Get Rich in 1,000 Easy Steps

how's it going i'm very excited today because we are doing a continuation of something i used to do back in the day i called it the robin hood trading challenge and it was a way for me to show you through a series of videos my trades and my thought processes behind each trade as i entered them on robin hood that kind of died as i switch gears towards more educational content [Music] but now we're back we're going to revive it so we're going to bring you in the room so you can see my trades and my thought processes behind each trade this time with td ameritrade so i got 20 grand queued up here we're going to enter some trades i'll give you my thought process and all that but really quick i want to say if you want to follow this portfolio and see all the trades see all my positions see my profit and loss see my progress across time i highly highly encourage you to download the app called iris and i encourage you to do it through the description below in the link in the description i'm affiliated with these guys so i make money as you use the link so that's why i prefer you don't just run off to the app store but it's also pretty dope and helps you keep up to date on everything i'm doing pretty soon they're adding live notifications so you get a live notification to your phone if you want it every time i make a trade so check it out second plug uh if you want to buy this pin it's pretty dope pen also comes with a sticker that's 100 bill with my face on it or at least will be pretty soon check out pins by charlie in the description below okay before we start making trades and stuff there's a few things i have to say to orient you to how we're going to handle this portfolio number one i'm not going to assume you know everything about thinkorswim which is td ameritrade's trading platform but i am going to assume you know a little bit so if you don't know anything at all watch the videos in the description below i have a couple videos that lay out think or swim in in really full detail in addition to that there might be a lot in this video that i mentioned that you have maybe you're new you have no idea what i'm talking about like leaps for example check the description below anytime you hear something you don't understand odds are i've already made a tutorial on it and i've put it in the description so check below leaps will be down there as well as a few other videos i'll also try to remember to link them in the top right hand corner for you okay now let's orient you to my investment philosophy and then we'll dive in and start making trades uh it's changed a lot since the first time i did a series like this uh back then i was a lot more speculative it was a lot more high frequency above the shoulders like mustard now it's slowed down considerably it's a lot more calm i like to maximize how much money i can make and minimize the amount of time i have to spend thinking about it and worrying about it i don't want to lose sleep i like doing other so why not make as much money as possible while spending as little time as possible worrying about it some people love doing like calculus to squeeze out a couple pennies of premium i'm not your guy go check out project option that's not me so my investment philosophy has boiled down and refined into really just a handful of strategies since i first started over the you know last six or seven years the three strategies that are going to be really the focus of this portfolio are these one long-term investing i highly encourage anybody who wants to trade or is trading to have the majority of their position at least half of their portfolio in long-term investments now that's just my opinion you obviously don't have to do it i'm not telling you what to do that's my opinion if you do if you have a large position in long-term investments it's gonna be like this compound interest engine that is always driving your portfolio in the upwards direction no matter what you're doing with your speculative positions they're going to hedge against your speculative losses and they're going to amplify your speculative gains plus it relieves a lot of stress because you know if you make a mistake in your speculative positions you're probably at least recouping some of that with your long-term positions so the goal of the speculative is to to have higher return than your long-term investments but of course those positions those trades are riskier so they have a higher potential for failure and if you fail you want to make sure that you're still making money and to do that you have a lot of money in long-term investments so one is long-term investing two leaps leaps are going to be our bread and butter and they're gonna be what we utilize to leverage our portfolio in the upwards direction it's important with leaps that you have money to average down in case things go really against you they're actually not much riskier than owning 100 shares of the underlying stock but you want to make sure that you can average down if things go really against you so we'll talk a lot about that as well when the time comes and lastly third our third main strategy is the wheel and what i've kind of discovered is that the wheel strategy is best utilized when you're running it on margin what i mean by that is when you used up all your buying power and then you sell a cash secured put what happens is your brokerage actually doesn't take any funds for collateral normally when you sell a cash secured put they'll take enough money to buy 100 shares at the strike price in case you get assigned and hold it aside as collateral and you can't touch that money until your cash put is either closed or assigned you use up open you have no money locked up as collateral so the real benefit the real the best time to utilize the wheel strategy is when you're running it on margin and when you're selling a naked put which in this case is basically a cash you could put except when you get assigned you're going to use your margin to buy the shares so those are our three main strategies and they're going to be the main things that are running this portfolio and you'll see that it's actually super easy and we'll be making money it's going to be great unlike other people who love being really high intense and high frequency about things i do not i like to be laid back i like to make money easily but i like to leverage my positions so i make excessive amounts of money i'll also be contributing to this portfolio over time i have the majority of my net worth in long-term investments through m1 finance so i want to start spending more money on my active trading all right so now i've laid out the whole scope right you understand what i'm about what i'm doing what this is yeah but now let's let's bring you in let's get intimate let's actually enter some trades and we're going to start from the easiest and work our way