How to Set up a Riskless Spread Trade

good afternoon ladies and gentlemen of course I want to say good afternoon to those of you who are joining me here on the East Coast it is just after 12:00 noon Eastern Time some of you might be under a little bit of snow if you're up in the New England area or here around the Mid Atlantic a small amount hopefully the rest of you of course are enjoying decent weather today I want to say good morning William chimed in and said good morning well good morning William and good morning to all of you joining me in the central time zone mountain time zones were the Pacific time zones and of course we want to say good evening to those of you who are joining us possibly from across the pond in parts of the UK or parts of Europe and of course good early morning if you're joining us from parts of Asia or Australia welcome to today's presentation on can we really do a riskless spread trade well it's a great deal it's a great idea for a lot of us of course we want to be able to take advantage of the spread shades but not take on the risk that is associated with them for those of you that don't know me my name is Mike shuck I'm the director of education here at power options I've been trading the radioactive techniques that many of you have been introduced to for about the past eight years and of course subscribers diffusion can follow along with my trades as well as other trades from earnings and rent are the president and founder of power options as well as Greg surrender now what we're going to cover today and the email we sent out to you this morning we made a promise made about three promises we promise you that we're going to show you how to limit your risk to two to five percent in any position we promise you that within that context we're going to show how to do risk with spread trades to take advantage of premiums or the benefits of the spread trades but not take on the additional risk we're also of course going to show you that you can do this with weekly options or with standard options as well well from the beginning why do we love spread trades well spread trades are an excellent way to generate income they can be done in a credit which I find is the most popular technique doing Bayer call credit spreads put credit spreads or perhaps iron condors a combination of the two but they do have parity trades that can be done in a debit with essentially the same risk reward profile now the spread trades can be set up to have a high probability of success you can look for positions that have a 75% probability 80 or 85% probability or higher of expiring worthless which is what we'd want in a credit spread and we know that the max risk is dialed in we enter a spread trade the risk is typically the difference in strike prices minus the net credit or the debit that you paid out to get into let's say a debit spread as well so you know the risk upfront this also means of course since we know the risk and it is lower because we're using leverage we can also get double-digit returns so a common question that comes in is why isn't everyone trading them well it's because of that lie of leverage having a leveraged return looking for a 10 day out 7 day out maybe even 14 or 15 day out position that offers a 10 11 or 15 percent return also means that you have leveraged risk and if you're looking for those positions of course that have an 80% 90% probability even although you have a high rate of success you take on a high risk reward ratio when entering positions that may have a sudden jump due to the unknown but what do I mean by the unknown well we can go through and we can identify positions for a bullish spread stocks that have been moving up have been MACD or Bollinger Band ratio technical and fundamental indicators that match what we want to see on the position for the sentiment of the trade and we can be 10% out of the money and have an 80% probability but something comes out on the stock buyout offer and the stock gaps up 10 or 12 percent when out in the money on our bearish position bad news comes out over the weekend or in the pre or after market hours the stock gaps 10 or 15 percent and now our polish spread is completely in the money and out of full loss one loss can wipe out several trades and this is the common question an investor will ask I see plenty of weekly spreads 7 to 14 days out or less that offer that leverage return 10 15 maybe even 20% with an 80% probability well what can go wrong why doesn't everyone trade this way and the reason why is because the math does not behave the way that we expect it to and we already talked about how spread trades have that dialed in limited risk here is just a simple profile of a bear call credit spread let's say we had a stock trading at 50 we're neutral to bearish on the position well 7 the 10 days out I might look at a weekly option I might sell the 7 day out 52 and a half call and then buy a 55 call we'd receive a credit for this position and as long as the stock stays below 52 and a half both calls expire worthless and we keep the net credit we know the maximum risk at the beginning it's already dialed in isn't it we can't lose more than the difference in the strike prices and we get to keep the net credit regardless of what happens so if I sold that 52 and a half and we bought the 55 let's say we take in a 25 cent net credit for a 7 day trade well my risk is 250 but because I keep the net credit regardless of hat what happens my true risk if the stock settling gapped above 55 would only be two dollars and 25 cents per contract $225 per contract so it's an 11 percent return on the position but the risk reward ratio is about 9 to 1 now sure want the stock to stay below 52 and a half that's the maximum profit if it gaps up above 55 well we take the maximum loss on the position so the problems with this scenario is that is it considered safer well many brokerage houses many gurus out there will explain this and educate write article saying that standard credit spreads bear-crawl credits both put credits or even iron condors are safer positions because you know the risk up front and you can't lose more than that even if our sample position here if the stock went up to 80 or 90 or 100 we couldn't lose more than that to 25 at the same time you can set up the position to have a higher probability so they mark this as safer I don't consider this really a safe trade because in order to get that safety the 80% 85% probability or more you have to take on a 10 to 1 risk reward ratio by definition I don't consider that safe and is the reward limited yes it is this doesn't allow our winners to run if I picked the right stock even though it's trading at 50 right now but over the course of this trade it dropped down to 47:43 $40 per share well that's great they don't make more than the 25 cent net credit on the position it doesn't allow my winners to run yes I have a dial than risk but it could be as high as 10 to 1 so 1 loss could wipe out 10 previous trades now that's a sample just a quick overview of what a bear call is let's look at an actual one that could be open today earlier before the webinar I took a look at Amazon Amazon is trading at 8 24 45 the February 17th expiration series 8 days out in time we could sell to open the 8 40 to 50 call on Amazon and collect a dollar 75 in training that's about 20 points out of the money or so so we've got a nice little cushion but at the same time I apologize there something went wonky when I was writing up the slide there this is actually the 850 not the $8 one so we look at buying the 850 to cover the upside in case the stock gaps up and that was priced at $1 so our bear call spread to be selling the 840 250 buying the 850 is $7.50 strike difference and we generate 75 cents of net credit as long as Amazon stays below 8 40 to 50 in the next eight days both calls would expire worthless and we keep the net credit what is my risk on the position well if the stock is above 850 we take the $7.50 full loss the difference in the strike prices but we keep our 75 cent net credit regardless so we know up front we're only risking 6.75 cents if I did one contract of course that means I'm putting up 675 dollars the margin requirement at my broker to cover the trade and I'm looking to collect $75 against it and if you did 10 contracts of course you're looking at making 750 if you're right putting up a monetary requirement of six thousand seven hundred and fifty