An Effective One Day Options Strategy

there's some cool option strategies that our desk traders are taught that can set up on that particular day and every month when monthly options typically expire which is the third friday of each month hi i'm seth freuber the head trader of smb capitals options trading desk here in manhattan and the best desk traders at smb are trained to learn how to express their directional views on stocks in many different ways and they've got the skills to apply them at the right time in this video we're going to focus on a really interesting strategy that you can trade on monthly options expiration so stick around i think you're going to find this fascinating [Music] hi i'm seth friedberg and i'm the head trader of smb capital's options trading desk smb capital's proprietary trading firm located in midtown manhattan and we provide capital for options and equity traders from all over the world trading both remotely and in our offices here in new york city now i'd like to suggest that you click on our subscribe button right now so that you don't miss any of our free trading videos that we produce for traders and investors all over the world they're really very valuable okay so on most stocks for which there's active options trading there's a weekly options chain that can be traded and that chain expires each friday but traditionally for you history buffs you dinosaurs who were alive before weekly options were introduced more than 10 years ago the third friday of the month was actually the only options chain available in that month and so that one options expiration was known and still is known as a monthly options expiration even though it's actually in the middle of most months and so as a result of that the fact that the monthly chain was traditionally the only available options chain for many years there's a tendency for that particular expiration to have a larger than normal open interest in options which means the total number of options contracts that are being actively traded for any particular option strike price now we'll get into the details of the importance of the open interest on options expiration day in a minute but before we do that we need to make sure that everyone watching this video has a good handle on the way stock options work if you already know this stuff this will be quick don't worry and then we'll explain how this strategy works so what is known as a call option on a stock entitles the buyer of that option to purchase 100 shares of that stock at a certain price called the strike price of that option regardless of what price the stock is actually trading at what's called a put option on the other hand entitles the buyer of that put to sell 100 shares of a stock he owns at the strike price of that put option again regardless of what price the stock is trading the buyer of the option pays what's called a premium to the seller of the option because the seller the option is taking the risk the stock will go past the strike price of the option in which case the buyer can exercise his options so in the case of a call even if the stock has gone way above the strike price of the call the call buyer can exercise his right to buy 100 shares at that strike price in other words he's entitled to buy the shares way below the market in that example he could flip them the next minute and make a huge profit on those shares in that case or conversely on the put option even if the market goes way below the strike price of that put the buyer of that put option has the right to sell his shares of that stock at that strike price of the put that has that he's bought even if the stock price has gone way below the strike price of the put which of course saves him a lot of money compared to whether he didn't own the put and he's stuck suffering a much larger loss on his shares because their price has gone way below what they were worth before but he had no protection against that happening on the other hand if on the expiration day of an option the stock price closes below the price of a particular call then that call has no value because the owner of the call would never exercise the right to buy shares at a price higher than the shares are worth and by the same token if a stock closes on expiration day above the strike price of a particular put then that put expires worthless also because no owner report is going to exercise his right to sell shares below the market price of his shares and so that option is also worthless okay so with that in mind let's take a look at the open interest in other words the amount of actively traded options contracts at each of the call strike prices set to expire that day and as you can see the tesla 450 call strike has a huge amount of open interest over 24 000 options contracts compared to about half of that at the 440 and 460 strikes all the other strikes you'll notice have small fractions of the amount of open interest of those three strikes but the clearly dominant strike is the 450 strike now before we get into how we're going to use that information to formulate an options trade that can be very profitable on expiration day i wanted to let you know that beyond what we're teaching you in this particular video there are a large number of sound viable long-term techniques for trading options for income and in fact we're currently running a two-hour free workshop at the moment where we'll be teaching you three of those strategies that real professional options traders use including a really simple but incredibly effective strategy that some of the greatest investors in the world like warren buffett use all the time plus an options trading strategy that has a statistical 80 probability of profit month in and month out plus an option strategy that you can employ with a stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down a small percentage so if those strategies would be of interest you then you should check out the free options place that we're currently running just go ahead and click the link that should be appearing now at the top right hand corner of the screen that will open the free registration page in a new window so don't worry you won't lose this video or you can just head on over to optionsclass.com to register for this free intensive workshop it's a rare opportunity for retail traders and investors to learn directly from wall street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it now that we've seen that the highest open interest was at that 450 call strike of tesla you may be asking why is that important and the answer is that there's a theory in the options world that on the day of expiration the market makers who sell a large amount of these call contracts get into a dangerous situation on expiration day if the market reaches the price of a strike with a huge amount of open interest because those market makers may well have to sell