back to the hardest the easiest being let's build up our long-term investments now the market's closed in 13 minutes so we may not get all our trades done in this today at least for me but i'll come back around we'll do leaps and stuff maybe tomorrow here are the positions i want to open so i want 50 my portfolio which is 20 thousand dollars to be in long-term investments so i have 10 000 right here here are the stocks i want to build into my long-term positions tesla you might be thinking well that that's pretty overvalued uh why would you want to do that when you wait for a dip i don't i don't give a because if it dips i'll just average down with long-term investments it's not important that you time it it's important that you get in and if things go down and you still believe in the company you buy more and with these five stocks i believe in these companies if they go down i'd actually prefer it so i can buy at a cheaper price but right now let's just get our feet wet let's get in so these are the stocks that i'm going to purchase from a long-term investments these are the percentages of our ten thousand dollars that we're gonna buy so for tesla it's gonna be ten percent of ten thousand dollars which is one thousand dollars microsoft is forty five percent of our ten thousand dollars which is four thousand five hundred etcetera so visa is fifteen percent apple's twenty percent and shag is ten percent check helped me get through college i cheated on a lot of assignments so let's open these positions really quick we'll start with tesla which is one hundred dollars so let's go to td ameritrade you can search up any ticker in the top left here and we're gonna type out tesla and we want roughly one thousand dollars to tesla so let's open up our calculator well i don't even need a calculator it's gonna be about two shares so we'll buy about two shares of tesla there's a million different ways to buy stock on think or swim let's just choose one and stick with it over on the right we have a trade tab if we click on that it's going to allow us to enter market buy orders and market sell orders and if we click this arrow we can change the quantity so i just want to buy two of these right so let's buy two and we're going to change it to market so once that's ready to go we just hit buy market there we go we spot two shares of tesla now is a little over a thousand dollars so we might have to buy a little less than we intended with some of these other stocks so microsoft 45 4 500. okay we'll buy 17 shares of microsoft so when i hit buy market this window pops up and it's asking make sure you're comfortable with the trade you're about to open if you want to send the order faster enable auto send with shift click okay so if we go back now if i hit shift and hit buy market it'll just send it off without the without asking you to confirm your trade all right next is visa okay we're gonna buy six shares of visa bam next up apple okay 15 shares of apple and one thousand dollars of check how much money we have left here one thousand fifty seven dollars eleven okay so that was pretty easy right you all you do is look up the ticker in this box here and then hit trade so it opens up this window change the quantity and send it off to monitor your orders go to the monitor tab and here we can see all our positions our profit loss so far look we've made four bucks so we're already heading in the right direction now when it comes to like all the stuff we're looking on this chart um and technical analysis and that kind of thing we will discuss that in the future so don't panic we're just starting with the easy stuff first you can see the upper left hand corner the cash remaining is ten thousand dollars roughly so we've used about half of our portfolio for these long-term investments in our monitor tab where we're located right now looking at all our positions i don't like that they're not grouped together because tomorrow we're going to open up some some leaps and shortly after that we'll be doing the wheel strategy so i want all those trades separated by those categories by long-term investments leaps and the wheel so to create a group we can right click on one of these positions and we go to move to group and add group so we'll do long term we'll hit okay now we can add each one of those to long term great and we can't and we can collapse this by clicking the arrow right next to long term so that way we can see our profit loss open i know that's profit loss open because if i unfold you can see it's under profit loss open so we see profit loss open and we see profit loss today towards the bottom right ish you can see your profit loss here to date you might be asking adam why five stocks that doesn't seem like a lot you know most people have hundreds of stocks well for me there's two things there's two reasons why i have such a concentrated portfolio the first is i want our portfolio here to be very aggressive i want to try to make as much money as possible and to do that that means i have to have a concentrated portfolio the more i diversify it uh the less risky the portfolio is but i'm also reducing my potential return so i want this portfolio to be very aggressive which means i have a concentrated number of long-term investments and in addition to that number two the more stocks you add the less risk there is right there's something called systemic risk and the more which is basically just the risk of being in the market and the more stocks you have in your portfolio the closer towards systemic risk you are the second stock you add to your portfolio is going to be the most powerful in reducing your risk towards systemic risk uh it's gonna reduce it substantially and your the standard deviation of the return of your portfolio is gonna be reduced substantially but then you add the third and the fourth and the fifth stock and it's going to have diminishing returns and the reduction in risk is going to be less and less with each additional stock meanwhile the whole time you're adding stocks you're going to be reducing your potential return so no 5 is not the optimal number of stocks it's argued between 10 and 30 some people think um based on one study and then another study says no not even close it should be 30 to 100. i don't care i'm going to be really aggressive i'm going to do five so i'm reducing my risk substantially it's way more risk averse than just one stock by a long shot but it is also very still very very very aggressive which means which means we can potentially have a very very high return okay that's it for today we've got i wanted to get this portfolio moving and tomorrow which will be literally probably 10 seconds for you right now i'll come back and we'll be doing some leaps and maybe get started on the wheel all right today we're going to open up some leaps and if you're not familiar i'll try to remember to link a