dollars now this is where the leverage comes in this is an eleven point one percent return on the position put up 675 to make 750 or $75 that's an eleven point one percent return for an eight day trade percentage-wise that's phenomenal and 20 points or so out of the money close to 20 points out of the money really about 18 but based on the trading range there's a probability the theoretical probability to stock would rain below eighty eight hundred forty two dollars and sixty cents is 80.6% okay so we're looking at a position that gives us a dialed in risk a leverage potential turn and a high probability of expiring worthless now graphically of course what does that look like well again correct numbers this time we're selling that eight forty to fifty up here it's the pivot point of this bear call spread and we're going to buy the 850 call to get that leverage of only a 675 risk and again as long as the stock stays below eight forty to fifty both calls expire worthless and you end up keeping the net credit so again the question comes into play why doesn't everyone do this what can go wrong what's what most of you have probably experienced as credit spread traders or spread traders and that's why you're here you saw the idea of a risk with spread trade how can we take advantage of the risks the benefits I'm sorry of our spread trade without taking on the additional risk as well okay the lie of leverage comes into play this is where most of you have been hurt this is why most of you haven't been getting the returns that you've wanted with the spread trades okay so what does the Amazon spread offer a dialed-in risk of only six seventy five monetarily per contract a possible double-digit return of 11 percent credit up front and a high probability of success so where's the risk we're essentially at a nine to one risk reward ratio aren't we if I opened 10 trades today for next week with the same risk reward profile looking to make 75 cents or risking 675 and I'm right 9 out of 10 times means we took in about a total of 750 dollars for the 10 trades we just did one contract reject 75 cents reach we take in $750 and we're risking 675 on each if one of them goes against us for an unexpected event not related to earnings just something we couldn't see in the news the stock chart fundamentals or technicals someone expected event comes out in the stock shoots up ten or twelve percent well here we are at the full loss so we take a 675 loss we only make seventy five dollars and we were right ninety percent of the time and if two of the trades went against me we had an 80% probability if two of the trades go against us we take a thirteen hundred and fifty dollar loss we're actually down about seven dollars six dollars and fifty cents six hundred and fifty dollars and we are right eighty percent of the time even with management if you can catch it before it gets to the maximum loss you may need to be right eighty percent or more in order to profit long-term with this strategy let's take a look at that how the math works and why it's not working as we expect we're going to go radio active trading comm we have a tool there called the trade simulator tool we're going to look at a simulation of a portfolio where if we're right we make eleven percent of our investment we're going to look at an 80% probability of success and we're only going to take a 50% loss of what we invest in each trade a meaning that if instead of taking the full in this case 6.75 cent loss what if we only took 50% of that because we caught it correctly and maybe only took a 3.40 cent loss on the position instead of the 675 so let's go ahead now I'm going to navigate over to radioactive trading and when we go to radioactive Trading , make sure that pops up there on your screen there we go up at the top I'm going to click on the resources tab right here in the middle it's going to show us where we can take advantage some free resources you can get a 14-day free trial to the power option site which we're going to look at a little bit but we want to go into the trade simulator tool now what do we know about any investment strategy whether you're doing covered calls whether you're doing spread trades iron condors whether you're just buying stock or maybe you're buying calls and buying puts you know that you're going to have a string of winners and losers you're going to take losses I don't know any investor I've ever talked to over the years who's right a hundred percent of the time or even right ninety five percent of time on a sidenote be wary of services that offer trade selections advisory newsletter services for example that offer 99% success rate they'll show you a track record where let's say 99 out of 100 trades are profitable but what they're probably not showing is the trades that we're losing they've managed they've rolled out in time they've made other adjustments so that they're not showing you the losers it may have rolled the position that's actually taking a 50% loss but it's not a loss yet because they rolled it eight months out in time so be wary of those kind of promises okay but let's take a look here what did we see well this tool what it's going to do for us is we're going to be able to put in numbers for what is our target return on a trade what is our loss limit for what we invest what is our probability of loss on the position and what is our starting amount for our portfolio and what is our percent invested per trade okay so let's say we started with a $10,000 portfolio to allocate to our spread positions we're looking for positions that have that high probability of success oops so we're going to put in 11 point one percent target return and I'm only going to allow a 50% loss for any spread trade that we open now our probability of loss well let's take that down to 20% okay so we're going to look at a position that has a 20% probability of loss and we're going to start off with 10 thousand dollars now instead of thinking about the seven and a half point spread which provided ten contracts I might be allocating 75 percent of that $10,000 to each trade let's keep our investment per trade of this $10,000 at 50 and we'll simulate a similar risk word profile in other words what if instead we did a five point spread did about 10 contracts for each and we got a 50-cent net credit well remember if we have a five point spread we take in 50 cents so our max risk would be 450 this would equal to the 11.1% return 50% allocated our $10,000 means we put up about 5,000 or the 4500 to do 10 contracts we're going to make 11.1% Oh metaphor right but we're going to control it and I'm going to say what if we only lost to 25 instead of that full for 50 on the five point spread and we're going to be right eighty percent of the time so let's go ahead and simulate a trading record with those numbers okay now you see right away if we took one loss off the beginning we're already down to 75 hundred hands about to 2250 half of that about 2500 we have three wins in a row we build it back up and then we take another loss the strings of winners and losers and we're right 69 percent of the time almost 70 percent and we're bankrupt after 95 trades we really have to be right we have to get this better to an 8020 risk reward ratio here's one that looks pretty good doesn't it remember what I told you in this simulation 86 percent of our credit spreads expired worthless and we made the 11.1% we took 50 percent losses about that 2500 2250 on 14 of the trades and at one point over 100 trade simulation you have a high return value of eighteen thousand five hundred forty-seven that is an 85% win and 85 percent return on our portfolio but at one point with our strings of winners and losers we ended up with a loss of 4000 or value I should say 4155 so we could have had an 85% return at one point and we also had a 60% loss on our portfolio how many of you would have continued trading okay if the stock continued I'm sorry if your portfolio is down 60% would you have considered trade continued excuse me to trade that method seeing a 60% loss in your portfolio's you adjust a trade I don't know how many of us would have on that okay but of course the end return shows up an 85% gain but what are the numbers we are right 86% of the time we had to be right 86% if I'm not 80 we have to be 85% to 90% of the time with this risk reward ratio to profit long-term here's one where you're right 84 percent of the time 84 winners 16 losers again