lose $350 or would I rather lose 1875 remember and credit spreads your goal is to not lose your margin that is your objective and nothing else that's really your objective because numerically all the stock has to do is stay above 60 and you will make money stock does this this this this this this I mean shoot it can even do this you're going to make money as long as it stays above 60 on the day of expiration you will make your money on this trade the option will expire and we'll go to option heaven so always ask yourself how much am I going to lose on this trade and is it better taking this loss or taking the entire margin loss and if Macy's doesn't close below 60 - don't even worry about it don't even look at it move on and all as well so that's exiting and that ladies and gentlemen is my plan for exiting a credit spread if it's best easiest and less stressful to simply exit in the same week of expiration if your loss is the same as your gain now unravelling is where it gets fun unraveling a credit spread is best accomplished when a the stock has a lot of room to move be your how should I say this the time remaining on your spread is more than four days very important see there was a gap strong candle or a lot of volume giving the trade an edge and that ladies and gentlemen is as simple as it gets unraveling a credit spread is best accomplished when the stock has a lot of room to move the time remaining on your spread is more than four days and there is a gap strong candle or a lot of volume giving the trade an edge so what do I mean by that well again let's say that you get into this Macy's spread and the expiration is February 20th which it is and tomorrow Macy's opens at 62 what do you do do you exit or do you unravel and hopefully you said unravel because in this example there was a gap there's a lot of volume probably there's more than four days and the stock has a lot of room to move how do I know that well support resistance here's here's resistance your support here's target one and here's target two it has a lot of room to move there's not tons of things in its way if it gaps oftentimes and you have more than four days you're probably going to consider to it you're probably consider unraveling that spread now here's all you have to do when you unravel it's very very easy in this example you sold to open a 60-foot you bought to open a 57 put all you do is you go in and you buy to close the 60 put that's it you buy to close the 60 put getting rid of your obligation that's going to cost you money and now you have a fifty seven fifty put and now you're just hoping that the trade goes down and you can get out it's really about it it's that simple ladies and gentleman from there it just simply becomes a regular trade it becomes a regular bearish trade with a put alright so you have a put that doesn't have a lot of time on it so your goal is for the stock to continue lower and if it doesn't exit it at some point and if it does and you're beginning to make a profit on the overall trade exit it so here's the way it works and I'm going to put this numerically for you best I can if you originally sold the 60 put you sold to open you would have brought in and let's just say this is a high pathetical figure but it's probably pretty close you would have brought in about I don't know let's just say a dollar a dollar of premium now you can see right now a Macy's if you do this exact trade to bring it in like eight cents that's why we're not going to do the trade of Macy's but you would have brought in a dollar of profit make this green now the closer to expiration it happens the less it costs to buy back so what I mean by that is if this sock gaps down here tomorrow this option would probably cost you three dollars to buy back if this gap happened I don't know the 13th of February it probably cost you about a dollar 20 to buy back it depends on how close you are to expiration and how much money has been lost on the spread because of the time decay so as long as the stock stays above 60 you're going to make your money on the trade if you again if there's a lot of time on the trade left it's going to cost you more money so this is the way this works it's very important to keep an eye on how much it cost to buy it back because it's going to cost you money this is money it's going to come out of your account so if you sold it for a dollar and you're buying it back for $2 for three dollars you're losing $2 per contract in your account so if you did 210 contracts that's a thousand a thousand shares you would be losing $2,000 true story okay you'd be down you'd be losing money however you have a put and that put now okay when you bought it you spent money and when you spent money you probably spent less than a dollar so I'm going to say you spent 75 cents that's how much money came out of your account so ladies and gentleman let's say if the stock gapped down and opens here and goes from 60 you know it opens at 62 you have to buy to close the $60 cut did you so and it's going to cost you money however you were originally bought at $57 put as well that put is going to go from $75 say five cents to approximately a dollar twenty-five so it's going to increase by 50 cents so so far you're really only down a dollar fifty so far which is good right you're mitigating your losses therefore your goal is for the stock to go down enough so that you can do what well you have a put your goal is to sell to close the 5750 put that's what you do you sell to close the 50 to 50 put at some point and your goal is to do so for the difference in price so you want to move up another dollar 50 which is