video explaining leaps in the corner if i've already done that maybe it won't pop up again it's definitely in the description below but leaps are long-term anticipation securities or in this case options and that just basically means that they're deep in the money and they have a far out expiration when they're deep in the money that's going to lower your breakeven by expiration so the stock price doesn't have to go as far theta is not that big of an issue the extrinsic value of the option the time value of the option it's pretty slim so there's you're not giving a lot up as time passes and the stock price doesn't have to go as far in your anticipated direction for you to reach break even by expiration and having a very far out expiration is going to give you a lot of time to be correct so you're not trying to beat the buzzer of course today we're going to be opening leaps that are calls because the stock market generally goes up why would i hinder myself by trying to anticipate the long-term downtrend of a stock that has good options volume that basically doesn't exist you're more likely to be right betting in the upwards direction of any given stock at random than than betting on any stock going down so because the stock market as an overall upwards trend why would i not just bet to the upside especially when we're talking about the long term specifically okay so if you need a refresher on leaps check out the video down below uh and before we dive in i just want to say all the stuff you see on my chart the lines and stuff this is all used for technical analysis we may not talk about it too much today maybe a little bit but we definitely will down the road in future videos so if you want your layout to look exactly like this go to the description i've linked it down there for you because i'm such a nice guy you can literally open it up into thinkorswim and then once you have it opened up into your thinkorswim you want to save it and to do that you go to setup in the top right hand corner and select save workspace as and once you do that you can always load it up so mine's name default i can always load this layout once you have one selected it should always load up into this layout every time you open up thinkorswim so you shouldn't have to load it manually every single time okay so let's talk about my thought process when opening leaps first of all i'm not the type of guy to scan for stocks based on like 52-week high 52-week low momentum volume across the entire stock market that's not me day traders have to do that all the time because they always have to find unique opportunities if their little handful of stocks that they know just aren't moving that much then they just can't make money you have to have a highly leveraged position at positions as a day trader and you have to leverage those into bigger swings so you always have to be scanning for new stocks me personally maybe it's just a fault of mine i don't do that i don't scan for new stocks a lot of often i might find new ones on seeking alpha or like bloomberg or twitter or wherever i might see it reddit but i don't intentionally go seeking out new stocks because over the last five or six years i've cataloged probably over 100 stocks in my noggin that i already know and can go check out and i know these stocks are pretty heavily traded which means they'll have good volume and liquidity and they'll also have good options liquidity which makes it easier to open options positions i don't want to scan for new stocks when most a lot of stocks don't even trade options and if they do they're usually pretty illiquid so i've cataloged you know the first 50 or so that popped into my head yesterday just back to back and i put it into a watch list you can make your own watch list by coming to the left here clicking on this drop down and creating a watch list there now i'll share i'll share my watch list in the description below and i'll be sure to add more probably today and tomorrow so it's a nice robust full watch that's full of pretty heavily traded stocks okay once you have your watch list selected when you go to personal and you select your your watch list you want this number this number two or whatever it is to also be the same up here so let's change this to the yellow number two what that means is whatever stock i click in my watch list it's going to pop up in the chart and i can use my arrow keys to go down through each watch list and just mainly take a look and see what's happening but that's not what we're going to use it for we're going to search for a few important characteristics that leaps need to have in this watch list so we're going to search for good options liquidity options volume we're going to search for low implied volatility because remember it's good to go long options in low implied volatility environments implied volatility has a mean reverting characteristic so if it's low relative to its history the historical implied volatility it will be inclined to move back up towards the average towards the mean as that happens your options premium is going to inflate because implied volatility is implied by an inflation of options premium so as extrinsic value increases the implied volatility metric that you might see on a chart graphed in a chart is extracted from that expansion in extrinsic value so as implied volatility goes up that means that your options premiums are inflating so you can make money that way as well as if the stock goes in your anticipated direction so we want to bind low implied volatility volatility environments so we're looking for options liquidity low iv and we want the stocks to be kind of cheap as well the reason for this being is you might have two stocks you might have tesla very expensive stock you might have amd relatively cheap stock they might have the exact same implied volatility metric of 28 an implied move of 28 over the next year if this is all greek to you i highly encourage you check out the options tutorial up in the corner but uh they might have the same implied volatility of 28 but 28 for tesla is a much bigger dollar amount than 28 for amd and because options premium change is based on dollar amounts not percentages a 28 move in tesla is a lot larger than 28 move in amd so extrinsic value is gonna be much much higher options premiums only care about how many points change over the next year they don't care about percentages points are what impact an options value so we want to find cheaper stocks because i only have ten thousand dollars to play with cheaper stocks and have cheaper options i want to be able to diversify amongst a good handful of leaps so to scan for all these metrics that we're talking about we're going to go to the scan tab and we're going to close out of all of these uh characteristics we're looking for so we hit these x's on the right side bam bam bam they're all closed out we're