How to Use Options Strategies & Key Mechanics

[Music] hi i'm tony batista from tastytrade and before we started tasty trade for about 20 years i was a market maker on the floor of the cboe that's the chicago board options exchange and the chicago board of trade but today we're here to help you learn about strategies entry and exit my goal when i'm done with this is that you have a good blueprint for starting a trade and more importantly what i think is the most important thing mechanics mechanics to getting out of that trade let me give you a little bit of content before we go into those strategies and there'll be about six of them allocating 18 of your entire portfolio to short puts gives us the same return remember a short put is a long strategy long delta strategy the same return is holding a hundred percent of spy stock now why is that important two things one everybody's measured by the s p and its return per year that's the standard and poorest 500. allocating only 18 of your portfolio to naked puts gives you that same return now i'm not saying that's what you should do but think about it that gives you what 82 of your portfolio sitting in cash to do whatever you want with it maybe enhance those returns even more because matching the s p and taking risk well we want to do that we want to have more return taking just about the same risk so the strategies the plan of attack for opening positions that'll be the first thing i'll talk about and inside those slides on one slide i'll give you the mechanics too the optimal rules of processing over time okay six strategies short strangle credit spreads ratio spreads iron condors diagonal spreads and broken wing butterflies they're all a small part of each other so we'll tackle one and we'll break them down individually first one we're going to go to is a strategy a short strangle maybe probably and should be it is my most popular strategy in a high iv rank stock now how can you find the iv rank on tastyworks it's right on top of your platform on the left hand side inside a circle very easy to find this strategy is a simultaneous sale of an out of the money call and an out of the money put now what call and what put are we looking to sell we typically go around the 30 delta call and the 30 delta put remember delta is just shares of stock does the what what uh what it equates out to what it simulates it simulates about 30 shares of stock if i'm selling 30 shares of stock and i'm buying 30 shares of stock it's basically neutral we start out these strangles at a neutral position most of the time unless you have a bias with a long delta or bias with a short delta it has a high probability of success 70 to 90 percent if you're using that 30 delta strike if you're using a different delta obviously it's going to have a different probability of success the management of this is 50 of the credit received now let me explain that to you if we sell the call and the put and it's a delta neutral strategy and you bring in two dollars for argument sakes that's 200 we're looking to close that at 100 profit that's 50 of the credit receive that's important to listen to or remember for these next slides because i'll i'll leverage that 50 of credit received throughout most of this video um 21 days dte which means 21 days till expiration that's really the mechanics of this when are we looking to get out of this trade either we collect 50 percent of the credit or there's 21 days left to expiration what are the defensive the mechanics and i think that's more important because getting into a trade is fairly easy high iv rank stock liquid liquidity is always king and now how do i get out of it because getting in seems to be very easy getting out everybody falls in love with their trade for me the rolling on the defense rolling the untested side what does that mean if the stock is going higher i'm going to roll up puts if the stock is going lower i'm going to roll down calls rolling the untested side when do we do that typically when our strike is breached or our delta gets too big roll the position out in time would be the second thing we can do 21 days to expiration hasn't come up yet we're going to take that position from the front month to the back month we may even use the same strikes that'll give us more credit more time higher probability of success and not use any more buying power go inverted this is something that tastytrade has has developed and come up come out with you've got a call and a put the stock is going too low your put is being tested you take your call below your put that's inverted on the opposite side of the spectrum you've got a call and a put the stock is going too high you take your put and go over that call that's inverted now what does that do that reduces your delta we're always looking to reduce our delta by 25 to 50 percent when we do any type of management or mechanics to this trade that's the short strangle next one that we're looking at here is you know why put on these you want to put these on with high volatility this is a good graph a good explanation of what you can expect to receive the premium collected if you notice will go right through the middle where the where the vix is most of the time that 20 to 30 range the premium collected is 1.3 percent of the money used that's pretty cool when you look at zero to ten percent vix and even greater when it's above 40 on vix that's vix that's the volatility index so when volatility is high which only around four percent of the time you collect more premium when volatility is low you collect less premium we want to collect more premium so what are you going to look to do you're going to look to ramp up your trades when volatility is