more than doubled the portfolio value one point almost realized one 55 57 percent loss on the portfolio and at the end of 100 trades you're just to break even a little bit below it being right 84 percent of the time of course be really profitable you got to be in the 90% range but let's go back this is more what I was looking for your opening positions an 80% probability of success okay here we see we're right 82% of the time with strings of winners and losers and we didn't even take the full loss only took half and at one point we have about a 57 percent return but we could end up with more than a 50% loss long term and that's being right 82% at a time so I guess the answer is well we just have to look for positions that have the better probability 85 or 90% keep in mind the higher the probability the further the out of the money so now you're talking about weekly spreads that only offer a 5 or 6 percent return where you're still risking now probably closer to 480 on each trade so even if you're right 90% of the time taking on the higher risk with a lower net credit you're going to have to be right if 94 95 percent of the time in order to profit long term this is why many of you probably aren't ahead the way you expected with the credit spreads especially trading it on stocks where a buyout rumor or just some bad news can come out again not related to earnings or anything else as well now I want to talk about one thing here I want to launch a quick poll and I'm just curious those of you that are doing the spread trades or even any other strategy what do you think you need to do to be more successful do you think you need to do a better job picking stocks do you need better timing do you feel for your trade entries and probably your trade exits we talked about here taking on that 10 to 1 risk reward ratio but here remember we're only simulating taking a 50% loss okay not even the full 100 if I put in that we would take a hundred percent loss and have the 80% probability we'd still be in trouble we'd be in big trouble very quickly this is assuming that we can close out of the position better ok so but just let me kind of know here what you think you need to be more successful at trading okay I have to pull open for about a minute okay Tom asked is the question I don't know if I'll be able to answer in this webinar Tom Tom asked a question our diagonals better than credit spreads well they take on a higher monetary risk which you put time value in your favor I'm going to talk about that a little bit we're going to see sort of an example of what you're talking about Tom it's done in a different context the true answer is it depends on the market conditions it really does and it depends on the success rate as well okay our diagonal is better because they put time on your side yes but the diagonals also take on a higher risk because you're going to pay more for that position you know next week I'm going to do a power options webinars looking at diagonal spreads and some of the comparisons I'll make sure to invite you to that just wanted to see that follow up there but ladies Jenna I apologize I had to pull open longer than I wanted to let's take a look here so many of you to answer the poll is about seventy seventy-five percent if you participate in the poll I apologize to do better at reading 14% of you think you need better job picking stocks okay 21% of you need better timing feel that you need better timing for entries and exits and 54% of you said you wouldn't mind taking a few losing trades if the losses were small okay and then 11% of you feel that you need a guru to tell you what to do okay no one said they need to make more money when the right that's great and that tells me that a lot of you are savvy investors that have been trading okay and that you realize that yeah you could open positions maybe spread trades but have a lower probability and offer a higher return but that means you're battling and citing it right so it's not just about making more money when you're right it's about controlling so one thing we can and control okay let me go ahead and hide that Bob that's a quick follow-up question interesting results what is the sample size this is looking at a $10,000 account and it's a sample of 100 trades that's why the wins losses come out to 100 Bob okay now what I was assuming is let's say I allocated oh oh I'm sorry you're talking about the poll what is the sample size it looks like close to 80% 82% it looks like of the people in the webinar right now answered the poll and I have 58 attendees right now on the webinar it shows me okay so 80% of 58 people answered the poll Bob okay all right so we'll come back to the trade simulator tool but we need to talk about those other things that we sort of promised today don't we okay so this is why I feel that many of you especially the common questions I get here at power options and it radioactive trading for coaching sessions email questions and so forth if it's so easy you can have an 80% probability of success and 11 to 15% return for a 7 day trade why isn't everyone doing it well it's because the math doesn't behave the way we expected and we just showed that and even with the strings of winners and losers that you can experience in any strategy we saw returns in the simulation with being right 85 88 percent of the time that would take us you know almost to a 5758 percent even one with an 85 percent return on our investment but at one point we had to stomach a 60 55 percent loss in our portfolio which is really true so what is the second promise how can we really do risk with spread trades and well in the proper context you can still apply the common spread trades bear call credit spreads ratio call spreads iron condors and even broken wing butterflies inside a larger trade to take on no risk okay now let's talk about limiting risk what we do here at radioactive training any brand-new position that we open the fusion portfolio so that our subscribers open or a blueprint on is open is going to consist of a stock and put combination to properly control risk the 54% of you said you wouldn't mind a few losing trades if you only lost a little bit well what is the one thing we can control in the market can we control how much money we're going to make now I can set up a position as we saw the bear call spread with a potential 11% return but that doesn't mean I'm going to get it the stock goes a little bit above my short call it might only make 8% it goes halfway between the strike prices on my bear call spread I'm going to lose you know five to one risk reward ratio so going to make fifty cents I lose 225 okay so I can't control how much I'm going to win I can set up the structure that if I'm right I could win this but I can't control that I can look for positions that have an 80% probability of success does that mean I'm going to be right eighty percent of the time well if we're doing both put credit spreads and on unfortunate event happens in the market something silly or ridiculous happens in the financial market and everything is dragged down five ten percent your stocks might still be strong your stocks my silver bullish trend but the market itself pulled everything down and now you're looking at a large loss because all those credit spreads are losing money okay so you can't control the probability because the probabilities your deltas everything along those lines are based on what has happened in the past looking at the past what could to happen in the future but that doesn't take into account any Black Swan events or any expected event the combination that we used is nothing new to be honest with you it's a married put it's a stock plus put combination but done a little bit differently where you put the time value on our side as tom was asking about a calendar spread or diagonal spread I should say in comparison to a credit spread so we maximize the costs of the time value we properly control the risk which is the one thing that we can control in the market to stack the market odds in our favor now I'm going to go over to power options and we're going to take a look at a position that I open 13 days ago is radioactive trade on ub NT you Piketty you can quit e networks let's navigate over to the portfolio it's going to take a quick look at the portfolio then we're going to talk about riskless spread trades in the proper context so this is a position in my portfolio open in my fidelity account