going to add some new ones but first we want to make sure that we're scanning in our in our watch list not all stocks although you definitely can i just think it's better for me personally to scan through stocks i'm familiar with so we click on this guy go to personal and then main is my watch list and we want to under all of the following add a filter the first one is going to be for cheap stock so we want the last price of the stock to between to be between 0 and 100 okay and if i'm going fast remember you can always slow me down youtube has that little cog in the bottom right where you can slow me down because i don't want someone going you're going way too fast dude when you can literally slow down how fast i'm talking yourself okay the next one we're gonna do is options liquidity so we're gonna add a filter it's gonna be option and we're gonna be doing volume we just want some liquidity okay we're not looking for insane amounts we can determine the level liquidity once we narrow it down to a few stocks we're interested in so we'll do 50 min and then maximum is whatever number that is and then we'll add another one add filter and we'll do study and it's going to be under volatility and iv percentile so iv percentile is the same as iv rank if you've heard about it it's uh it's a number between zero and 100 0 to 50 means that the stock's implied volatility is relatively low compared to its historical implied volatility so we want to be long options 50 to 100 is relatively high compared to its historical implied volatility we don't want to be long options so we're going to search for 0 to 50. okay we hit scan on the bottom right ish and here we have a nice list of stocks now you won't see iv percentile listed in any of these columns unless you go to this tiny tiny little cog to the right click on it customize and then search up iv percentile and we hit okay and on the right you can see iv percentile so we're going to sort from lowest to highest you can see there's some good ones like alaska air that might be a good leaps play ntnx not so sure about that one i've already looked through these a little bit um but amd i chose amd and activision yesterday after looking through some of these just because those are the stocks i'm most bullish on and i know will probably have higher options liquidity than some of the others you know if you're like if you look at any of these companies and you're like man i really like this company i just like the company a lot i would use a product i do use their product i would i understand how their business works and how they make money and i see their potential if you're if you're into a company for the long term that's a company that's great for leaps the important thing about leaps is that if things go against you that you're able to average down you're able to open up a new leap using margin or your own cash or open up 100 shares of the underlying stock to recoup your losses from the first leap that went awry we'll talk about that later but if you are anybody can make money long-term investing and you can carry that over to leaps anybody can make money in leaps over the long term as long as they're willing to average it down if the leap goes against them so if you see a company and you're like i really like that company that's basically all you need to know if you think that it's a it's a popular company good growth stock whatever as long as good options liquidity and you have the balls to average down when things go really really against you and you can handle that like putting more cash into your account which i personally can then leaps are a great option so don't get tied up into like really nitty gritty like what are the fundamentals as long as they're making money and you know what does that chart look like maybe the chart can help with timing but if you are if you like the company for long term uh that's basically all you need to know when you're picking your leap leaps leaps is actually kind of singular long-term anticipation security so it's when i say leaps i'm not being stupid anyway i'm really bullish over amd and activision for the long term so let's go to charts this is where we originally enter entered our stock trades yesterday but this is not where we enter our options trades we want to do that in the trade tab we also want to change this number to the same number that's in our charts tab which is the number two yellow so that when we you know change the stock over here maybe we change it to apple we go over to the trade tab it's also going to change it to apple we don't want those two to be different otherwise we might accidentally open the wrong option so once those are the same let's go back to amd with the leaps you want to pick nine months or more out generally speaking the further out the less liquid so it might be harder to get in but over time they'll become more and more liquid as the expiration nears the closer the expiration is the more liquid the options are going to be but you also have to be a little bit careful because if your option gets very very deep in the money uh the deeper in the money gets the less liquid it gets as well so you may end up over time with an option that's super liquid that you could maybe not even sell that's entirely possible so you either one want to keep a good lookout and take always be watching your options liquidity and also the liquidity of options that are deeper in the money because those are going to be less liquid and that could be where your option is going to end up in the future so you want to check and make sure that your option and the ones slightly deeper in the money are still looking good still looking liquid or you want to be willing to exercise at some point which means you have to have the margin available to exercise or the cash available to exercise and yes with leaps you may want to exercise if things get to a liquid even though most of the time you don't because you give up extrinsic value but with leaps extrinsic value is so small that it may not be a big deal and you might actually end up making more money through exercising than selling at a really horrible price just to get out of the trade okay so it's april so our options basically are under the expirations of january 2022 or june 2022 january is going to give us a good nine months june is going to give us much longer than that and the june ones are going to be slightly more expensive as well and we can kind of compare that here so if i unfurl the june expiration options and the january expression expiration options we can compare the prices so on the left side what we're looking at are calls right here are all the strikes eighty eighty two five eighty five eighty seven five and these are all different call options right here each one of these rows so if i look at the 80 80 strike call you can see that the premium is somewhere between 1340 