higher somewhere between that 10 to 30 percent range optimally somewhere around 20 25 percent which is where we land just about 70 percent of the time in volatility strangles make a great strategy um the short strangle on average when ivy rank is below 30 we tend to see iv move against us what's iv that's implied volatility it moves against us let's take a look at what that means it's just showing that over time volatility contracts faster than it actually goes up now it moves swifter on the on the way up but once it's there it continually contracts for a longer period of time what do we want when we put on a trade we want high iv rank we want the stock to have a high implied volatility and then slowly contract because as it contracts we make money on our theta decay also on the short strangle what strikes are we looking to i explain it to you from the beginning it's the 30 delta the 30 delta gives us uh you know what it gives us a less chance of a whip saw look at this if you were to use the 40 delta strangle you've got almost a 40 percent chance of a whipsaw what do i mean by a whip saw that just means that the stock keeps going back and forth between one or both of your strikes meaning it goes above your call and goes below your put which you don't want it to do now the 30 delta string only happens eight percent of the time now of course you're collecting less premium but you know what for that 30 percent difference in being whipsawed which is what most customers most most retail investors like myself don't want to happen i think it's a good take away second strategy is an iron condor it's just combining that short call and put that we did and then defining our risk by buying a call or put a call above and a put below our two short strikes the strategy has about the same probability of success but i want to caution you here it's a lot less money even though it's the same probability success a lot less money to make but you're using a lot less buying power you have a lot less risk management of this trade is exactly the same of the strangle as the strangle the defense the mechanics there really aren't too many let me explain a tight iron condor say five dollars wide between the difference of your short call and your short put if that's like five dollars wide there's not too much to do you have a limited risk you collected one third the width of the strikes so let me explain if it's a three dollar wide iron condor you'd collect a dollar medium only can make a dollar i can lose two that gives me a little over a seventy percent probability of success if i'm collecting more money i have a lower probability of success so on a five dollar wide iron condor we want to collect somewhere between a dollar sixty and a dollar seventy to keep our probability of success the same and you want to know something there's not too much you can do with that because you're only using two three hundred dollars worth of buying power as opposed to two or three thousand dollars in the strangle limited risk collect enough premium that premium's one-third the width of the strikes my next strategy and as you can tell as we go through these slides the first slide that i did the first strategy i did the strangle kind of gave you a lot more of the mechanics than the rest of these i will do because they all piggyback on each other all right a credit spread short call spread that means you're bearish short put spread that means you're bullish um it's a really popular way of getting some directional risk now please remember you're going to be right 50 of the time with with direction but if you use the same type of mechanics that we did on the strangle your short delta is somewhere around the 30 delta call somewhere around the 30 delta put remember if you're bearish you'll do a call spread if you're bullish you'll do a put spread you can have about a 60 or 70 percent probability of success 50 of the credit received exactly the same as the strangle i won't go over it again for you there's really no defense to this just like the iron condor and it has a limited risk limited risk you can make one you risk two about a seventy percent probability success that's what we want if you're risking one to make one meaning on a three dollar wide credit spread you've collected a dollar fifty you have a 50 50 shot so collect less have a higher probability of success perfect math model next strategy is a ratio spread it's become very popular for me to do ratio spreads in this market that we presently have what do i mean by that volatility is not really low and it's not really high what does it do what's a what's a ratio spread it's a short call and a long call spread put together now look at where we have our long call close to where the stock is look at where we have our two short calls further out of the money the same delta i'll give you the exact delta from our research that we've done to show you on the call and the put which should be your short strikes it has a very high probability of success i told you it was one of the more one of the more popular strategies as of late because you know what volatility is not not necessarily too low that's not necessarily too high so this gives me a good mix makes my probability of success a little bit higher but yet still gives me that credit that i want to receive so i have positive theta decay 80 to 90 probability of success is probably one of the highest probability of success trades i will make management of this is 30 of max profit now let me explain if you did a three dollar wide ratio spread that means i bought the hundred call and sold the 103 calls i sold two of the 103 calls i bought one of the 100 calls and i did that for let's