was open on January 27th 2017 roughly 13 days ago we purchase stock at 61 75 and at the same time I purchased a June 65 put for 765 now the stocks up 3.6 percent we're still making about fifty percent of what we expected to make even with the cost of the put fifty percent of what the stock is moved very quickly let's take a look at the profit and loss chart alright here is the profit and loss chart of that radioactive setup we purchased the shares of stock at sixty one seventy five and we purchased the June 65-foot for 765 is my total investment much higher than the stock was trading yes I have a total out-of-pocket cost of six thousand nine hundred and forty dollars into this position but I've guaranteed that I can't lose more than $65 per share buying the put is much better than a stop order if I entered this position and three days later the stock dropped ten percent was trading at $55 I have a six dollar loss on the stock I'm going to drop down to 55 again $6.75 loss from stock if I put in a stop order at 5% if it happened overnight in the pre-market it's irrelevant the stop order just becomes a market order to tell my broker to close it if it drops down this level sell to close it at any time so I still take the 10% loss even a 5% stop order in place purchasing the put gives me the right sell to close a shared stock at any time between now and June expiration so even if the stock fell to 55 or 60 I'm sorry 55 or 50 or 45 I'm guaranteed that I can't lose more than four dollars and 40 cents or 6.3 percent is that risk less than the spread on Amazon monetarily absolutely for only one contract we would have had a risk of 675 invited a five-point spread 7 day out trade collected 50 cents my risk would be 450 still about the same but remember on the spread I would be risking 100% of whatever I put into the positions of it'ld 10 contracts we'd be risking 4,500 here we set up a proper structure where we can only lose single-digit percent on the position by the way we already showed back in the portfolio the stock is up 3.6 percent it's trading at $64 my put did not go to zero it's still priced at around 650 okay so I'm not 765 behind the 8-ball when I open this position I'm not down even four hundred and forty dollars when I open this position all I risk when I first opened the position is the bid-ask spread of the put option so this is a structure which gives us infinite upside profit potential which we don't see with the credit stress remember they don't allow the winners to run and we have a dialed-in loss that is guaranteed unlike a stop order or even a trailing stop this is guaranteed that we can get out at $65 per share so we're only risking single-digit percent on the position now let's talk about something else let's take a look at UB NT where it is right now now that it's trading at $64 per share and what if we set up a bear call spread on you BNC by maybe selling the 65 and buying a 70 or maybe even going further out of the money okay so let's take a look at UB NT where it is right now this doesn't offer weekly options we're going to take a look at that in just a moment I'm going to go out to March now let's go to February we'll go eight days out anyway okay now we see here the 65 call has a great premium about 280 270 bid 285 ask maybe 275 and then of course 90 there it's about a dollar 10 for the 70 call so we can still get about a dollar net credit for a 5 point spread but it's the 65 in the stocks right around 64 probabilities only about 55 percent so let's go with the 70 75 bear call spread and so we'd sell to open this I see a bit of 90 and an ask of 130 so we're going to go midpoint just gives you one contract we're going to get 110 at midpoint I'm going to buy the 75 call zero bid 40 cent ask so we're going to put midpoint in at 20 so we're looking at a 90 cent net credit for you be NT on a 5 point spread so this is going to be a potential profit of 90 cents for a risk of only 410 that gives the 22 percent return by the way no one enter this trade right now please don't I know I'm showing your trade but I am NOT making a trade recommendation right now by any stretch of the imagination using this is a specific example do not enter this trade today for next week do not do it okay but here we have a reasonable range out of the money we're still about 10 percent out of the money with a 70 call fault bought the 75 good cushion 90 cent net credit 22% potential return with a risk of 410 now this would increase our return that we saw on the trade simular instead of making 11% we're going to risk 22 and we'd be maybe risking 205 instead of 225 so this must be a better trade but there's two things we know about you VNT number one well it doesn't offer weekly options but this is a weekly trade but number two I'm going to go over here to our stock research tool grab the highlighter real quick the earnings are coming up and I don't want the highlighter I love the drawing you see here on this page our earnings are coming up it's confirmed after market today on February 9 don't do a credit spread any type of credit spread bulb hood or bear call any time between now when you have earnings coming up between now and expiration that's why the prices are high okay and even if I was bullish and did a bull put credit spread we get a similar return but we don't know if the stock is going to drop ten or fifteen percent we don't know if the stock is going to gap up ten or fifteen percent from a positive earnings pick moves up twelve fifteen percent we're going to be at a loss in a bear call if we enter the bulb hope we were lucky but we're kind of flipping a coin aren't we but what about this what about taking this bear call credit spread in the context of the larger nested trade being able to take this 90 cent net credit in the context of what Bob mentioned is still a bullish position since you have a positive Delta I'll be at a much knowledge out there yeah the Mary put by itself is positive Delta and usually my Delta difference the stock has a delta of one which I purchased the put might have a delta of negative point five point five five that I bought which is far out in time so I'm still looking at a positive Delta but every time the stock moves up a dollar the Delta on my foot drops okay okay let's see here it's just going through another question real quick okay yeah earnings David that's right today okay and that's what we're looking at all right so let's go back let's take our properly structured position where it's controlled our risk it's about six percent but remember that six point three percent maximum loss would only occur if I held the position all the way to expiration and made no adjustments took no income okay that's the worst case scenario curved red line shows me on April 14 female stock Falls to 69 I'm only losing two hundred and sixty-seven dollars because the puts not going to zero I put time on my side by buying further out which is what you want to do in that diagonal spread tom is looking for the longer term call but it costs more so the benefit might not be as good as a credit spread depending what happens at that time again Tom we'll talk to you next Wednesday when we have a full presentation on the diagonals okay now let's take our bear spread that we just saw looking at 90 cents to 4/10 so that's close to our five to one risk reward ratio but if I did the same thing on my already existing trade even with earnings coming up today I'm going to sell the seventy call again once more we're going to add that in in the proper context by our seventy-five a twenty this is a bear call spread done in the context of the larger trade okay what we call income method number six in the blueprint now remember this the risk on the radioactive trade the married puts set up initially was four hundred and forty dollars the risk on the bear call spread we took it ninety cents was four ten so shouldn't my risk now go up to 850 I've got a four or forty risk on the marry put a four ten risk on the bear call so our risk is going to go up to 850 no it doesn't the risk drops it dropped down the three fifth you only five percent in the incorrect direction but we still have an infinite upside profit potential and we have a 10% cushion why didn't the risk increase well it's simple when we do a bear call credit spread you have to cover the difference in the strike prices you obligated yourself to deliver shares of stock at seventy okay well you reserve the right to