and 1365 alright that's a pretty nice tight bid ask spread and this is kind of close to out the money so it's not too surprising if i go down to the next expiration the june one another six months out you can see that's roughly 300 more expensive but the bid ask is still pretty tight so these options are fairly liquid so we're gonna pay an extra 300 bucks basically in time value in order to push our expiration out by six months it's not really that bad when you consider what we're basically doing is trying to get the leverage of a hundred shares into into into a cheaper position it's a reduction in buying power but a similar leverage to that of 100 shares the extra money you're risking is going to be extrinsic value again i highly encourage you to watch my leaps video because i explained this in great detail now we'll get into this more of this in just a second but let's change the layout of things because right now we just see like the asking price if we follow this down we see the asking price of each option the bid uh net change and last traded price i don't care about any of those so i want to change this up so go to well i do care about the bid and ask but not the other stuff so go to layout we're going to customize i don't care about these two things you can double click them to get rid of them here's what i do care about i hear about delta i care about theta vega volume it's going to help us determine uh options liquidity open interest number of contracts currently open at the moment and i also care about extrinsic we can actually see extrinsic value so we can see what we're paying for for a time premium how much more how much more we're risking than if we had just owned 100 shares of this stock so let's hit okay so here we have everything laid out you can see the extrinsic value if we follow this column down you can see how much premium we're paying just for time and we're looking at at the money options which have really high extrinsic value you can see the majority of the premium about 14 14 of almost 15 of premium is for time value and you can see that the option is trading at 15 10 and 15.65 so almost the entire options premium is just for time value and that'll decay across time until the extrinsic value is zero at expiration let's see more strikes and see if the in the money options have less extrinsic value so we're gonna change strikes from four to all so you can see as you get deeper in the money you can see this column extrinsic value decreases and that's the case as you get away from at the money in both directions the further in the money you are and the further out of the money are the smaller the extrinsic value is so generally speaking when i'm looking at leaps the first thing i look at is delta i generally open a leap leaps option between a 0.8 and 0.9 delta gives me a good starting place then i can evaluate the liquidity of the option as well as the breakeven and see if everything there i like otherwise i can otherwise i can change the strikes a little bit and maybe even if it's just not looking great i can change the underlying entire underlying entirely okay so we're going to look at this option as a 0.3 delta right there if we follow it over you can see that the extrinsic value of this option is about three dollars in premium so that's three hundred dollars so that's the extra premium we're willing to risk as compared to just owning 100 shares of underlying stock but by expiration we're going to have the same leverage of owning 100 shares of the company with just this one option before expiration that's not the case because as you get away from at the money extrinsic value shrinks so that means the premium of the option shrinks so you don't have a 0.1 delta if extrinsic value didn't change when the stock price changed then you would always have a one delta with any option but because extrinsic value shrinks meaning your options premium shrinks even as delta makes you money that's gonna mean that your delta is not gonna be one so you don't have exactly a hundred shares worth of leverage until expiration day when extrinsic value is gone therefore extrinsic value can't change so your delta is going to be one at expiration so this this uh price tag this 343 is the expert we're risking as compared to owning 100 shares for leverage very similar to that of 100 shares okay but how much money are we freeing so we're risking 343 dollars as compared to owning 100 shares how much money are we freeing up by using the leverage of an option instead of buying 100 shares outright well if you look at the current stock price of amd which is 83.07 and multiply that by 100 it would cost us eight thousand three hundred sorry from about handwriting and seven dollars to buy 100 shares of amd but these options only cost about two and a half grand less than two and a half grand so we're using basically like a quarter of the buying power to have similar leverage as eight thousand dollars while risking only an extra 343 that i think we can make up by the the six grand that we're freeing up to use elsewhere do you think we can make 343 bucks off of six grand over the next nine months i bet so and you can also see that these options are relatively liquid even though they expire nine months from now they have a open interest of 617 and no volume and no volume is generally considered like oh no bad but it's actually not a big deal because expirations that are way out there there's not many people trading them on any given day and volume is just the number of contracts exchanged today so even though there's zero that's not a big deal what i really care about is the bid ask spread are there market makers there providing liquidity and is there open interest and the fact that this open interest is on an uneven uh strike means that it's going to have less so i would recommend that we probably move it either one point more in the money or one further point further out of the money i'd rather do one point more in the money because if i erase the circle here you can see that one point in the money is about 300 of extrinsic value and the price of the option goes up by about 200 bucks which isn't that big of a deal okay so we we started with around a point eight to a point nine delta somewhere in there then we take a look at extrinsic value how much extrinsic value is there is how much money we're going to lose if we hold this option to expiration um how much it's going to decay across time and also extrinsic value is going to determine your break even your breakeven is premium strike price plus premium paid the higher your extrinsic value the higher your braking is going to be so we want that to be nice and low and we also want theta to be low which means um the money we're paying to play each day is going to be low and for it to be low that means our extrinsic value has to be small because that is a portion of the premium