shares of tesla at a price of say 450 and if tesla a very hot and volatile stock decides to blow past 450 and rally way beyond that price those market bankers would be forced to deliver a great deal of tesla stock at 450 and they could conceivably take a large loss on those shares so the theory goes that market makers will tend to protect their positions by buying up shares of a stock as the stock price approaches a dangerous high open interest strike like the 450 in the case of tesla and so this theory which is known as expiration day pinning suggests that on on expiration day the market makers will keep pushing the price of a stock to the price where there's the greatest open interest because they're buying it so heavily to protect their large call positions and they're doing that so that this buying pressure pushes prices right up to that level in other words it pins the shares to that price towards the end of the day basically purely as a technical result of the fact that the options market makers have to buy those shares to protect themselves around that price okay so this trader his idea was to enter into what options traders refer to as an iron condor an iron condor is basically a four legged options position where your shorter call that is above the market combined with a long call that is farther above the market for protection further combined with a short put that is below the market with a long put even farther below for protection to the downside the combination is known as an iron condor now you'll see shortly why the trader decided on this trade but before we do that let's look at the cash flow implications of what we've done so first off we sold the 465 calls for 452 but those represent 100 shares of tesla so you multiply that by a hundred and we sold 10 of those so the total cash income from selling those calls was 45 20 as you can see from the calculation we sold the puts for 2.23 cents as you can also see and that brings in similarly 2230 as you can see from the illustration now we bought the protection the 470 calls and the 425 puts as well so those cost us some of that cash that we brought in so if you net it all down the iron condor trade net of everything generated cash flow of two thousand and sixty dollars now your broker would require you to put up 29.60 for this trade incidentally which also is the largest possible loss that you could suffer if the trade goes wrong now let's take a look at a chart of tesla that day and you can see tesla actually opened right around the predicted pin strike but then it subsequently sold off and then ultimately rallied all the way back to about 450 before a last-minute sell-off down to 442 to end the day so there clearly was some buying pressure towards the end of the day although in the last 15 minutes that buying pressure backed off a bit and so while the price didn't exactly pin to 450 by the end of the day there was clearly buying pressure towards that strike in the final half hour so whatever the cause of that the fact is that we built a trade around that price and the stock closed not too far from that price so let's analyze the implications of that on our trade well first off it's key to realize that tesla has closed at 4 42 on the day that all four of these options expire so let's break it down option by option well the 470 call obviously expires worthless because we clearly are not going to exercise our right to buy tesla at 470 when we could buy the shares in the open market for 442 and of course the same is true for the guy we sold those 465 calls to that will go those will go on exercise also for the same reason and therefore expire worthless the 430 put that we sold well that has no value either because obviously the guy who owns it he would not exercise his right to sell his tesla shares at 430 when he could sell them in the open market for 442. so that put as well as the protective put that we own both of those expire worthless as well for the same reason and so all four options expire worthless and that initial cash flow of two thousand and sixty dollars is ours to keep you see we have no obligations to buy or sell any shares because not one of those options made any sense for anyone to exercise and so we just simply pocket that initial 2060 of cash flow which provides us a return in one day of slightly over 70 percent on our risk so what we'd like you to take away from this video is that professional traders develop a thesis around a trade such as this in this case the thesis was that the large open interest at tesla 450 that call would lead to an end of day pinning at that strike with that thesis the trader built an iron condor such that at any price between 430 and 465 all of the options expires worthless because the calls at any price below 465 have no value and the puts at any price above 430 have no value and so at any price in that 430 to 465 range all four options simply die and you keep your cash flow so while in this case tesla didn't finally pin exactly at 450 as was the trader's thesis he wisely gave the trade some room so that if the buying pressure towards the 450 strike eased up as it did at the end of the day there was still plenty of room below and above 450 in that winning range that we just explained was the winning range for the trade in which all options would expire worthless successful professional operators have the knowledge to construct trades around their trading thesis and in this case earn very strong winning trades when their thesis is correct or correct enough for maximum gain as it was in this example now just to remind you as i said earlier if you enjoyed this video and learned something valuable from it and would like to learn the details of three real world options strategies that professional options traders use all the time then you should check out the free options class that we're currently running just go ahead and click the link that should be appearing now at the top right corner of your screen that will open the free registration page in a new window so you won't lose the video don't worry or just go ahead to optionsclass.com and register for this free intensive workshop it's really a rare opportunity for retail investors and traders to learn directly from wall street traders but that's exactly what you'll be getting through this free online workshop so click the link to sign up now and don't miss it and please don't forget to click on the subscribe button right now so you won't miss any of the free trading videos that we're posting constantly on our channel to help you to improve your game as an options trader

Channel: SMB Capital

Views: 38,707

Rating: 4.9071255 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, one day options trade, options strategy, iron condor, trading options, how to trade options, day trading options

Id: rHFJdAw4PtQ

Length: 13min 46sec (826 seconds)

Published: Fri Sep 25 2020