buy share you know sell their shares of stock at seventy five you have to cover that difference in the strike prices - than that credit because you don't own the stock you've entered an obligation to deliver shares of stock at seventy which you don't own but you can cover it at 75 in the context of the larger trade that already has a controlled risk in place you own the stock you've ensured the stock with a put option which is not just insurance it is a second asset that you own remember my stock is up about three percent it's gone up about two dollars and 25 cents to sixty four dollars for share roughly okay well it's about yeah it's almost yeah two dollars and fifteen two dollars and twenty cents $2.25 excuse me but the post only lost one fifteen and still holding a lot of its value it's an asset that I can also use to manipulate but now I can do a bear call spread I leave my upside open because and I lower my worst case scenario I lower the risk because we keep that credit regardless of what happens it takes our risks down to 350 or 5.1 percent and we've got an infinite upside profit potential now we could see a similar graph we could generate more credit by using the 65 in the 70 but we're not giving ourselves a lot of cushion I kind of like this position and I kind of like this setup by the way those of you that are trading fusion you might see this in there as well okay okay the Bob asks another question since you want to stock why buy the 75 call because earnings are coming up there coming out today let me just clear that out this is okay the first income method talked about in the blueprint income method number one now the stock gaps up 10% there's up to 64 to 70 dollars it's looking good that's an eight point one percent return that's looking good we reduce our risk more to four point eight percent but as the stock continues to go up Bob what happens well my put as the stock continues to go up remember Bob we had that positive Delta that we talked about as the stock continues to go up we gain more positive Delta we're still gaining a dollar on the stock and we're giving up less because our put would be declining just selling the call by itself remember at expiration eight days from now what happens well this short call magically goes to a delta of one negative one because I sold it so any further gains beyond this I'm not making positive profit on the position this was a collar I took the married put converted it into a collar gave myself some room okay I lowered my risk further by just selling the call but now I have this problem with the upside because I've completely negated the positive Delta on the stock and as the position continues to move up my put continues to lose value which we'd expect to happen but I'm not getting any further gains from the call that is the advantage of income method number six not only is it a bear call credit spread that I can do and take advantage of the net credit but I don't have to put up any margin to enter the trade the obligation the short call is covered by the stock and we leave the upside open if the stock continues to move now sure there's a little bit of difference here but remember we're just selling the call for the higher return if the stock moved up further I'm not really expecting a 20% gain on you BNT but I'm not remember that portfolio the position would go like this with our income method number six with the bear call spread it continues to move up in price I keep my upside open I don't cap the game and you're right it's still a nice gain but what if it moves up 15 percent 20 percent or more I lose out on the call side okay I start to lose money that peak hits with the income method number one trade with income method number six I leave the upside open okay all right so just going through some of the other things okay all right now looking at this here there's different things Burt asks okay looking at that one as well I want to cover some other things here I'm sorry folks just lost a there we go I'm sorry so David I'm sorry David it came up with Burt David what would I do if the stock went above 70 well I would treat it just as a cover call but remember this still has some days to expiration I can show you this in my favor we talked about that in the full blueprint and another presentation for radioactive training I could treat it just like a covered call Bob mentioned I could roll the call up to a higher price not the 75 but I could roll it and maybe the 80 or maybe further we could continue to adjust the bear spread there's other adjustments that we can do against it okay as well there are different ways to manage it we could roll the call we could let it go in the money both of them and close out the spread for the you know we took in ninety so maybe we take a 410 loss on the spread but in order for that to happen the stocks at seventy-five we've gained twelve dollars on the stocks and the time we entered the trade that's a sign payout then I could sell a march 75 on march 80 and still get more premium and then of course I can also manipulate the second asset okay those are all things that you can do when the stock moves up when you have income method number six whether it's between the strike prices whether it's above both strike prices there's different ways to manipulate all of the working legs on that position to look for further upside profit and potentially reduce the risk even further as well okay now another popular trade another popular credit spread I'm going to bounce back over to one of our other custom spread builders another thing that can be looked at is potentially a ratio call spread now ratio call spread to the outside allows you to control potential risk but it has this unnerving habit of taking on unlimited upside risk now none of these are really great examples but I'm going to show it anyway in order to do income method number five the ratio call spread which is a spread trade I want to be able to do it at a credit I want to make sure that the calls that I'm selling are giving me twice as much as the calls that I'm buying in this case we really don't see that here's a $0.50 different so let's say I could be lucky and I could sell 267 on sorry 265 calls for 275 I get a really good bid-ask spread and I get lucky on the 60 call and I'm able to buy 160 call for 540 okay let me just go ahead and put this in as well okay Bob you're just about to take a look at that all right now here's what's called a ratio call spread use gained popularity for awhile in certain market conditions because it's a neutral strategy it really is it's not really bullish it's not really bearish it's really neutral you get a peak here profitability if the stocks trading right at you're too short strike prices here we sold 265 calls at 275 bought a 60 call at 540 so it's a two-to-one ratio and I faked the numbers a little bit so we got a ten-cent and credit now if the stock falls what you've really done here is you've entered a bull call debit spread you bought a 60 call and you sold 165 that would be a bull call debit spread but you sort of double dipped you sold an extra call here at 65 to get a positive net credit so if the stock falls below 60 what happens all three calls expire worthless you keep your $0.10 net credit if you have profitability anywhere from 65 down to zero any profitability really still up to 70 10 but what happens after that well now you've got infinite risk to the upside because you've got a bowl called debit spread with a naked call that second 65 call is not covered by anything what do we know about a naked call was the riskiest thing you can do because it takes on infinite risk to the upside same with the ratio call spread but although it's a small credit what if we did this in the context of that position Sam's right says the broker might not allow you to sell a naked call you're right it depends on what you're allowed to trade but even if I'm in a restricted account an IRA account and I can trade spreads guess what I can do this in the context of the larger trade so let's go back to UB NT original limited risk setup and we're going to go ahead now use those same numbers let's make them a little bit we're going to sell 265 calls at 275 and you're going to buy 160 called 540 now I'm not going to be able to get those prices but we're just showing it for an example now it's a ratio call spread in the context of the properly structured limited risk trade this would be income method