How to Construct an Options Trade With a Really Wide Profit Zone

if you know a little bit about options income trading it's got one major distinction for most other forms of trading in that with just about any options income strategy you don't win in just one circumstance you went across a whole range of circumstances whether the market goes up or down or sideways within a predefined range for example you can set up an options trade that wins of the stock trading at say 300 a share closes anywhere between 250 and 350 on the day that the options expire we'll show you how that basic trade can be set up in a minute but then you logically ask well suppose that the market trades outside of that range of 250 to 350 do you automatically lose well the good news is that options trading is extremely flexible and so the answer is no you don't have to lose you just have to learn how to adjust your trades to adopt the new reality for the stock that you're trading to widen the profit zone to accommodate the unexpected move that the stock is made so if you're interested to learn how professional options traders adapt their trades the price changes on a stock or index I think you're going to want to watch this video so stick around [Music] hi I'm Seth Freiburg and I'm the head trader of SMB capitals options trading desk SMB capital is a proprietary trading firm located in midtown Manhattan and we can 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 before you forget go ahead and click our subscribe button right now so that you don't miss any of our free trading videos that we produce for the trading and investing community so let's jump in if you have a little bit of familiarity with options trading then you might realize that there's a discipline within options trading known as options income trading in which to express it simply you create a wide zone of prices over which you can make profit on a trade and that is done by combining short and long options in different ways these strategies have different names that you may have heard of such as iron condors butterflies credit spreads debit spreads and many other names today we're going to be discussing a fairly simple strategy known as the iron Condor which is a great way to set up a trade where you can win over a very wide zone of prices for whatever you're trading whether it's a stock an index an ETF or a commodity so let's first explain how an iron Condor works and then we'll discuss the flexibility that I mentioned earlier now most of you probably knows something about options but just for a quick review what's 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 trading 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 again regardless of what price the stock is trading at the buyer of the option pays what's called a premium to the seller of the option because the seller of the option is taking the risk that the stock will go past the strike price of the option in which case the buyer can exercise his option but if the stock on the expiration day of the option is not beyond the strike price of the option then the seller just pockets the premium that he was given by the buyer he walks away completely free of any obligations the option in other words expires worthless because it was ever triggered now in a minute we'll see how this idea of options expiring worthless comes into play when using the iron Condor strategy now before we go any further I wanted to mention that we're actually running a free workshop where we'll be teaching attendees about three options strategies that options income traders including those on our options trading desk here at SMB employ on a consistent basis including a really simple and powerful strategy that Warren Buffett and other great investors use all the time plus an options trading strategy that has an 80% probability of profit statistically month in and month out plus a really interesting and simple option strategy that you can employ with the stock that you like where you make your target profit whether the stock goes up goes nowhere or even goes down a small percentage so if you want to register for this workshop 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 the new window so don't worry you won't lose this video you can also visit options class.com to register for this free intensive workshop it is an unusual opportunity for 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 sign up for it now so you don't forget okay so let's take a look at the price chart of a stock trading at about 1060 on November 1st of this year so let's construct an iron Condor which would win anywhere between the prices of 1000 on the low side and 1125 on the high side this is what that would look like on November 1st incidentally this is a real stock and these are real options prices but we're not mentioning the name of the stock intentionally so that you don't get hung up on which stock we're talking about the idea is to understand the principles of the trade so that you can be creative and apply those principles to any stock or index that you'd like to trade ok so here's an iron Condor that we could have hypothetically set up with a winning range between 1000 and 1125 so what we're is what's called an iron Condor which is comprised of a short call above the market 1125 protected by a long call at 1150 and a short put below the market at 1,000 protected by a long put at 975 okay so let's go through each option and see what's happening here so you get the full picture of why we did this on the downside of the trade we've sold four puts at 1,000 fifty one days out from expiration which is in this case happens to be January we got nineteen dollars and forty-five cents for each option and each options contract represents 100 shares so the total cash we received for selling these four puts was actually seven thousand seven hundred eighty dollars we purchased four of those protective 975 puts as well costing as you could see fifty seven hundred now on the upside of the trade we saw four of the 1125 calls for twenty one eighty five which generated eight thousand seven hundred forty dollars and we went ahead and purchased for eleven fifty protective calls at fourteen dollars and thirty cents costing us five thousand seven hundred twenty dollars so as you can see the entire transaction actually netted out a cash flow of five thousand one hundred dollars which we get to hang on to