that decays across time if extrinsic value is small your theta is going to be small if extrinsic value is large your theta is going to be large so we take a look at extrinsic value to see how much more we're risking versus owning a hundred shares and to see and to make sure that our breakeven is going to be low which we'll analyze here in a second and to make sure that we're not fighting theta the entire time that we can make money easily as the stock price rises then we took a look at options liquidity to see the bid ask spread in this case is you know about one point wide which isn't that big of a deal for an expiration that's nine months out that'll decrease as we get closer as the expiration gets closer to us front month options are gonna be more liquid versus options that expire in 9 to 12 months i mean you can see this is a 62.5 option the bid-ask spread is about one point wide if i if i go to in a closer expiration like june 18th and go to the 625 and i go to 625 you see the bid ask is only 20 cents wide so it shrinks a considerable amount by like 75 80 but we also want to analyze and see what happens if the stock price goes up if this option starts going deeper deeper in the money because that's going to reduce liquidity well if we look at these options you can see liquidity gets you know a little worse this one's like four points wide that's not great but we also have to consider that the deeper in the money it's getting the more time is probably passing so we want to take a look at expirations that are closer to us and analyze the liquidity of options that are deeper in the money at those expirations so for example we might go to september and look at the 50 strike and see what the liquidity is it's less than a point wide so that's great that means as time goes on and as our option comes deeper in the money liquidity is still going to be good so the last thing we want to take a look at before we open this option is what is the break even and we'll look at the chart and see if it seems like a reasonable expectation for the stock so break even is strike price which is k plus call premium so in this case we're going to move it up by one strike because it's going to be slightly more liquid which is a 60 strike so we'll do 60 plus and we'll guess that we're going to get a fill somewhere between the bit ass which would be 2640 which equals uh 8640 so we can come over here to the chart and if i hit my middle mouse button i can select price level okay we're going to use that to help measure here in a second our breakeven is 86.40 so we go down on the right-hand side you can see the stock price it's going to be somewhere around there and then we hit our middle mouse button again select this line this trend line and we're going to go to our expiration so our expiration was what january 2022. okay so we're there you can see the date on the bottom we're going to click here and just go straight up hit the middle mouse button again select the circle we're going to draw a circle around it okay that's our break even that seems like a reasonable expectation for amd to hit that point by expiration you have to remember break even rises across time as extrinsic value decays so right here your breakeven is going to be right where you started but as we approach expiration your break even is going to slowly rise and in the last 30 to 40 days it's going to rise pretty quick as extrinsic value decays exponentially within the last 30 to 45 days so this is a reasonable expectation and if things take a pooper no big deal because i'll just average down the benefit of owning a leaps is that if things go down really really bad and your option becomes worth a penny if it goes down further than that you're not going to lose any more money if you're owning 100 shares you would lose money all the way down so leaps actually kind of protect your downside a little bit if things go really really against you because it can't be you can't lose more money than you put into it and if you average down and buy new leaps and wait for the stock to recover and start moving the upwards direction or maybe you just want to buy 100 shares so you don't have to worry about expiration or you just don't have the money to keep recycling leaps into it then you can just wait for the stock price to rise and recoup your losses just as you would with long-term investing okay so all this seems fair i think that's a reasonable expectation we could wait for a better time perhaps maybe this will zigzag a little bit and start moving in the upwards direction maybe that'd be a bit of a smarter idea but i'm ready to get some skin in the game so let's go ahead and do it so we'll go to trade the trade tab where we were just a second ago and we're going to be doing the 60 strike call okay make sure we're under calls right call right there and we're on the right expiration make sure we're at the right strike and we can select the ask price that means we're going to want to buy when you hit the ask price that means you're buying when you when you hit the bid it means you're selling right when people want to get immediate fill and they're buying anything stock or option they're going to buy it at the asking price so if you hit that hit the ask it's going to assume you want to buy this option it's going to pull up this trade window towards the bottom let's work our way from left to right so we want a single option we're buying it our quantity is just going to be well actually we'll do two because they're pretty cheap now we'll do one we'll think about adding another one maybe in a little bit uh expiration is 21st january 22. yep a strike is 60 call yep now price this is where i like to negotiate okay this is where i haggle i don't just give the asker what they want i want to put it in the middle of the bid ask or even cheaper and hope the stock comes down to me something that's helpful is we can go to charts go to our time frames in the top right and switch to five minute now we can see what the trend is for amd on the day it seems like amd has kind of bottomed out a little bit right after open launched up in the stratosphere now we're having a little bit of a trend change and you can kind of feel that when you look at the stock chart right ignoring all the lines and stuff you can feel the tr the trend changing a little bit that doesn't mean it won't continue up it could totally continue up for the rest of the day amd's you know people love the stock more than more than not it's going up but you can see kind of a trend change it's kind of topped out here there's some resistance which means there's uh more supply around this price level of around 83 more people are selling up there than are buying so every time that so far the two times the stock prices hit it outside of pre-market it's bounced off because there's a level of supply people don't want supply overwhelms demand at