Master Credit Spread Class COPY Flashcards
Premium - where is the money coming from?
TEST EDITING
The premium is the current market price of an option contract.
income received by the seller. ln the money premiums are composed of extrinsic and intrinsic value
Theta
the rate of decline in the value of an option over time. its our best friend ON SELLING OPTIONS
Delta
how much will the price of an option move if the stock moves $1? That’s where “delta” comes in.
Delta is the amount an option price is expected to move based on a $1 change in the underlying stock.
Calls have positive delta, between 0 and 1. That means if the stock price goes up and no other pricing variables change, the price for the call will go up. Here’s an example. If a call has a delta of .50 and the stock goes up $1, in theory, the price of the call will go up about $.50. If the stock goes down $1, in theory, the price of the call will go down about $.50.
Puts have a negative delta, between 0 and -1. That means if the stock goes up and no other pricing variables change, the price of the option will go down. For example, if a put has a delta of -.50 and the stock goes up $1, in theory, the price of the put will go down $.50. If the stock goes down $1, in theory, the price of the put will go up $.50.
As a general rule, in-the-money options will move more than out-of-the-money options, and short-term options will react more than longer-term options to the same price change in the stock.
vertical spread
buying or selling a call or put and simultaniously selling or buying at a different strike price but with the same expiration
Expiration Date
the date on which the options contract expires
Strike Price
the price at which an option or other derivative contract can be exercised
how much per month can you expect to earn on credit spreads. %
5-10%. 50K can bring in 2500 to 5000 PER MONTH
How do I avoid max loss?
never hold to day of expiration
He risks max loss of?
16% of account. 50K = max loss 8000 . TONY PLAN IS TO LOOSE 30% OF MAX LOSS so 2400 PER TRADE. TRUE RISK IS 5% OF ACCOUNT PER TRADE
What is a vertical spread/credit spread? Where is the risk in the strategy?
Entering 2 options at the same time. Buying and selling each leg. Your risk is the difference between the two strikes.
THE LEG CLOSER TO THE PRICE OF THE STOCK IS WORTH MORE MONEY
THE LEG FARTHER AWAY IS WORTH LESS
A CREDIT SPREAD IS SELLING A SHORT AND BUYING A LONG
Discuss how expiration date and premium and theta work.
The farther away the expiration the more premium you could recieve AND
the further away you can sell your spread from the stock price,
But theta does less work until closer to expiration, and you have more time for the trade to lose.
Benefits of Spreads (4)
1 Dont have to have perfect entry timing
2 consistent income
3 you don’t tie up much buying power
4 pre determined ultimate risk
cons of spreads
risking more than you are making
easy to mess up in the broker
What is a bull put spread and how do you win it?
you are using buying and selling puts but you win if the stock stays above your sold strikes.
How do you use puts for a BULL PUT SPREAD and how do you win?
HOW DO YOU WIN IN A BEAR CALL SPREAD?
You SELL a put and BUY a put. and as long as the price of stock stays above your sold put you win. YOU SELL A HIGHER STRIKE PRICE YOU BUY A LOWER STRIKE PRICE
YOU SELL A CALL AND YOU BUY A CALL IN ORDER TO WIN PRICE OF THE STOCK NEED TO STAY BELOW SOLD STRIKE CALL. YOU SELL A LOWER STRIKE YOU BUY A HIGHER STRIKE
What does selling a put mean?
What does selling a put mean?
If it closes in the money at exp. you have to buy 100 shares of that stock at the strike. Its a bullish move.
If it expires worthless then, you just keep the premium and leave.
When you sell a put, you agree to buy a stock at an agreed-upon price. It’s also known as shorting a put. … That’s because the buyer must buy the stock at the strike price but can only sell it at a lower price than the current. Seller makes money if the stock price rises because the buyer won’t exercise the option.
In a bull put spread do you receive a premium? why or why not?
You are selling a put and receiving a credit. You are agreeing to purchase the stock at a strike that you sold the put at. You will get paid to enter into that agreement.
Why do you buy and sell a put in a BPS?
Buying a put is like buying insurance. It will kick in when the stock price moves below the strike of your put. This way you lock in a max loss.
How are the expiration dates handled in a Bull Put Spread?
They are always at the exact same time
How much money does the broker put aside for a bull put spread?
The difference between your short and long put
Where is the value in the Bull Put Spread?
The Premium. Thats why we get out before expiration
What stock action are BPS best used on
stocks in a bull trend that are having a pullback to support
How do you win a bull put spread
You sell and receive money and then buy it back to get out.
This costs money.
So the money collected for the selling is larger than the money you spend to buy to get out.
How does the winning strategy work when the stock is moving farther away from the credit spread?
If the price moves away from your spread the options will be worth less and thus you can buy back for less.
How does winning strategy work when stock doesn’t move much in a BPS
theta - time decay. The closer to expiration the trade gets the less it’s worth.
