BETTER STRATEGY THAN USING CALL CREDIT SPREADS? | EP. 100

hey what's going on YouTube and welcome back to Tech conversations I'm your host kmo it is November 11th hope you're all having a great day today as you can see it is a green day for me up $270 today or about 2% so we'll see what the rest of the day brings us now in today's video I want to talk about one of the best strategies to use any bare market I'll go over how to set up this strategy and why I really like it so before I get into that all I ask is that you guys hit the like button down below and subscribe guys it really helps out the channel goal here today is going to be to benefit from bearish behavior in the underlying stock with limited risk so you think the stock is going to drop in price in this will have limited risk I stay away from strategies that have unlimited risk I suggest you do as well so the ideal situation here then you're pretty bearish on a stock you believe the price of the stock will go down you would like to make as much money as possible on the downside and so one bearish strategy that a lot of people like to use is the call Credit spread this going to be one of the more popular strategies people use uh when they're bearish on a stock and so I actually want to start with that strategy right now and then show you how you can modify it to even make it a lot more powerful keep in mind the call Credit spread is a bearish strategy and it's going to be very similar to selling calls so let's go over to ticker symbol Li this is going be leato I'm going to use the stock for today's example keep in mind this is just an example so don't copy this exact same trade now again before we even go into the options for this stock two things we need to check first thing is commission fee reason being that we are going to be opening and closing multiple contracts now Robin Hood doesn't have any commission fees other Brokers do that might eat away at a lot of your profit that's why you need to check commission fees first but again Rob doesn't have any commission fees so we don't worry about that on here second thing dividends why do we care about that because we're going to be selling options anytime that you sell an option there is risk of assignment we want to avoid early assignment early assignment is generally related to the X dividend on a stock that has a dividend now le AO doesn't have a dividend so I wouldn't have to worry about it on the stock but let's say we were using a stock that does have a dividend we could go over to something like n dq.com let's say for example we were using Walmart we could go ahead and search for Walmart here WMT we would click on it on the left here we would go to dividend history this would show us when the X dividend date is for the stock and so the next X dividend date is going to be December 9th and ultimately we would not want to sell options that expire on the week of the X dividend if we did we'd want to close out two days before the X dividend but again Le AO does not have a dividend so I don't even have to worry about it for this stock so let's actually go into the options here and again we're going to start off with the call Credit spread which again is one of the most popular strategies I'm sure a lot of you guys have used this and let's see how we can modify it again to make it even more powerful so call Credit spread like the name suggest is going to involve call options right so we're going to stay here on calls for now and ultimately first thing we want to do here is choose a proper expiration date so let's say that by from now until the end of the day tomorrow I believe leato will go down in price so I can just leave it as November 12th for my expiration date again you would choose a proper expiration date uh you know for whatever it is that you know you you're thinking when the Stock's going to drop now the next thing we do here with we call Credit spread is you try to determine what price you believe this stock will be under by the experation ation date right and so ultimately what we're going to do there is let's say we think that by you know the end of the day tomorrow Le a will be under $30 what I would do is I'm going to switch over to sell and I'm going to sell a call at that strike price or any strike price that's as close to that price as possible so if I think leato will be under $30 by this expiration date I would start by selling a call at that strike right so again this this strategy is very similar to selling calls now since you don't actually have 100 shares here to sell call what you do instead is you switch over to buy now and you actually buy a call and this call that you're buying acts like if you had a 100 shares and ultimately you want to buy this call with a higher strike than the call you just sold so we just sold a call a $30 strike we got $79 now we need to buy a call since we don't actually have have 100 shares to use covered calls and it's going to have to have a higher strike so I'm just going to go one strike above to the $31 strike and I would buy this call right and this is a call Credit spread here again I'm sure a lot of you guys use this strategy uh and it can be very powerful and this is what it looks like so we're going to get a credit here right you're going to get a premium of $52 in this instance and that's going to actually end up being your max profit that's the most you can make whatever the credit is that you receive which again in this scenario is about $51 Max loss is $49 so I'm risking about $48 $49 to potentially make $ 5152 right uh and so you know you guys can uh you know determine what you know if that's a nice risk to reward or not but ultimately that's what this call Credit spread is going to look like so the first thing I'm going to do here is I'm going to go over to