that price level you can see that has happened twice and you see the trend changing it went from higher highs and higher lows and now it's starting to shift to what looks like perhaps maybe lower highs and we don't know about lower lows yet well a little bit lower of a lower low there but i imagine over the next hour to we'll see whether or not this trend is actually developing in the downward direction but this is enough of an indication that maybe you know we can get a more fair price for this call option as this stock goes down if this is an actual downtrend forming here and it goes down across the day the value of the call option is going to decrease and as it decreases that means we can get a cheaper fill so we can set a limit order below the bid ask spread hope that amd goes down in the day so that the price of the call option decreases to the limit price we set and then we'll get a fill now a good way to determine what point your option might hit a certain price depending on what you know the stock price determines what the options price is going to be how do you estimate what the what stock price is going to be where your limit order is like if i set a limit order for 290 where does the stock have to go for the option to hit 290 well good way to do that is using the option profit calculator app it allows you to see what your potential profit and loss or the value of the option would be across time given different dates it also allows you to see a break even on every any given day as we discussed we have a quick formula for breakeven which is strike plus premium paid but your break even for each individual day is going to be different than the break even on expiration which is typically what people mean by break even when they're talking about options so option profit calculator the app allows you to see your break even on the current day which is really handy to see how far away you are from your goals i highly encourage you to check it out because it's mobile you don't have to use the options profit calculator online because that's a little bit clunky not as modern and you can't carry it around in your pocket as easily so we're going to go back to the trade tab and we're just gonna set a limit order that's somewhere below the mid price okay we could we could look at the daily chart and be like well look it's been you know up down up down up down it's having this mean reversion over and over the mean somewhere in the middle here okay and every time it goes outside of the average it returns back to it so you might think it might come back down and we can set a limit order much lower than where it is right now but we're not going to do that with this one i just want to get my skin in the game i'm not trying to guess too hard i just want to get a slightly better deal so let's go to the trade tab we're going to down here in the bottom right we have the mid price which is the middle of the bid ask and then that price which when you're buying is going to be the asking price when you're selling it's the bid price it's the price where you can get an immediate fill so let's drag it over to the mid price and we'll lower it by probably 20 points so we're going to try to save 20 bucks here i just don't want to wait too long so we'll set it to 2610 i also forgot that you can see the expected amd price for your limit order so in this case it says 8304 so if we go to our intraday time frame again we can see that would probably get a fill around here okay and that seems fair it's fair enough to me could definitely take a leg down to that point so let's go ahead and set it for 2610 oop the mid price change this is why i always want to set it lower so let's move it down even further okay so you can see that leg down is actually starting to develop a little bit if it breaks this point right here it'd be probably a good indication of a downtrend but we're not going to wait that long so let's just do the mid minus 20 cents again you can see it's always a little bit clunky but you can always get it the expected price is 82.45 so let's re-measure that that's a little low for my liking i'm going to move that up a couple points you know i'm going to leave it at the mid price there i think the mid is fine the expected amd price is 82.69 which is all the way down here but that that's also assuming that um that it's the asking price is going to be there okay so right now if i enter the mid price i'll probably get a fill immediately because these options are pretty liquid so let's just move it down 10 cents from the mid price try to get squeeze out next for 10 bucks okay so once you look over all this and you see that it is good like god created this then you're going to hit confirm and send it's going to bring up a dialog window making sure you know what you're doing making sure everything looks good and once you've analyzed all this and decided yep this is exactly what i want then you can hit send now we didn't get to fill immediately you would see a little window pop up if we had gotten a fill but we didn't but we can see over in our monitor tab under amd we have a call there but you can see under quantity it's zero so it's pending if you want to see our working orders you can see it under today's trading activity just unfurl this uh drop down window and you can see our working order if we ever wanted to cancel this order just come here right click it you can cancel it or you can cancel and replace which will bring up this dialog box so you can change the price uh change the strike whatever you want to do and then you can send it off again so it'll cancel and replace the order that you had to send off we're not going to do that so hit delete that'll leave our trade still open and we'll wait for our fill now let's do the same thing really quick with activision i'm not going to drag out too long otherwise eric's going to kill me because i've been filming for 37 minutes so let's go to activision really quick um let's see here so we got january 22 there's no expiration between january 22 and january 23 so we're gonna do january 22 i don't want to hold on to an option for that long and we're gonna go to a delta around point nine point eight six let's see here liquidity is looking okay because the bid ask is one point wide let's check um this is for the 70 strike let's check closer expiration so we'll do august of 2021. 