What is the most money you can make in a credit spread?
The amount you make from selling the spread. short put - long put = profit.
What is your “limit” price in a BPS
The combination of both legs in the spread.
What if you start losing on trades?
The market changes a few times a year. When this happens wait two weeks, reassess plan and make sure youre doing the plan right also
What is the only way you can loose max loss?
ON the day of expiration
He’s only lost more than 35% how many times in 4 years.
twice.
How often does he lose 30% loss
Always a chance and happens a couple times after you are on a 10-30 win roll.
In 7 he might also lose on 2-4 of those at the most.
If in three then you will lose on maybe 1.
It’s hard to tell really but overall 92% win rate minimum.
What is the max loss risk he likes to take?
16%. 1600 per trade max loss for a 10,000. But with his plan you lose about 30% max rarely
only if you lose $480 or 4.8% of max loss.
explain drawdowns
I lose when the markets change sentiment. On average 2-4 spreads at once. So drawdowns on average will be about 10% of his account.
Maybe happens once a year where you lose on your account (max loss?). But account will be bigger than now so its fine.
He wants to get paid what percentage of what he’s risking?
10%
for a vertical spread you pick two things…
The strike and the expiration. strike is different USUALLY 5$ BETWEEN SELL AND BUY expiration is the same.
Where should you set the limit order
Mid price is good. The price between the ask and bid. or the price you are hoping to get filled at.
If you aren’t getting filled within the first ten minutes
bump the price a bit 2 to 5 cents lower than the bid . Never market in or out of an credit spread. The lower the number the less you get paid
What will cost more in a credit spread. What will cost less?
The sold price will give you more than the buy price. The buy price is what you pay to get out.
What to check before placing an order?
6 items
- You are receiving a credit for the spread and and not paying a debit for it.
- You have the correct strike prices, expirations date, correct limit order
3, Hedging game plan - not selling over earnings or other major news announcement
- You have the correct # of contracts
….. - You put your target in as soon as you are filled.
A monthly credit spread is what kind of trade?
swing
How long are we in a monthly credit spread
5-15 days or 5-8?
What is the win rate with a monthly credit spread
92%
What is his average profit on a monthly credit spread
75$ PER CONTRACT
What does IV mean to a monthly credit spread?
- Low IV (big moves are not expected)
2. High IV (big moves are expected)
How many average daily contracts do we want a stock to have to consider a credit spread?
Minimum of 5000 total average. https://marketchameleon.com/Home/Dashboard
Monthly Credit Spread Plan General Beginning Rules
7 of them
These are broader than the #1 #2 rules
- Minimum of 5000 total daily contracts
- Do not sell over earnings
- Sell the monthly spreads around 30 days out
- Stock must be ABOVE the WEEKLY 60 ema for bull put spread
- And BELOW the 60 ema on the WEEKLY for a bear call spread (go with trend)
- Check 3 news sources to make sure no big event is coming out during the time of your spread. You don’t want to sell a spread if has unusually high IV = gaps are death to spreads.
- Close the spread, no matter what, the day before expiration. Max loss occurs on the day of expiration!
How many days out do you sell monthly spreads.
Also talk about time, premium and expiration and how they are inter-related
Sell monthly spreads about 30 days out.
the shorter the time to expiration the better, but the shorter the expiration time the less premium you will receive.
need to get paid 10%.
Low IV means?
Big moves are not expected
The average daily volume on options is what? how many minium should we be dealing with.
All calls, puts, strikes, expirations, volume traded needs to be above 5000. Below 5000 is not super liquid and will be hard to get out of and hit profit target.
How do we deal with earnings
Do not sell over earnings. If the earnings are over any time of our spread you can not do. How do we know for sure when earnings are?
How many days out do we do a monthly spread
around 30 days.
could be 20 or 40.
but the shorter the time frame the better.
Less time to not go against you. quicker you can get premium capture. But have to sell closer.
What EMA do we deal with on a BCS
60 ema above for a bull and below 60 for a bear call spread.
Watch 3 news sources before entering into a spread? why?
We dont want a big news event to come out over the time of your spread. you do not want a high IV. They are the Death to spreads. gaps are the death of spreads.
What do we need to know about IV related to news. How many weeks is it an average of?
52 week average.
- broker can tell you about it (trade station)
- market chamelion can tell you
- if it’s unusually high IV, normally means they are expecting something big.
- If the premium is too good to be true, believe it.
- They may not have news but the weird IV is saying something for that particular stock.
Implied volitility IV
How high is something expected to move. If there is a high IV we get paid more but there is a chance it will gap and go against us. IT’s stock dependent.
We will close the trade no matter what when.
Day before expiration. It DOESNT matter what you are gaining or losing. Just get out.
What are the focus steps for entry on monthly BPS. Short version
- RSI
- Barriers closest to stock price
- Determine what set up to sell one or two
- What you get paid minimum 10%
- Create game plan if trade doesnt work.