at least $2 in singing 5 cents that's what you do so when you originally by the put it costs you 75 cents when you originally sold the foot you brought in a dollar that gave you a 25 cent credit aka 10% return on your investment because your margin is two dollars and fifty cents right the difference between sixty and fifty seven fifty is two dollars and fifty cents if you're making twenty five cents on the trade that is a 10 percent return so in this example you sell the $60 pullet you bring in a dollar you bide the fifty seven fifty foot and you cost you 75 cents you're not going to touch this trade at all unless it closes below 60 250 well by golly the stock market gods are mad at you the next day the stock opens at 62 fifty and you say all right Jeremy says there's more than four days in the remaining in the expiration there was a gap there was a strong candle there's a lot of volume and the stock has room to move I'm going to unravel the spread so you simply buy to close the $60 foot that's all you do you buy to close the $60 foot and you're done now all you have remaining is this particular put that has already increased a little bit in value and you're hoping that since you analyze this as a gap and go you're hoping that Macy's continues lower and you can sell to close the 5750 put for X amount of dollars your goal is to at least break even on this trade that's really your goal sometimes you can do much much much better I mean let's say hypothetically that this was a gap and go boom tomorrow and Macy's comes down to $56 okay by the 18th of the month you'd have a pretty good value left in your put it would be worth more than 75 cents guaranteed so that's how you unravel a spread and you don't even worry about unraveling or exiting if your line does not get crossed so let's go ahead and get rid of some of this and I hope you guys enjoyed that information it does take a little bit of practice is of course but let me do something I'm going to show you I'm going to show you some credit spreads that I have going on right now so you guys can see what I'm referring to okay let me go to iw in an iawn here is my exact thing I just told you guys about I have a 112-111 bull put spread I will not even look at this spread unless it closes below one 14:20 on the hour here's one 1420 we have not closed below that price therefore I have not even looked at this particular spread the 112 spread is right here so ladies and gentleman let's say tomorrow I have a 112-111 put and tomorrow morning iw a.m. which is the Russell 2000 has a huge gap and we open right here at the redline would I unravel or would I exit and the answer is I would be looking to unravel because I have more than four days to expiration it happened with a gap and there's not a lot stopping IWM if we break the support line if we break the support line there's a really really good chance it's going to come down you know who knows how far but it's likely going to come down now I have the same the same strategy up at the top this is called the bear call spread and I have the 123 122 bear call spread so since I have both of these on it's actually called an iron Condor so my spread of this is I'm not going to look at the spread list we close above 1959 1 9 19 119.50 which is right here so we're getting close to that but it hasn't happened yet so unless it happens I'm going to look at the spread consider it not worry about it everything's gonna be fine however I have that particular price I have this particular line so I have two lines holding this bear call spread back from being prophetess I have this resistance right here and I have this blue line right here and you guys can see this blue lines been a pretty strong resistance for quite a while so boom boom boom so the closer we get to expiration I'm going to need IWM to close above 120 57 for me to even be concerned because 122 is the option that I sold and 122 is right here so again if IWM closes really strongly above this resistance line tomorrow I would likely be getting ready to unravel because there's nothing stopping IWM if we close above this resistance there's nothing in the way and I have time and if it happened with a good gap a good volume in a good candle and I have time then I would unravel if I don't have time what do I do I just exit the spread so this way when you guys by the time you watch these videos you'll see if this trade worked out bottom line if IWM is below 120 to and above 112 on February 20th I made about a 23 percent return and about three and a half weeks not too shabby let's look at another one this is Adobe this is one that we've been in for a while and again 67 50 65 bull put spread bringing in 30 cents so ladies and gentleman true or false this particular credit spread brought in more than 10 percent ROI the answer is true 25 cents would have been 10 percent ROI so here was my my line 68 83 if we closed below 60 83 consider unraveling why who can tell me well that's because you have a resistance you have a level you have a gap you have the support you have a wick you've all kinds of stuff holding it up right here so if Adobe closed below 68 83 there's not a lot holding it back so I would consider unraveling it if we just simply closed bow that price but right now looks like everything's gonna be just fine on that particular spread let's go do one more Manas Santo Monsanto same thing I had a 113 112 February week 1 bull put spread that expires this Friday so in about 3 days I also have a 123 125 bear call spread so again notice you have a resistance right here and you have a support right here these lines in blue these are my lines that