70 strike is uh 15 cents wide okay but how about deeper in the money because what happens if our option gets deeper in the money across time so let's go deeper in the money and take a look yep the bid ask is still really tight so as the expirations get closer you can see that liquidity improves so we're not too concerned about liquidity here if things got really bad we could always exercise give up that extrinsic value as long as we have the margin or cash to exercise to buy 100 shares at the strike price so 70 is looking good for liquidity how about extrinsic value so we look at extrinsic that's 100 points uh one point in extrinsic value almost two points almost 200 we're willing to risk um in excess of owning a hundred shares data is going to be low our breaking is going to be relatively low we could lower our break even even further uh but let's take a look at the chart really quick and see what the momentum is behind activision see where it's heading okay so right now it's having a bit of a pullback and i wouldn't be surprised if it continued pulling back a little bit before continuing the upwards direction so i kind of want to have a lower break even um just to reduce any potential losses if things go down considerably at least my braking will be lower and the stock price won't have to rise as far for me to break even by expiration so let's go a little bit deeper than 70. let's go 65 we're going to do um yep we'll do 65 okay now let's analyze the break even price of that so we'll do strike plus premium paid so for 65 it'd be 65 plus somewhere around 31 which is going to equal 96 so we can come back over to the chart open up hit middle mouse button price level we want to go to 96 it's right about there if you want to make it super accurate you can hit middle mouse button select your selector and then double click the line you can change the exact price so we can change this exactly to 96 then we want the trend line and we're gonna go to our expiration date which is uh january 2022 about right there so our break even's right there that's not very far up from where the current stock price is and we have a lot of time to get there so that's looking pretty good how much money are we saving as compared to buying a hundred shares of the underlying looking at the 70 strike call we're paying about uh you know 2 700 for it okay so we're paying we're gonna end up paying around around 2700 bucks to own a hundred shares of aimed uh activision right now it'd be one hundred times the current price of ninety four dollars and eighty six cents eighty six cents which would be nine thousand four hundred and eighty six dollars so you can see the price difference the amount of buying power we use for this option which will have the same leverage as 100 shares at expiration once extrinsic values decayed is much much less than buying 100 shares outright and as long as we have the ability the margin or the cash to deposit into our account to average down if things go really against us it is not much different than long-term investing except for the fact that you're giving up extrinsic value that's the extra you're risking on top of or versus holding 100 shares so huge reduction in buying power there so let's go ahead and open this one up so the you can see it's less than a point wide on the bid-ask we already checked liquidity i guess you can see there's some open interest that's getting some volume as well so we're going to hit the hit the ask we're going to change the quantity to 1 for now everything looks good and we're going to change it down to the mid price now we can come to activision and look at the intraday and see if we can squeeze out a few extra pennies you may want to look at the daily and just see what's you know even now we can set a limit order way way way way lower and wait for days for a fill but i'm just ready to get in and get going so you guys can start seeing my trades on on iris maybe i'll set some lower limit orders i'll open some more leaps maybe on activation amd again and maybe some other underlyings with much lower limit orders in anticipation for a small correction on some of these stocks so we'll go to intraday and you can see that it's already pulled back pretty significantly this is definitely an indication that there could be another leg down but at the same time it's also pulled back quite a bit 1.68 percent so you know any move down probably wouldn't be that substantial i'd probably just get in at the mid price for this one again to be fair this is pretty bearish to have a very long downward trend and then a sudden sell-off like this and then some consolidation where people are exchanging hands whatever but there's no big bounce in the upwards direction there's no cancel that cancellation of that downward move there's just some consolidation and there's probably going to be another downward move after it but i don't want to wait days for that to happen so i'll probably enter an order just slightly below the mid price again i might again i might open ones with limit orders that would take days to get filled but we won't do it for this one so we'll do 30 90 and we'll bring it down just by five cents and hit confirm and send and then send it off we come back to the monitor tab you can see both our working orders here and uh those will eventually get filled if you get impatient just cancel replace the order move the limit order to a higher price you'll get a higher chance of getting filled um rinse and repeat until you get filled but i'm willing to wait a little bit to see if i can squeeze out a few extra pennies but i'll keep an eye on this again if you want to follow all my trades and stuff and everything i'm doing on here because this is not all i'm going to be doing this video is just getting too long you can follow me on iris download it through the link below please and you can see all my trades there we are gonna be trading the wheel strategy so i highly recommend you watch the the video i've made covering the wheel strategy it's gonna be in the description below um we're not trading it now because i'm moving my margin privileges over from an old account that i had with td ameritrade you can't have on two accounts and the wheel strategy is best traded on margin you can actually sell cash secured puts on margin really it's not a cash secured put it's a it's a naked put it doesn't require any collateral no money is being held aside as collateral but when you get assigned that put you will use your margin to buy those hundred shares so it's actually a naked put but it acts as a cash secured put using margin so it's not even your actual money so you can you don't have to have your own cash set aside as collateral just being held up held hostage for long periods of time anyway we're gonna get into that in the future videos which will start next week uh but for now just play around with think or swim if you're using it and i hope this gave you some insight into how i handle my options trades and of course each time will be a little bit unique and you'll kind of see how my intuition plays into it and all that jazz anyways i'm excited thanks for tagging along for this long i'll catch you guys in the next one [Music]

Channel: InTheMoney

Views: 197,604

Rating: 4.957212 out of 5

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Id: 6sAgqRWTQyQ

Length: 45min 58sec (2758 seconds)

Published: Mon Apr 12 2021