just say a dollar credit i'd be looking to make 30 cents on that trade no remember i bought the 100 call i sold the 103. that's three dollars wide i'd be looking to make 30 percent of three dollars or one full dollar credit on that spread what's the defense of this well you can obviously close the spread that makes it pretty easy right for a profit or a loss i hope you're not taking a loss what can we do if we have a loss you can roll out in time roll one of the short options out in time let's think about what's happening you're long a call that's that was at the money you're short a call that's further out of the money let's just say for argument sakes the stock was a hundred it goes to 103. you close that call spread because you have a long call spread and you take that short 103 call and you move it to the back meaning you move it to the next month out give yourself some time to be right if you want to make it an even higher probability of success trade turn it into a strangle you could sell a put in my example cost you no extra buying power to use in your position all right so the mechanics are a ratio spread so since 2005 we've looked at this in a 45 day period because that's when you want to enter a trade you want to enter trade throughout all of these strategies around 45 days to expiration i use the regular monthly options i use the regular monthly options on all of these strategies because they're the most liquid liquidity is king in my book they move on average of 4.5 percent and land around the 25 delta strike now that's the 25 delta strike on the put and the 30 delta strike on the call so if i was doing a ratio spread with uh with using puts my two short puts would be somewhere around the 25 delta and if i was doing a ratio spread with the calls my call strike would be some my two short calls would be somewhere around the 30 delta call next strategy five of six we're almost done hang in there with me you got a broken wing butterfly remember i'm trying to put you into progression here what are we doing with a broken wing butterfly we're buying one call selling two calls what does that sound like the ratio spread that we just talked about and now i'm buying a call that's further out of the money to define my risk use less capital i could do that on the call side i can do that on this on the put side it's really just a combination of a butterfly with a short call spread probability of success i'm sticking around that 70 to 80 percent listen when i was a market maker on the floor of the cboe it was my job to tell you the retail investor what price you were going to be filled at to buy or sell if i could have had my my ways about it i would have said to the retail investor you know what don't go for the 50 50 shot give yourself a higher probability of success on entry so you could be successful in the long run manage those winners manage those trades to keep the ball rolling management of these of mechanics over here we're looking at 25 percent of the max profit 25 percent of the max profit of that strategy remember you've got that embedded call spread use the same math that i did on the ratio spread um what's the defense on this since you have defined risk and in most defined risk trades there really is no defense to it you can at times move from one month to the next month but nine times out of ten you can this is such a high probability success trade you have to give it time to work when do we get out of this if you remember from my previous slides when there's about 21 days till expiration so you're really only in these trades for a few weeks two to three weeks all right my last strategy is a diagonal it's a very interesting trade it's a very complex trade listen to me when i first started in 1983 any trade that used a combination of one or two options more than one option two options was called a complex trade these are not complex trades what are you doing here well in a diagonal we're using both front and back month this is a simultaneous purchase of a long calendar can combined with a vertical spread let's go to the next slide and see what that means it's one of the lower probability of success trades it's also one of the trades that uses the least amount of buying power your probability success is closer to 50 to 60 percent so it's not one of my most popular strategies i saved it for last because it's my least popular strategy just because of the probability of success we're the management of the mechanics very similar to everything else we're looking at 25 to 50 percent of the max profit what can we do for defense roll forward to the near month yeah you know what with diagonals there's not too much to do in defense either you're typically setting this trade and letting it work if it doesn't work you're taking your defined risk limited risk remember you don't have unlimited risk on any strategy that i've told you you can just let it go the strategy that you have higher risk gives you the the leverage the option to do something about it trades that have defined risk you're a little bit more put into a box and you have to do your mechanics on the beginning all right i really hope you enjoyed this my name is tony batista from tastytrade i had a blast i hope you did too [Music] you

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Keywords: options, trading, investing, tastytrade, how to, learn, education, basics, key mechanics, key concepts, probability of profit, call option, put option, cost basis, stock, profit, loss, portfolio management, floor trader, professional, trading strategy, ratio spread, strangle, broken wing butterfly, diagonal

Id: T6uA_XHunRc

Length: 17min 43sec (1063 seconds)

Published: Thu Oct 15 2020