number five bought the ratio call spread what does it do well it allows me to double dip now I only collected ten cents again so we really didn't reduce my risk by too much to the downside but if the stock just moves up a little and I don't think I do this at earnings but if the stock goes up to 65 what happens well the 65 calls expire worthless my 60 call is now worth five points we double dipped we gained on the stock we gained on our long call remember we hedged this loss this is essentially a long call received at a credit but now at expiration we can sell to close that at five our 65s expire worthless and we're going to reduce the risk even further we're going to take this 4:30 risk down to where it's almost bulletproof isn't it so let's say those two expired worthless and we sold to close this position for $5.00 best-case scenario but you know wouldn't do that exactly let's say we sell to close it at 490 and we keep that $0.10 net credit which we already reduced our risk down call space is 69 30 okay so let's say that expires in the way we'd want well originally we keep the 10 cents we would have dropped our cost basis down the 60 165 and let's say we just get we're able to sell to close that 60 call for for 65 this will reduce my cost basis on the stock down to 57 dollars the 10 cents - the 465 now he's got a guaranteed profit the 65 put in place this position is now bulletproof as well but it's more of a neutral position but you don't have infinite risk with the ratio call spread it was done in the proper context you reduce the risk slightly with a potential for a double-dip to take advantage of the bull called debit spread profit but you paid for it with an extra call which was covered by your 100 shares of stock so even in my IRA account which I'm allowed to do debit spreads in I can go ahead and place a bull called debit spread with a 60 65 and then sell a 65 call I've entered a ratio call spread my broker doesn't see it that way they just see it as a covered call with a bull called debit spread in place those are two of what we call the money net trades the riskless spread trades but as possible to be done in the proper context and you don't take on the extra risk on those positions only asking another quick poll question think about what I just showed you with a protected position in place originally not even considering the bare spread or the ratio call spreader or other adjustments that we could make if every loss you took last year was limited to 5% or less how would that have likely changed your trading with limiting your risk to 5% of less not have helped your trading over the last 12 months because you may be lost last year you would have naturally not lost as much did you lose last year but you would have won in every position that you had was kept to a risk of less than 5% or did you do pretty good last year but you would have done better had you done that David said sounds complicated well that's why we describe everything in basic detail in the full work of the blueprint there are 12 income methods these two that I showed you today income method number five I only use in certain scenarios but for those of you doing ratio call spreads this really shows you the benefit there are other positions I could use if my stock hadn't moved I could do a condor for example on top of the radioactive trade which wouldn't take on any risk would still reduce it by the net credit Maira overall risk would be reduced I could still take advantage of that in a neutral market as well but the way the blueprint is written we don't go into the complexities of what is your Delta what is your gamma what is your theta we teach you the proper structure from the beginning to set up this really simple stock and put combination correctly to put time in your side stack the market odds in your favour and have the limited risk in place and each of the 12 income methods is described on how to use them properly when you would look to use them when you would not look to use them I want to show an example of when not to use it as well the question that came in earlier this week that I need to address let me share the results okay 8% of you who answered this poll and again it was about a little bit or this time Bob asked about the the area I'm sorry the sample size about 65% answered this poll and we're at 54 attendees right now Bob 8% said limiting your risk to 5% would not have helped your training 16% said yes you may have lost last year you would have lost as much 36 percent of you lost last year but you would have won this is a game-changer isn't it properly structuring the trade to control your risks the one thing you can control in the market where do you want to be when I ask this question again 12 months from now or even six months from now and 40% of you did well last year but you would have done better with this okay now let me just ask this for my own curiosity what did you think of what I showed you today in relation to being able to do a risk with spread trade okay does your not think it was possible I was going to show you how to do a risk with spread trade how you could do a bear call credit spread a ratio call spread you don't have a lot of time to show broken-winged butterflies of course and the the condors in the context did the one trade either income method number six or income method number five make it worth the time you spend here today do you want to know more about risk with spread trades okay and of course I put up can you do what I just showed you in an IRA I just mentioned and shows you that you could so no one's probably going to answer that the bear call spread even if you're in an IRA by the way if you just have level 1 trading where you can just buy stock sell covered calls buy calls and buy puts in your IRA you can still do that bear call credit spread in the context why because if you already own the stock in the put correctly you can sell the call your broker just sees it as a covered call then you buy the other call and your broker just sees it that you have a covered call with a long call and a long put but really if a married put with a bear call spread okay you like that it reduce the risk can it actually go to zero we kind of just shows you that with iniquity in a sense okay what I mean by that is that if I did that income that's at number five we showed closing it out then absolutely we bulletproof the position I'll show that just I think we're still showing up I'll show that again just a second okay six percent of you said that was wild you didn't know you could do a risk of spread trade 39% of you said this one trade made it worth all the time that you spent here today and 22% wants to know more about risk with spread trades and 33% of you said you like to reduce the risk can it actually go to zero absolutely that's what we call being bulletproof and I'll show you an example of some of the definitions of those in just a second as well let me just do this real quick there we go okay let me go ahead and hide that let's set a question come in okay let me go back Oh mark okay good let me go back to the custom spread here this was with that income at the number five remember this is what would happen if we closed if we didn't come at the number five in a week from now the stock traded right sixty five we got about the five points back to that long haul and the $0.10 net credit so our total invest in the stock would have been reduced to fifty seven dollars we're still holding a June 65-foot at 765 so my total investment on a pocket after the income exit number five to be 64 65 I'm still guaranteed anywhere between now and June expiration to get 65 back so we have a negative at risk that bulletproofing the position bulletproof means when we reduce the risk using the different income methods to the point where you've guaranteed profit to the downside but in limited upside profit potential you can't lose on the trade okay mark says if the stock goes down and stays down okay so in the original position let me go back to my 60 175 cost basis here mark okay and let's put our income method number six back in place which was the 70-75 bear call spread what we call income method number six was just a bear call spread purchase name in that way because that's the order that he put them in we were using a price of 20 there okay so let's say I did this position mark says if the stock goes down and stays down when the married put expires in the credits