Dan talks how he sells Short Strangles for Monthly Income.

[Music] and shared in TV time [Applause] [Music] good afternoon ladies and gentlemen and welcome to another installment of Sheridan TV my name is Johnny and as always thank you so much for being with us today today is Tuesday August 22nd the 230 fourth day yeah of the year we are joined today by mr. Denman Sheridan who will be chatting with you guys a little bit about how he sells short strangles for monthly income if you have any questions as he's working through the content just scroll down let's do a little chat box underneath the video box and we will answer your questions mr. Sheridan Oh young Jan hello everybody know her talk today about the Boston Strangler since the Boston Strangler short strangles and how I would do it we could talk about that the Jack Lemmon or I mean them what's the day I mean did that movie I'm sorry glad I do we ask you well sure but there was a movie it anyway it is a movie yes I focus or educational purposes today nothing can be we can say can be used against us in the court of law or in the court of public opinion or wherever and in other words you can say whatever we want all right you guys exactly right all right so first of all couple things I want to point out and my little whiteboard here I think we're about SPX is around 24 48 right now if not that's where it is I'm talking it was Tony Curtis brother and so what you say he was Tony Curtis by the way Tony Curtis need the Boston Strangler was he really I don't picture him as that but I guess he could get a little psychotic so folks in the last what two three weeks have gone from a high in the SPX of 24 90 I think we've gone we could dipped a little bit below 24 20 24 17 which is what maybe two point I don't know I'm just guessing here two point seven percent and then today we've pumped up big move up today by 18 points wherever in the SPX or near 24 48 pump up the volume so we're around this 24 48 so did we get the 5 or 7 or 8 percent correction that we have all been desiring no not yet um and so we basically went down about 2.7 percent a little bit from 2492 24 17 and then today today we came from that that we close to 24 17 last night but this is where we're at today so kind of now in the getting approaching of the middle of the range over the last two three weeks and that's where it is so I mean we can't correct no but it's just right now where we're not in VIX going back down a little bit that's what a market is and we're going to talk about short strangles today and just again I'll just point it out if the stocks at 100 short strangle is you're just selling it out of the money put they sell 190 put and then sell one 110 call so short strangle selling an out of the money call and an out of the money put why would somebody do that for income you know it's a kind of a probability trade you're saying okay as long as the stock is between 110 and 90 at expiration whatever we sell the strangle for the premium of the call on the put we keep there's a lot more that goes into it than that but that's the general gist of it and so we're going to go over today and if we're starting out selling the 90 put sell and selling the 110 call with the underline at 100 we're going to talk about today how I would sell the strangle and you know just giving you a sneak preview I normally wouldn't sell the out of the might call input because it costs a lot of capital to sell make adoptions that's the main reason and so when I talk about what are some ways a couple ways today that I would sell a strangle or strategy where the foundation is the strangle one of them is okay if I do a if I buy my options or my hedges against my short call and put if I do them in the same month but let's say I buy against the 110 calls the 120 calls and against the 90 puts I buy the 80 puts well what's that called out of the money call put credit spread and call credit spread to the iron Condor but we'll also talk about when the volatile is maybe our very low instead of buying my Long's and the same month as my shorts maybe I'll go out a month or so and buy my Long's and a further out expiration and I can even buy my Long's maybe a little bit lower strike or further out and something I would do maybe in a low-volatility environment so we're going to just talk about today couple ideas and how I would sell strangles and of course why so if you look at as well here's a short strangle and so here's a real example with sp exid you know I took this today around 24 42 here I'm selling a 2500 call and a 23 35 put and let's say in this example my deltas are the short strike or 14 each 14 Delta just means there's only a 14% probability that we're going to finish through my short strikes at expiration and we're doing a SEP 22 expiration so I think SEP 22 is about 31 days from expirations like a 31-day short strangle so the idea is at expiration between your short put in your short call you make money at expiration as it goes beyond those points because you have no protection you start losing but the bigger problem is if you look at an irregular margin account in a brokerage firm now this is just an example from thinkorswim it's showing me my margin or capital required to sell one strangle at about a 1070 credit so I'd be bringing in you know almost $1100 but I got to put up capital of two hundred and seventy six thousand that's nuts right and and so I don't want to put up that much capital because you say Dean even if you had the capital would you would you do it no because your yields are going to be lower when you use a lot of capital and to use that kind of capital your yields won't be as high so again a short strangle is a probability trade you're selling it out of the money put there's a twenty three thirty five so on out of the money call 2500 and as long as we stay between there I'm your credits going to decrease and you should be able to buy it back at some bit less than that and again a 14 Delta is just making this a high probability iron Condor and that our calls and puts a pretty far out of the money again a 14 Delta um signifies that is a very small probability that SPX will finish beyond that strike in the period of time and this will be 31 days oddly enough when you when you add a 14 Delta of 14 Delta together it's 28 28 from 100 would be a 72 this is a 72 percent probability to expiration of getting the whole credit if I'm saying when you