if the stock closes between one thousand and eleven twenty five fifty one days later why think about it because if the market is lower than eleven twenty five on expiration day both the eleven twenty five and the eleven fifty calls are going to expire worthless no one is going to exercise the right to buy 100 shares of his stock trading at 11:25 if if the stocks actually trading below that and similarly no one is going to sell shares of a stock for one thousand if the stock is trading above one thousand so both the one thousand and nine seventy five puts will go out worthless as well in that case well of course that would be great but what is our plan if the market Pierce's either price you see if the stock closes beyond the short call or the short put on expiration day then that call or put will have value and either will lose money by being forced to buy shares at higher than their trading or being forced to sell shares at lower than their trading in either event we will lose money because that obligation got triggered our plan for dealing with that is called an adjustment plan which sophisticated options traders use and it's the way we manage risk on options trade so for example let's say that we add a risk management component to this trade and make an adjustment rule that if the market gets within five points of either the 1000 put or the 11:25 call which were short in both cases we're going to roll the short and the long option on that side further from the market price of the stock so let's see what happens in that case by moving to November 20th which is nineteen days later when the market on this stock actually got to 1003 which is within three points of our short puts located at 1000 well we have a choice here we could be a sitting duck and hope the market doesn't keep going down or we can employ what is known as a trade adjustment and roll our position down 50 points what we're doing is closing the original position and establishing a new position where we're short four of the 950 puts and long for the 925 place that gives us additional room so that if the market keeps trending downward it has a further way to go before the buyer step in and be get to bid up the price of the shares of what they believe to be bargain prices so after the adjustment the position looks like this now this adjustment is not done for free the adjustment cost us some of that original credit that we collected so let's see how that works now as you can see to buy back the 1000 puts and closed that position we need to pay 15,000 780 and closing along 975 actually gives us cash of 11,000 980 also we went down and sold those 950 puts for total cash of 8,000 640 and then we paid six thousand five hundred sixty dollars for the 925 foots so if you do the math the total cost of rolling those 1,000 puts out of trouble was 1720 dollars so now instead of having a profit area of 125 points our profit range is 175 points although now we have less profit to walk away with it's now down to three thousand three hundred and eighty dollars after we paid for the adjustment which is still pretty solid so now with the same logic we just discussed before if the stock closes anywhere between 950 and 1125 on expiration day then they've reduced but still substantial cash or three thousand three hundred eighty dollars is fully earned by us and we just pocket it and move on without any obligations that's because anywhere between 950 and 1125 means that all the puts and all the calls in the trade expire worthless even though we had to give some of that original credit back because of the rolling of the position in other words the trade adjustment now as it turns out the stock did close at 980 which is below the original 1000 a we would have gotten killed on those 1000 puts because they were so far above where the stock finally closed instead all of the options of the existing positioned expired worthless meaning you just pocket two three thousand three hundred eighty dollars of options premium that you kept after paying for the adjustment that's your profit so what I'd like you to take away from today's video is simply this you don't have to be a sitting duck once you enter an options income trade it's very simple to adjust your trades like we did in this case and roll the positions out of trouble and still have plenty of credit left over as your eventual profit on the trade and incidentally you can roll more than once and still have profit left in many cases if the market runs a little further in an adverse direction for you but the main point to internalize here is that these trades just don't begin and end with the same position sometimes you cleverly move the positions around to accommodate what has happened to the stock's price and still have a winner on your hands that's what the professionals do and now you can do that for yourself now that you have the knowledge of how to adjust trades now just to remind you as I said earlier if you enjoyed this video and you'd like to learn three more real-world option strategies that our traders use includes including the surprisingly simple 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 percent profit profit month in and month out plus an option strategy that you could employ with the stock that you like where you'll make your target profit whether the stock goes up goes nowhere or even goes down the small percentage 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 or you can just head over to options class com to register for this free intensive workshop it is 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 works up so click the link to sign up now and don't miss it and one more thing I'd like you to do is go ahead and click our subscribe button so you don't miss any of our trading videos produced for the trading and investment investing community and while you're at it please add your feedback in the comment section for what videos you would like us to produce next as well as what you found helpful from this video so from all of us at SMB trade well

Channel: SMB Capital

Views: 9,612

Rating: 4.9463086 out of 5

Keywords: stock market, day trading, smb capital, trading, investing, markets, wall street, stock trading, options trading, options income, economics, finance, How to Construct an Options Trade With a Really Wide Profit Zone, iron condor

Id: 5QZUDprprlU

Length: 13min 32sec (812 seconds)

Published: Thu Aug 08 2019