receives in the bear-crawl creditors do not pay for the put we can have a greater loss no you can't no mark you can't I can't lose more than five percent the stock is go to zero it could go to ten cents per share I'm getting sixty five dollars back my call space is only sixty eight fifty I can't lose more than five point one percent that put is a guarantee and by the way as we showed earlier with just the married put that maximum loss only five percent well six point three percent this only occurs at expiration this curve line here the halfway point again even if the stock dropped to fifty nine dollars per share I'm only losing two seventy three because it's not going to zero it only goes to intrinsic value it a sock has a massive collapse in price or m at expiration anytime between now June expiration I'm not going to tell us what happens at the stock follows 250 dollars tomorrow for poor earnings now I'm going to be close to the maximum loss but not there I'm guaranteed this is a guarantee mark I cannot lose more than $440 with just the married put by itself not even doing an income method okay you can't lose more than that with the put in place even if you don't anything you generate with the income method so in the bear call spread it's going to keep reducing this risk okay so the first one would take it down to you know we get 90 cents it would take it down to 350 I do another adjustment collect another 90 cents we're down to 260 that's the worst second lose even if the stock went to zero now my risk is lowered about half where it was okay that's the same thing you can do yeah and I mean if you trade a good coverage trust me you BIC wa t is not going to go to zero I'm not worried about that but this is locked in place unlike a stop order unlike a trailing stop when you do the protective put position the married put trade the radioactive trade you are guaranteed not to lose more than this initial amount even if the stock goes to zero even if you're doing income and even if the stock gaps up you're not going to lose more than that on any single trade okay all right yeah I wouldn't trust the drug company I mean you know doing a Mary put on a something has a phase two or phase three trial coming up that's not necessarily a great idea it could go up 50 60 % if it passes a phase two phase three trial because it'll drop 80 percent but you've protected some of it you're going to pay more for the put because that's also going to have a higher volatility and a higher price all these little things we're talking about now the structure the trade the higher volatility what we teach in the blueprint itself where you can learn all 12 income methods place where you can learn all 12 income methods how to use them when to use them of the 12 income method some are best used if the stock doesn't move between now and expiration I mean even in the first 30 to 60 days the stock doesn't move it's stagnant there's income methods you could use if the stock moves up there's bullish income methods you can use as the stock falls or if you think the stocks going to fall there's adjustments you can do to lower your cost basis even if the stock falls maybe lower your risk as well or to be able to profit in both directions the blueprint is the full work that describes the initial setup how to use the twelve different income methods to get real cash out of a stock with the various adjustments to control risk even further lower your risk and still realize it's an upside profit potential you can combine income methods and there's other things case studies mortem that are available as well inside the different chapters now if you do use this special bonus radioactive trading comm flash iridium to check out the blueprint to see how to control your risk properly with the proper setup to begin with and how to apply the different income methods you'll also receive something Curt called put together called a quick action guide we'll send you one of our mastery series videos for free it's usually an $89 value the foundations of radioactive trading mastery series video the fusion subscription I wanted to show that real quick I'm going to go into fusion logged on to my account I'm sorry I didn't mean to bounce over here too soon but here we go on the fusion we see a couple of positions here the two right now those are you said bulletproof okay okay and I'm sorry my ally position is bulletproof meaning I can't lose I've done two adjustments on it I can't lose on the position of the stock balls and Greg is got a bulletproof position on Alibaba as well so as we make adjustments you know I've adjusted the risk here on AIAS we're going to continue to make adjustments against it and more Ernie does have a bulletproof position here on health equity as well I'm not sure why that's not showing up with a highlighted green but that's the goal we're going to continue to make adjustments as well and bulletproof ability so yes it's absolutely possible to do that okay so that's that answer I'm sorry to the other question about is it possible to cancel all the risk yes and we do that on a very regular basis inside the fusion portfolio not every position is going to be bulletproof but it is potential as well okay so we showed the fusion if you pick up the blueprint using that link radio active trading comm flash iridium you can get your first month of the fusion subscription to follow our trades and track other lessons and other members only webinars for only $10 for the first month it's usually $69 per month you'll also get a free month of the power options tools that i illustrated today for tracking managing finding your positions as well yeah other bonuses that you receive if you pick up the blueprint you also receive a money-back guarantee you're not satisfied with the material for any reason you don't feel that it's going to fit into your portfolio you can send it back to us and we'll refund your purchase price sorry about this this is a forgot to clean this up here but we also do Members Only presentations for blueprint owners and fusion members there's also the archive of the Members Only webinars in addition to Members Only blog articles and white papers as well we'll have one coming up towards the mid fed at end of February probably February 20th February 25th someone that time range will have a Members Only webinar for blue print and for radioactive trading as well all right there's one other thing I wanted to mention here's a link it didn't show up as well as I wanted to I'm going to show you where you can find it real quick we also offer you're not ready for the blueprint now but you want to see some other information on these risk with spread trades someone can answer that poll you wanted to see more information on the riskless spread trades go to radioactive trading here I'm going to go into the products menu I'm going to click on the blueprint here but when you go into the store you click on the products link here there's several other forms of education the mastery series videos I mentioned you should go into education the scroll down here's the link and I'll send it to everyone stop losing at spread trades forever this is a bout a one and a half to two absolutely is closer to two our conversation to our video send you a link to the video the curt put together and this covers several of the risk with spread trades you can use in the context this webinar includes seven killer techniques for taking an income from market beginning with the low risk structure no riskless pledge trades and ending with zero risk for either it's only sixty seven dollars so you can go to that link it's a radioactive Trading calm slash store details so on and so forth I'll also asset and excuse me a reminder and a link to this video here stop losing at spread trades for every worker cover seven of risk with spread trades that you can use against the radioactive trade and that information is contained in the blueprint but you put together a little video here to show you that as well it's only sixty seven dollars so it's a small price but I'll send that to you when we post the archive of today's webinar so you can access that better as well okay so I wanted to let's see let's go back real quick I had a couple other questions come in as well let's go ahead here and we move on okay so questions yeah I'm going to post the archive today at around 4 p.m. Eastern times you think of a question later on you can email me to support