look at probabilities because technically I know you can say well I can't lose in both sides but that's how they do the probabilities when you're when you're doing two options they add those together but the bottom line is it's a good income generation trade but again I don't like to do naked options on a portfolio margin account which some people have that just kind of a risk based account now with a minimum of like 125,000 at your brokerage you could do it and and it will require much less capital to put up but then as it goes against you uncle guido will come to your house and ask for more margin I looked at a speaking of Uncle Guido I looked at I don't know what site yesterday he had the top hunter movies of all time and you could tell by what they picked is number one number two and number eight that the people doing this were demented people because like myself because number eight was Goodfellas number one was Godfather number one number two was Godfather r24 was Shawshank whatever yeah charging good at redemption so I don't think in most people I know on my wife's top movies one two would not be Godfather wanted to like say that really who they are been at for them so so let's go from the short strangle I wouldn't do it because the margin but okay if we stay with these same strikes or teen delta call and put let's turn it into a iron condor you're not answering you're you're sure yeah you must be psychic because the couple questions under what about the iron Condor yeah so here here's the short strikes the same short strikes twenty five hundred and twenty three thirty five or teen Delta's here's the current price and all I'm saying is hey in the same expiration SEP 20 to 30 one days out I'm going to buy the twenty five ten calls against the twenty five hundred shorts and I'm going to buy the 23 25 puts against the 23 35 this is giving me a credit of $2.15 which margin or risk is 785 you just take the width of the spreads a thousand less your credit so for every one contract it cost me seven hundred eighty five dollars they bring in a credit of 215 so by doing that instead of putting up two hundred sixty thousand dollars for the short strangle I can do this or seven hundred eighty five dollars and I don't know where you come from folks but I'd rather put up seven hundred eighty five dot dollars and two hundred sixty six thousand unless you're like an oil baron in Texas or something yeah that knows to do yeah um the VIX is eleven point six three but my deltas on the spreader minus three Delta's for every one contract and a little bit short Delta's but that's okay against the short you know maybe normally I want to be one or two Delta short on this but volatility is an ant Bulow's and it's short Vega which just means that it as we go down and the volatility goes up I'd like to be a little bit short Delta to offset that Vega pain I could take on the downside interesting enough when I'm doing an iron Condor with the same Delta where my short strike is a symbol for Delta where my short called Delta is fourteen in my short put Delta is fourteen it will be equidistant in other words if you look at the price of the underlying which is right here 24:42 are short calls at 2500 is 58 points out of the money in our short puts with the same Delta 23:35 with the price of 2442 for the underlying is 107 points out of the money so even though they both short strikes 23 35 it's the graph at expiration 2500 the puts when you do a same Delta iron Condor I call it a traditional iron Condor you get about double the distance on the down side than the up side and so that's how it looks at expiration this is your graph today so you can see today with the price being here as you go up it's tougher on the upside than the down side over the short term the first day or two so you have to be careful but generally one when I set up this type of an iron Condor I call it same Delta or traditional iron Condor it would be when we're kind of in the upper end of the range and you're volatilities are a little bit lower so you know now we finally rallied off this 80 point move down from 2492 24:17 we've come up today to 2442 I think as we start getting up near 24 60 in that area 24 70 2475 within 25 points of the all-time highs and VIX gets down under 12 I would do this more of a traditional iron Condor um where I picked the short strikes by getting them the same delta again here I picked 4 I wanted a higher probability iron Condor maybe at 10 Delta now is the underlying was lower you know if we're closer to 2400 in the SPX of yesterday or before I would do a little more equidistant iron Condor so I'd want a little more room you can see here's the underline we have this much room to the upside a lot more room to the downside as the vixx's maybe over 14 or 15 and SPX is near the 2400 level I'd want a little more equidistant so I would instead of maybe a 14 Delta call 14 Delta put I might do maybe a 9 Delta call and a 16 Delta put that it make it a little more equidistant anyways so that's iron Condor low probability now the last thing would be there's a double diagonal so let's say that when the VIX is particularly you know in the area of 9 to 12 I'm or consider the double diagonal VIX is 13 or above maybe look a little more at the iron Condor but the double diagonal again I'm selling an out of the money call and put in this instance when I get into the double diagonal I'm going to sell calls and puts that are closer so here I'm selling a column put that are closer than I used with an iron Condor I'm selling a call 2480 call with us at 2443 with a 27 Delta and the put with a 29 Delta which would be the 2400 so generally with a double diagonally I'll have my call and put a little bit closer in this instance I'm doing it for a 2 dollar credit and my margin which in this case is the downside risk about $2,800 so what you've seen here as I'm selling a Sept 22 24 and the Sept 22 24 22 is 31 days until expiration and then I'm going out 14 days and my puts and calls on the put side I'm going 30 points and the call side I'm going 25 points up a little narrower on the upside to get the deltas can within that three Delta's or less range if I did the call side thirty wide instead of twenty five wide I'd be shorter Delta's so when I get the deltas in they're kind of two to three area so again you have a graph that looks like a double diagonal right here's the underlying 2443 here's your short