First step (1) on Bull Put Spread
- Oversold on the 4 hr RSI
(below 32 on the RSI)
BELOW 32
If not oversold - no set up.
Wait for it to be oversold!
If oversold - move to step two
Step two (2) for a Monthly Bull Put Spread. 3 parts to answer
- Locate the next two weekly barriers
WEEKLY support, or
WEEKLY ema 10.20.30 - find those closest to the current stock price and the sold strike that you’re selling
- We can sell anywhere below the second weekly barrier
THE 2 BARRIER MUST BE 1 ONTHE CURRENT PRICE OF THE STOCK SECOND WHERE ARE YOU SELLING
Step three (3) for the Monthly Bull Spread
Determine if youre going to do setup #1 or #2
Step four (4) for Monthly Bull Put Spread
- Make SURE you get paid a minimum of 10% of what you’re risking if you are risking $500 the minimum you can get a pid is $50 for the spread.
If it does not pay at least 10% of what you are risking pass on the setup
If it pays more than 10% of what youre risking - move to step 5
Step 5 for a Monthly Bull Put Spread
Create a game plan if the trade does not work. If you cant figure out a hedging plan, do not take the trade
What setting do you want the RSI on for bull put spreads? and what about what chart to look at?
- 14
- extended hours OFF.
- on a 4 hour.
It wont be oversold prob on a weekly. Doesn’t matter. It’s the 4 hour that matters.
Step #2 Monthly BPS - locate the next two barriers. how do we do this? and on what time frame? involved wicks
- Weekly support, 3 or more interactions in the same zone or more.
You dont want these to be near where the price is at currently.
the barrier is a zone.
Three wicks at least or body closes in the support/resistance zone
- 4 hour chart.
If a weekly support is near the price or even if the current price is sitting on an ema is this a good barrier?
No. If the current price is sitting on a barrier. Pass
The barrier has to be where as far as pricing?
Below the price of the stock and above the strike price for the BPS
With regards to barriers, where can we sell the monthly credit spread?
At the second barrier, which is the long put or below it.
How do I choose between set up #1 or #2 and what is the selling difference between them.
- I will use if set up #2 is not available. Or if set up #2 doesn’t pay the 10% ROI.
One 1# is when we sell right on top of a weely support. This would look like the neckline of a double bottom at the retrace of it in his example.
- # 2 requires a strong weekly support (if it was a strong resistance, it should be a strong support = needs two bear candles under support, check out example slide #13.
This is where sell below a higher low. (double bottom look on chart, sell if there is a second bottom or higher low, but below the first part of the double bottom or the first low of the support)
Which set up is easier to hedge. one or two
2
What does he consider a higher low
One bear candle on the weekly is not a higher low, two bear can be considered a higher low and then bounces above that, it can be a higher low. two or more. It’s got to then bounce above those.
where do you want to sell it around the weekly support area? I think this is for #1
Right at the support or just below.
how do I hedge against set up #1?
Buy calls
They will make more than the spread is worth and when It bounces out of the area it will be a WIN in the end.
This is when the stock doesn’t keep continuing up and looks like it’s coming down to bounce off the support line. If it doesn’t bounce and keeps going lower. you lose on the put spread and on the calls.
But hedging like this usually works (if youve picked your resistance and support lines well.
Location of set up #2
- have barrier one and two
- have higher low
- Then look for the 10%
- you will pass on most 4 hour oversold stock set ups
Dont forget to set up your EMAs like Tony
10.20.50
When does a weekly chart become bearish?
When we take out the higher low
Higher low sell Bull Put Spread below how far below higher low?
At least two percent away from alert level where you would short a stock. This gives you room to hedge with puts.
Higher low must have at least two bear candles in the pullback.
why do I have to get paid at least ten% of what Im risking
it’s the ONLY way the math works for you to be profitable
What is the Math on 10 contracts with 4 spreads per month and three months
800 per month and 2400 in profits
What premium capture will you get in for the monthly BPS
Get in at 13-15% premium capture if can so you can exit at 10%
If he gets in at 10% he then will hold for 80-85% premium capture and walks with 8% premium capture
Always assume…
You are going to loose. have a plan if you will lost. Keep your emotions out of it. Follow the strategy.
on average how many loose?
1 out of ten
On average how long are you in monthly credit spreads?
5-8 days on average to win on these.
Ten on average overall.
1 1/2 weekly candles going sideways to win.
How to use the indicator start here for cards.
- Money sign goes off
- Use second barrier on it, orange line.
- Decide set up #1 or #2. do you use the indicator?
There may be extra barriers there that the
indicator doesn’t show.
*you can turn it to be more sensitive but he goes for the big supports. The sensitivity level is where he uses it.
What EMA do you want to be above on a BPS?
60
What do we want to see on a daily bullish chart for a BPS
Bear candles as it needs to be pulling back.
In the higher low pullback for a BPS how many bear candles
2