Learning New Strategies
Even if you’ve been trading options for years, branching out into more complex option strategies can be daunting.
In order to make use of our text and trade alerts, we want to make sure they make sense.
The following examples include explanations of buying long options, as well as entering into credit spreads, debit spreads and iron condors, and GTC orders. It also explains why John *typically* uses these strategies, along with their benefit of them. Though the examples are done in ThinkorSwim, the orders are read the same, regardless.
Calls and Puts
Trade: NVIDIA Long Calls
Alert: BOT 10 NVDA (Weeklies) 6 Jan 17 90 Call @$7.75 (To OPEN) Filled – JC
This options trade alert means that John bought 10 Nvidia calls for $7.75 each, and this is the price he was filled at. The strike price is 90, and they will expire on January 6th, 2017. This is an opening position for the trade. John typically buys naked calls when he is looking for a big move, using call debit spreads instead when he is bullish but looking for a smaller move. He buys calls when he doesn’t want his gains capped by the spread.
To enter the trade in TOS, you right-click on the option chain in the same row as the 90 strikes on the call side. Select buy, then choose single. At this point, you can choose how many you’d like to buy. This is the same for buying puts, except you select the opposite side of the options chain.
Trade: Nvida Long Calls
Alert: BOT 10 NVDA (Weeklies) 6 Jan 17 90 Call @$7.75 (To OPEN) Filled – JC
Make sure you’ve entered your order correctly – selecting the quantity you’d like, as well as double checking the strike price and expiration date. If the price you’re getting varies greatly from what John or Henry stated they got filled at, you may be entering the trade too late.
GTC Orders
John has typical profit targets that he is aiming towards when he enters a trade based on the setup and strategy used. It is advisable for each trader to not only understand their risk, but also have a plan for their exit – which includes both a stop loss and profit target.
When John enters a trade, many times he will place another order directly after the trade – that will be noted as GTC with a closing price. This is because he already has a predetermined exit – and he doesn’t want to have to watch his P/L all day. As such, he places a GTC – or, Good Till Cancel order, which will be filled automatically when the price target of the option is hit. Here is an example of a GTC trading alert as well as how to enter it into TOS.
Trade: Exiting Nvidia calls with a good till cancel order
Alert: SELL -10 NVDA 100 (Weeklys) 6 JAN 17 90 CALL @13.50 LMT GTC [TO CLOSE] this is a good till cancel order that is a target for the above NVDA order
John bought these Nvidia calls for $7.75 each. His target exit is $13.50 per contract. As such, he places a good till cancel order, so that when (and if) these calls hit that price, they will sell automatically within is account. This is a good way for traders to know what John has in mind for a particular trade, as well as giving them a good idea for when they should get out. Of course, every trader needs to decide when to take profits for themselves. If you’re happy with a $2.00 profit instead of trying to hold on for a $5.75 profit – that’s fine. Nobody ever went broke taking a profit!
To set a GTC order, right click on the trade on your ‘Activity and Positions’ screen. Click ‘Creating closing order,’ and then click on sell.
Trade: Exiting Nvidia calls with a good till cancel order
Alert: SELL -10 NVDA 100 (Weeklys) 6 JAN 17 90 CALL @13.50 LMT GTC [TO CLOSE] this is a good till cancel order that is a target for the above NVDA order
Once the order comes up, you need to change the price to your desired price, as well as changing this field to ‘GTC.’ Once you hit ‘Confirm and Send,’ the order will be saved in your account. If the option hits your price, it will automatically send.
Vertical – Call Debit Spread
Trade: Vertical – Call Debit Spread
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
This alert, along with screen shot of John’s charts, tells us that John is buying 10 vertical call debit spreads that will expire December 23rd, 2016. He purchased 10 770 calls, and is selling 10 780 calls against this, to bring in an extra credit to lower his cost basis on the 770 calls. This transaction cost him $5.04 per contract, and this is the price he was filled at on the CBOE exchange. 9 DTE means there are 9 days till expiration.
Trade: Vertical – Call Debit Spread
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
To enter this trade in TOS, we first find the correct expiration date in the option chain. Clicking on the date will make the option chain appear so that you can choose your strike. We then want to buy the 770 call, while selling the 780 call in a vertical debit spread. Therefore, we right click on row that has the strike of 770 on the call side.
Trade: Vertical – Call Debit Spread
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
Now that we located the correct strike and expiration, right-click on the bid, select buy, and then vertical.
Trade: Vertical – Call Debit Spread
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
Your order will now appear down below. You can adjust the quantity, check to make sure you’ve entered it correctly, and also, make sure that the price you’re getting is close to what John got. If not, the trade may have taken off, and the late entry may not be ideal. If the entry price is still close, it should be fine to enter. In the order entry box, make sure you are buying and selling the correct strikes in the vertical. You should be buying the 770 calls, and selling the 780 calls. You can remember this because the alert says BOT – and the first strike will always be the one that is bought, while selling the second. If the alert says SOLD, the first strike listed is the one that is sold.
Trade: Vertical Call Debit Spread
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
After you hit, ‘Confirm and Send,’ you’ll see this order confirmation dialog. Never take a trade if the risk/reward is not acceptable to you for your personal account. If you’re not comfortable with the risk/reward, just pass on that trade.
This trade in particular has a 1:1 risk/reward ratio, and you’ll be risking about $500 per contract that you enter. If it all looks good, hit send.