uh option Strat and let's just quickly take a look at the what this looks like so let's go to build here and again this is the call Credit spread or the bare call spread so we'll go there and then again we're using ticker symbol Li which is leato and then let's go over to uh the expiration date we chose which was November 12th again we solely call at 30 the 30 strike since we think that this stock will be under 30 by the expiration date and then we bought a call right above it right so this is actually the same one we just uh set up over there on Robin Hood so we're getting a $54 credit that's also the most we can make here Max loss is 46 but again the problem with this right the biggest problem here is that your profit gets capped very quickly right as soon as this goes under 30 it doesn't matter how much more the stock drops that's the most you're going to make is going to be $54 so if it's $54 uh if it's at $30 tomorrow you're going to make $54 right at 29 tomorrow you're going to make $54 if it's that $25 tomorrow you're still only going to make $54 that's where the downside with this strategy comes is that no matter how much farther down it goes after the 30 after it you know goes down below 30 you're still going to make the same amount of money so let's take a look at what we can do here then to switch that up to basically uh make this more powerful so that we can end up making more money so let's take a look here now since we are getting a credit here a premium we can to ask ourselves how can we improve this because again our Max profit here isn't the best so what we can do is we can enter into an additional play now at no extra cost to us the reason it's going to be no extra cost to us is because we're going to actually be using the credit that we're receiving to enter this extra play right so we're going to use this credit we're receiving this premium Now to actually buy and out of the money put option and this put option should cost less than the credit we're receiving so I'm going to go now to puts here and I'm going to buy an out of the money put option so remember out of the money is where the strike price is under the current share price so these are all out of the money and again we need to look for one where the premium is less than the credit you're receiving right so I could actually just do this one right here at $30 strike because only have to pay $27 that's less than the credit I'm receiving which is $49 so ultimately we still want to enter this play for a credit uh but it's going to be less credit but let's take a look at what it does by buying this put option here so I'm going to go ahead and uh click add here and so we're still getting a credit we're still getting $22 here but now take a look here at our Max profit Max loss take a look at how much it changed so our Max loss went up to $77 remember used to go it used to be $50 so it went from 50 uh to 77 So Max Max loss is a little bit higher but now look at our Max profit our Max profit went from also being $50 to now over $3,000 right why because we bought that additional put right here which now basically gives us unlimited profit potential on the downside up until zero because a stock can only drop to Z and so uh our Max loss went up a little bit but our Max profit increased dramatically here and our break even went up a little bit as well so let's take a look at what this looks like now so let's go to a new uh tab here on option Strat so we'll go to build again we'll start off with uh starting with the call Credit spread and then we'll add that additional play so again with the call Credit spread we sold the 30 call uh we yeah we sold uh we sold this is palent let's go to Le Auto here so we sold a 30 November 9 uh November 12 we sold a 30 call here about the 31 call so this is what it looks like and then we went ahead and we bought a put uh and that put costs less than the credit we're receiving so we bought the 30 strike put so now looks like this we're getting a credit of $22 Max loss goes up a little bit if we take a look over here Max loss over here was 50 bucks Max loss over here is $78 so went up a little bit but now look at our Max profit it's now $3,022 we're over here uh it's only going to be $50 break even over here 3050 break even over here 3022 so our break even drops a little bit but now we have so much more potential that we can make on the downside right so let's say for example Le AO really drops tomorrow and it goes to let's say you know $28 over here now I'm making $222 whereas over here if it drops to $28 I'm still only making $50 so by adding that extra additional play very simple play and again at no additional cost to us since we're using the credit received we can increase our profits dramatically uh as the stock continues to drop we no longer have to cap off our Max profit like we do with the call Credit spread so as you can see that can be very helpful here uh and if you guys have any questions about anything I just talked about feel free to leave them in the comment section below check out the Discord link to it in the description below hope you enjoyed the video let me know what you guys think and I will see you guys next time

Channel: TechConversations

Views: 37,295

Keywords: credit spreads, call credit spreads, option trading strategies, robinhood, credit spread robinhood, credit spreads explained, call credit spread on robinhood, call credit spread strategy, call credit spread, call credit spread explained, credit spreads options strategy, bear call spread, bear call spread strategy, bear call spread robinhood, bear call spread example, bear call spread option strategy, call credit spread risk, bear call spreads, trading options, options trading

Id: ywxuIE9wEIU

Length: 11min 45sec (705 seconds)

Published: Thu Nov 11 2021