call twenty four eighty in your short foot 2400 um and again I'm selling my shorts SEP 22 x per a Schnoor 31 days till expiration and the oxic songs are 45 days out there's two weeks between my logs in my shorts my call width is 25 I put with is 30 and again I'm buying my Long's the expiration is fourteen days beyond my shorts and in this particular one I'm doing it for a two dollar credit so the neat thing is if you look at the Greeks I'm sure you know three Delta's or less one way or the other is kind of getting close to neutral for me my fate of positive sixteen so it's still an income trade and that my short options are going to decay quicker than my long options so I'll get a positive theta but instead of an iron Condor or short strangle being short Vega this actually has a little bit of long Vega so benefits of volatility goes up but it's close to zero so I don't really have that much volatility risk it's a little volatile II neutral Vega is 11 vs. in the previous example my Vega was short 53 so again depending on how I want to position my volatility again I can use an iron Condor if maybe the VIX is 9 to 12 or if it's over 12 13 to 16 or 13 to 70 and iron Condor so I just want to give you a feel today of using this foundation of a short strangle why wouldn't do it cost too much and you know if the VIX was nine to twelve I'd look at selling a strangle via an iron condor it VIX is 13 or higher I'd like to sell a strangle via via whatever we said via a iron or double diagonal yep and what we end up here doubleday I think that's the last slide okay um all right it's so folks if I can leave any help let me know we have the tomorrow general let you know we have our last summer series webinar with mark Fenton taking my place tomorrow you know mark Fenton is no relation to Bobby Vinton that'll be tomorrow and what else coming up we've got a continuation of our very successful plan to make $4,000 and 20k portfolio or have any follow up doing three more weeks of practice on that that'll be starting Johnny can give you the dates on that and then our new class will be an iron condor class starting up we're going to have a free class starting pre webinar the third free webinar and Jenny will give you the dates on the end where the information is what's coming up so again you got the som TV Tuesdays Thursdays that's free freeze always good praise good fries good a life is great and then the free webinar for iron condors coming up and if you look right on the if you scroll down underneath the chat box you can register for that part 3 absolute right there so click right there register for that and tomorrow will definitely tell you more about the next free webinar coming up after that but priority of here if you haven't already registered for tomorrow's webinar definitely do that I did have a question here do you ever look at Vega / Delta ratios or anything along those lines when you're setting up these trades I'll overlook your way ah Bega / Delta ratios alright let's take a look if we pull up an iron Condor and we look at deltas versus what Vega / Delta ratios Vegas legend again I think if you're an engineer you like that kind of stuff right sure it gives you worth life worth living for but no do I know anybody in the pits right over 20 years it started getting to all the different ratios no do I know why sometimes it's popular with engineers and others yes they need that right they need it for from the like what but I'll entertain you and we'll talk about it for a second um if I'm looking at a ratio do I you know again Delta's is the most important Greek in my opinion by far you're dealing with price risk so to me if I had to look at a ratio the most important ratio would be Delta the theta right Delta to theta generally right this is about two to one so generally starting out trades that let me be clear here I'm not talking about 14-day and under trades that's a different ballgame 14-day and under trade your theta is going to be a lot bigger than your Delta but if I'm talking about thirty to fifty day trades starting out for an iron Condor or a butterfly I'd like my delta theta ratio to be or your fate at least three to one so if my deltas are - I theta should be minimum of six right so again let me be clear here or trades 30 days out or duration or like an iron Condor or a butterfly or calendar yeah I don't think that's a bad thing to shoot for at the beginning of the trade Delta Theta Rita what now in this case it's like 2 to 1 so that deltas might be just a tinge you know maybe maybe have them looks a little bit less than 3 right now so that ratio kind of means more to me just because again I make money with theta and the smaller the Delta is relative to the theta the more the theta could absorb a price movement the bigger the Delta relative to the theta the less the theta can absorb an adverse Delta move against us now as far as Delta to Vega not as much just because again price risk Delta and theta is reality Delta to Vega um you don't know on a day-to-day basis what the vague is going to be so I would more I don't know if I could give you a delta to Vega I'm sure it could but to me the bigger issue is what should be a level of Vega now some of this dependent on your size and everything but the bigger issue is this with if VIX is 9 or 10 or 11 I'll just leave it at this I want to be less short Vega I want to be closer to zero Vega as VIX gets to 13 14 15 16 17 I want to get more short Vega so it's not so much that I would make any comment really on Delta versus Vega but the point is when do you want to be short Vega when do you want to be more short Vega when you want to be less short Vega and it would be tied to the level of the vixx's so I would look at Vega in relation to the VIX awesome any other questions did appreciate all right thanks folks appreciate you joining us today we'll be back on Thursday and if you have any questions for us you can always send us an email info at Sheridan mentoring com we are happy to chat with you thank you for joining us [Music]

Channel: Sheridan Options TV

Views: 15,038

Rating: 4.5159235 out of 5

Keywords: options education, option education, stock option, stock market, Dan sheridan, sheridan, SheridanTV, Short Strangesl, Iron Condors, Double Diagonals, Options101, Options 101, Trading Options, Options for Income, Income Trading

Id: a9FRCjjBbmk

Length: 27min 14sec (1634 seconds)

Published: Tue Aug 22 2017