Vertical – Put Credit Spread
Trade: Vertical Call Spread + Vertical Put Credit Spread on AMZN
Alert: BOT 10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 770/780 CALL @ $5.04 CBOE (To OPEN) FILLED 9 DTE – JC
Frequently, John sells put spreads in addition to buying calls and/or call debit spreads at the same time. This is a way to bring in a premium to purchase the calls. He does this a lot when he has a strong bullish conviction on a stock. Also, if you’re not comfortable spending money to buy calls, selling premiums is a lower-risk way to make money with options. Your risk is defined, and the stock doesn’t need to move a ton to collect your premium – just stay out of the money. Therefore, in addition to his call debit spread, he is also adding a put credit spread.
Trade: Vertical Put Credit Spread on AMZN
Alert: SOLD -10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 775/765 PUT @ $4.40 (To OPEN) FILLED 9 DTE – JC
Because we are selling this vertical, it makes it a credit spread – we are taking in credit for selling this to someone. It is our hope that the premium we sold will decay, allowing us to buy it back at a cheaper price before expiration, or have it expire worthless.
The order says SOLD – so we want to sell the first strike listed in the order – 775 – and buy the lower strike for protection, which is 765. Right-click on the bid in the options chain in the row that says ‘775’ scroll down to sell, and click vertical.
Trade: Vertical Put Credit Spread on AMZN
Alert: SOLD -10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 775/765 PUT @ $4.40 (To OPEN) FILLED 9 DTE – JC
Make sure you entered the order correctly on this screen.
The order says SOLD – so we want to sell the first strike listed in the order – 775 – and buy the lower strike for protection, which is 765. Right click on the bid in the options chain in the row that says ‘775’ scroll down to sell, and click vertical.
Trade: Vertical Put Credit Spread on AMZN
Alert: SOLD -10 VERTICAL AMZN 100 (Weeklies) 23 DEC 16 775/765 PUT @ $4.40 (To OPEN) FILLED 9 DTE – JC
After you hit, ‘Confirm and Send,’ you’ll see this order confirmation dialog. Never take a trade if the risk/reward is not acceptable to you for your personal account. If you’re not comfortable with the risk/reward, just pass on that trade.
This trade in particular almost has a 1:1 risk/reward ratio, and you’ll be risking about $560 per contract that you enter. While the max profit says $440.00, John targets 80% of max profit on most spreads he has sold. f it all looks good, hit send.
Iron Condors
Trade: Iron Condor on Chipotle
Alert: SOLD -10 IRON CONDOR 100 (Weeklies) 6 JAN 17 402.5/412.5/352.5/342.5 CALL/PUT @ $2.22 (To OPEN) – Modification for existing CMG spreads -JC
In this case, John states he is modifying an existing position – which means this isn’t a standalone trade. It’s meant to add to the current CMG trades he has on. As far as entering iron condors though, the content remains the same. (In this example, John modifies an iron condor on Thiknorswim).
An iron condor is just a call debit spread and put debit spread done at the same time on the same underlying, OR a call credit spread and put credit spread done at the same time on the same underlying. When we are SELLING an iron condor, that means we are collecting premium on both the call side and put side, and don’t want the underlying to move much – so we can collect the premium. The goal here is that the underlying stays stagnant so the premium we sold will go down in value, and we can buy it back before expiration at a lower price When we are BUYING an iron condor, it’s because we are generally expecting a big move, but we aren’t directionally biased, so we want long exposure on both the call and put side. The goal here is that it moves more than the debit we paid.
In this case, we are selling a call credit spread (because our order says, SOLD Iron condor) with the strikes of 402.2/412.5, and also selling a put credit spread (strikes 352.5/342.5). If you’re confused about which one is the call side and which is the put side you can look at the price of the stock. CMG is at $377.43. The calls will generally be above the stock price, while the puts are below. Also, in the order, John lists the CALLS before PUTS.
To begin entering the order, find the correct option expiration date (6 JAN 17). At that point, you can click on either side to begin your order.
Trade: Iron Condor on Chipotle
Alert: SOLD -10 IRON CONDOR 100 (Weeklies) 6 JAN 17 402.5/412.5/352.5/342.5 CALL/PUT @ $2.22 (To OPEN) FILLED – Modification for existing CMG spreads –JC
Clicking on either side of the options chain will get you to the order entry. You can click on one of the strike prices so the numbers are filled in correctly, but you will have to change it later anyways, so it’s not a huge deal.
Trade: Iron Condor on Chipotle
Alert: SOLD -10 IRON CONDOR 100 (Weeklies) 6 JAN 17 402.5/412.5/352.5/342.5 CALL/PUT @ $2.22 (To OPEN) FILLED 9 DTE – Modification for existing CMG spreads –JC
After you selected ‘SELL’ and ‘IRON CONDOR,’ now you can change your strikes. Because you’re selling the iron condor, the first call strike listed is the one you sell (402.2), buying the 412.5. On the put side, the first strike listed is the one you sell (352.5) and you’re buying the 342.5 for protection. The credit you bring in for doing this is $2.22 per contract. Once your order looks right, you can confirm and send.
Trade: Iron Condor on Chipotle
Alert: SOLD -10 IRON CONDOR 100 (Weeklies) 6 JAN 17 402.5/412.5/352.5/342.5 CALL/PUT @ $2.22 (To OPEN) FILLED 9 DTE – Modification for existing CMG spreads -JC
Always check your risk. Each trade’s risk/reward parameter may not be acceptable to you. In this trade, we are risking $790 to bring in $210 – and remember, we rarely target the max profit. In this case, this trade was put on in addition to other trades, and was not meant to be a standalone trade. Generally, selling iron condors is a great strategy for when the market is chopping around – which is a high percentage of the time.
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