radioactive trading com and you can also course call us during market hours at 3:02 nine nine two seven nine seven one okay David asked a question I was talking to my brother about this yes why not just by a call it limits downside and unlimited upside I wasn't sure how to answer the call is leverage trade it has the same risk reward profile David but unless you're disciplined which most people who buy long calls aren't you get yourself into trouble quickly and let's let's take an example why I I don't have a presentation on this but I can send you I'm going to send you something David that send you a link to a webinar I usually do here we're discussing three core principles of radioactive trading and the trade comparisons now thirteen days ago I bought ubiquity sixty one seventy five about the June sixty five foot four 765 I invested six thousand nine hundred and forty dollars okay and at the same time that gives me a controlled risk only for forty four hundred forty dollars so the question is why not just by a long haul we've got the same risk word profile and you'd use less money well let's assume that they are parity trades which by the way they are not a long call is not a parity trade to the protected foot position let me explain why let's say that we did just by the June 65 call when I purchased the radioactive trade and I bought one contract for 440 okay not one forty four forty or four forty five let's put in for forty okay it would have been close the time value of that out of the money call would have been very close the same monetary risk I'm taking on the Mary put usually it's a little bit higher might even for fifty or four sixty at mid point but okay this looks like the same exact risk reward profile that we entered into a radioactive trade why is this not the same because you're risking 100 percent of what you invested now let's say that David I have a the same with fifty thousand dollar account total value and I had $10,000 of free capital when I entered ubiquity I forced myself into an ideal size trade one of the three core principles by buying the shares of stock at sixty one seventy five and buying the put option to pay sixty nine forty okay so I invested six thousand nine hundred and forty but remember my risk is only four hundred and forty dollars remember my total portfolio fits so I'm less than one percent on my total portfolio value let's say your brother at the same structure he is a fifty thousand dollar total portfolio value ten thousand dollars in free capital and he says well I'm not going to do the married put I'm just going to buy the call at four forty well okay but what do we know about that well is he going to buy one contract no he's going to buy maybe five so he's going to invest let's say $2,200 for five contracts of this call you know how much he's risking on that long call now $2,200 twenty percent of the monetary amount he had to enter into new trade okay but it still comes down to about you know five six percent of his total portfolio but now he's got eighty six hundred dollars left to invest so that's a bit much sub so $7,800 sorry 7800 to invest so what is he going to do now he's going to buy three calls was maybe stock XYZ and five calls of stock one two three and so forth he's probably going to invest maybe six or seven thousand dollars into long calls we're nowhere near parity at this point okay this is what a long call investor does they use leverage just that we saw with a call with bear call spread excuse me they're using leverage but they're going to end up over investing it's the nature of the long haul trader and what are they doing they're trying to diversify so that they realize less of a loss if one position losses and you can lose 100% of whatever you invested if one of these long calls loses a hundred percent well because they have other investments here that might have a ten percent or maybe an eighty percent return and they're not going to realize as much as this hundred percent it's a balance right diversification what they always teach you with going into the money markets okay and going into mutual funds that's why you want to be diversified so your gains you don't you can have a 20% gain on the side but it doesn't reflect a 20 percent gain in your portfolio because you really only gain four or five but you took a 20% loss on one of the 20 stocks in your portfolio the long calls someone who builds a long call portfolio is doing the same thing we are not at parity even if your brother just bought the one contract of this June 65 call at 4:40 and said okay well I had $10,000 to invest same as Mike in a $50,000 account I bought one call at 4:40 we're risking the same so we're at parity well what is he going to do with the remaining ninety five hundred and sixty dollars he's going to buy three calls of stock one two three five calls of stock ABC six calls of stock XYZ and more a Black Swan event he might be risking up to 40 50 60 % of his portfolio okay or of the 10,000 he add to invest which might come out to be 20 percent of his total portfolio value I'm risking $440 so properly structured trade the long call by itself is not a parity trade to the married put if I bought the June 65 call and I left the remaining $6,500 I would have used to buy the stock on hold in my account and made no other trades that's a parity trade to the Mary put okay but this is where it falls is the discipline of the long haul investor they're going to invest more and they're always risking 100% of what they're investing so the risk is going to be double triple quadruple mine and then they're going to more of that capital they had aside to open up other long haul trades so if they're not disciplined and if they don't practice proper position sizing they're going to get burned that's the difference in the blueprint we do talk about an alternative for one of the income methods is to actually buy a call after adjusting the position once you bullet-proofed it okay that way you're not taking on any risk on the position with the profits you've already realized that's also available in the blueprint as well it's one of the alternatives to what we call income method number four an adjustment you can use on your second asset which is the put option all right well ladies and gentlemen that's all I had today Sam I know that you put in a lot of effort into the comments that you made here regarding the different positions you have on Tesla I really think that's a discussion for tomorrow for our open discussion at 4:30 p.m. because we're bouncing around with a lot of different strategies you have going on and things of that nature and it's just not it's going to take away from what we're trying to show here on a radio active trading presentation and the proper context of limiting the risk and I know you've got proper position sizing you've got things in there but your questions you can send them to me by email Sam or we can talk about it tomorrow 4:30 p.m. Eastern Time as well so I wasn't ignoring your question sammiches the description of your questions and having to show the different spreads you have open on the profit loss chart would just kind of detract from the concept we're trying to follow today so we look forward to talking to you tomorrow or send me an email today if you have any pressing questions regarding your different spread positions your credit spreads your laddered spreads and so forth all right well ladies and gentlemen I want to thank you again for joining me today take a look at that link I sent you there's only $67 and you'll be able to see the seven different ideas occurred has four riskless spread trades in the context the radioactive trade to stop losing at spread trades forever video also send you a link to that when I post the webinar archive today so you can access this recording to review the information as well on the proper limited risk and using risk with spread trades in the context of the Nesta trade without taking on the risk ladies and gentlemen take care have a happy trading week we will see you soon good night

Channel: PowerOptions

Views: 54,499

Rating: 4.7211156 out of 5

Keywords: Bear Call Credit, Bull Put Credit, Iron Condor, Condor Spreads, Broken Wing Butterfly, BWB, Credit Spreads, Debit Spreads, Ratio Spreads, Married Put, Low Risk trading, stock insurance, portfolio insurance, long calls, Diagonal Spread

Id: W3yebWyespw

Length: 79min 22sec (4762 seconds)

Published: Thu Feb 09 2017