I'm watching if it gets above and if it doesn't I'm not going to worry about it so 114 65 if we got below mono Santo at 114 65 I looked at it and this is 123 and if we get above there I'll look at it otherwise I'm not going to touch the spread imma let it do it's going to do and that's that LinkedIn was the other one so again you guys can see these are examples oops LinkedIn expired last Friday sorry about that well anyway I had a bear call spread up here and we had a bull put spread down here and both of those expired last Friday there was an iron Condor and that was approximately 15 percent return so let's see if I can find one really quickly that is expiring SP y no SP Y probably be really good one here's what I would consider doing on SP y and you guys can set this one up and look and see how it worked out but bottom line what is the intermediate and primary trend on SP y if you're saying bullish to sideways I agree 100% that's why it's time for credit spread so we're going to want the credit spread below this support level as far away from the credit or as possible so the fact that we have a gap right here the fact that we have a bullish candle the fact that the stock is above the support those are three check marks spread to be below the 100 and 200 simple moving average that's three checkmarks we're also above the 10 to 20 to 50 so this nine checkmarks ladies and joan on the spui we're done so let's hop over here to the SP y and let's find out a credit spread we're going to a bull put spread since the primary trend is bullish to sideways we're coming here to February 20th and we're going to get as far away from the stock as possible so the stock is going to come down here and we're going to do a 190 let's see 196 195 bull put spread and if we do that at market tomorrow that's going to be bringing in approximately seven cents seven cents on the dollar is 7% return for three weeks remember I said my kind of cutoff is about 8% so what I would do that situation is I'll do a 196 195 bull put spread I would do that for a limit of 8 cents and I would simply say I will not even look at this spread unless we close below 197 51 on the daily so keep that in mind as far as your practice is concerned of just when and where to enroll and I'll show you guys the most recent unravel the credit spreads on mu and on mu we were in a 28 27 bull put spread that's a that was expiring this week and we unraveled that particular spread based on the gap and the candle and the volume back here so right now we are breaking even on the spread or losing very very little bit so since we unraveled the spread right which means we had a 28 27 bull put spread we bought to close at 28 and we still are holding on to the 27 we're still holding on to that we are and we can put a stop on our $27 put that we're still holding in the stop is 29 11 that's the stop price for the put so if right mu does not continue to go down if mu does go up we're going to exit out of our 27 put that we're holding on to and bottom line we will have taken a loss on this bull put spread but it was absolutely without question less than the margin if I had to be honest if we were to overall the margin was $1 I think you know if if mu goes up this week we'd probably end up losing about 35 40 cents on the spread so a little bit less than half of your margin and truth be told this is the first credit spread that we've lost in about a month month and a half and I set up probably about 30 credit spreads a month so I think we've gone to or break even which we're both on Netflix 27 have been profitable and this will be the one that we're going to lose on if it goes up if it goes down this week we still have the opportunity to make a little bit we're probably not going to do very well but if it just absolutely free Falls will do very very well but right now on MU we're not looking bad so again if we have just 30 cent loss as long as you lose less than our margin ladies and join that is the key and I truly do suggest if you ever have any questions about unraveling you know join the trading floor ask questions you know get your hands dirty practice do a lot of virtual trading and the truth of the matter is ladies and gentleman it just takes time it takes practice but it takes creating a plan so write down what your plan is on any given credit spread simply follow it and I really do hope this video is beneficial if you have any additional questions any time feel free to reach out to me at geremy at real life train com I do and truly enjoy you taking the time to watch this video thank you so much have a great day tell everyone you know about real life trading because guys we're giving away this information for free this video by itself is worth at least $400 in value I know countless companies that would sell it for more than a thousand so just understand that we honor we want to enrich lives we want to educate and help people from all over the world and it all starts with you and the word of mouth and you giving people the information of your life trading and sharing it widely so thanks so much guys have a great day like us on Facebook subscribe to us on YouTube follow us on Twitter and until next time remember love life live life and trade it I'll see you later

Channel: Real Life Trading

Views: 90,770

Rating: 4.7853808 out of 5

Keywords: reallifetrading, day trading, day trading tutorials, stock market, how to trade, free day trading classes, jerremy alexander newsome, real, life, trading, option strategies, candlesticks, proprietary trading, Howto Trade

Id: DhuRZFQFejA

Length: 57min 52sec (3472 seconds)

Published: Wed Feb 04 2015