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Using Options as Protection | James Boyd | 8-12-19 | All About Options Series

September 10, 2019


–All About Option Series. My name is James Boyd. We welcome you to Using
Options as Protection. My name, again, is James Boyd. Today’s date, August 12, 2019. We welcome you here. Also, want to give
a quick reminder. If you’d like to
follow me on Twitter, my handle is JBoyd_TDA. All right. So with that said,
just real quick. And now, let’s just do
a quick sound check. We should be good to go. OK, got it. Yeah, there’s a little delay
on that, but we’re good now. All right, yeah. Perfect. All right. So let’s go ahead
and get started. Tonight, again, is all about
using options for protection. We’re going to talk about
two different strategies. We’re also going to talk
about some bear strategies as we go as well. But mainly here
tonight, we’re going to be talking about some
positions in the past that we’ve done and
also some new potential positions as well. Hello, Jim, Helen,
Sandy, Ricardo, Frank, and many others. Let’s go ahead and get started. Now, remember, as we
talk about examples, remember that options are not
suitable for all investors. Special risk inherent
to trading options. Please make sure you read
the previously provided copy of the characteristics in
risk of standardized options. I know I’ve read it–
make sure you have. Please also understand
that when we do examples, those are for
illustrative purposes. Remember, that TD
Ameritrade does not make recommendations or
determine suitability of any security or strategy. That is up you to decide
what type of stock or ETF you want to do and also
what type of strategy. OK, that’s up to you. Remember, when we actually
bring up examples of options, know the terms, delta,
gamma, theta, vega. Know how they apply
to the strategy. All right. So what are going to
talk about here tonight? Well, last week,
remember, we talked about using options for income. And we’re going to come
to some of those, OK? We will. But tonight, I want to
talk about for protection. Now, has anyone in the last
week really thought in your own, maybe, trading paper
money, et cetera– did anyone think, man,
I wish I knew about how I could protect my portfolio? I wish I knew how
to actually protect my individual positions. Well, so happens tonight
we’re actually on that topic. Now, we talked
about this before. But I’m going to focus
a little bit more on the building steps, the
entry, and the management of the protection. Now, I’m not assuming
that you know everything about this topic, OK. I learned things about
this topic all the time. And so just know that
if you have questions as we go, go ahead and
ask those questions, OK? I’m a very approachable guy. If you’ve got questions,
go ahead and just ask. Now, we will take a look
at markets and sectors. We’ll talk about covered
call, which I would call the foundation of protection. It’s not a protection strategy. It’s an income. But it is the foundation of
learning how to sell something to protect some of the stock– some to a point. We’ll talk about that. Third thing we’ll talk about
is protected put, which is that next stepping stone. And then we’re going to talk
about past and new caller examples. Now, the learning
outcome that I want us to really focus
on and be able to do is to be able to trade
protective puts or callers in terms of doing
manual orders or putting on pending orders as what mere
resistance or as those stocks might be going down
now below support. We’re going to talk
about the timing, OK. Now, if let’s take
a look at this. So let’s first go
just real quick to the market and
the sector update. All right. Now, let’s take a look at this. And first thing we’re
going to look at here– and I don’t know
about you– what time you got up this morning. You started looking, let’s
say, at the overall market. The market really started
to drop right around 4 AM Eastern, OK. So let’s go ahead
and take a look at. And I’m going to start just
right quick with the S&P. Last week, we really talked
about how the S&P was really a drop down and
made a lower low. And it came back up. And we called it that it was
in the middle of the W, OK. And when we actually do
that, what I’m going to do is let’s kind of
zoom in on this. And now what I’m going to do
is, this is where we were. So we dropped down. We got down below
both moving averages. We made a low. And then last week we
talked about how we came up. We started to make
that middle of the W. The middle of the W is
really the lower high. That lower high came right
up near that 10-period moving average. Now, all eyes are on
when we do pull back. Where do we pull back to? A, do we make a higher low? Two, we make a equal low? Or three, do we
make a lower low? Right now in the S&P, we
actually did drop back today about 35 points, about 1.22%. And you’re going to see that
the low is still intact there. But the biggest thing is we
want to see a shorter shower pullback if we’re bullish. And we want to really
see that bounce back up. But today actually down– sure. Now, so the S&P– we would just label this as
still in condition number one. What is condition number one? That means the price is
below both moving averages. And if price is below
both moving averages, it tells us negative
momentum, negative trend. So that has not changed, OK. Now, if we take a
look at the NASDAQ. And I know a lot of you
like the NASDAQ stocks. We take a look at the NASDAQ,
it’s going to look the same. We had– just the
other day where we close above that 10-day
moving average, just slightly. And you’re going to
see about right there. We did not actually take
out a lower low today. We did not, OK. And you’re going to see that
it’s also still just looking like the S&P– still trying to make a higher
low, OK, and that pullback. This is really that
lower low, lower high. And now we’re looking
to hold that prior spot. Now, volatility,
though, was not great. When you take a
look at volatility, and I’ll bring up
the VIX here, you’re going to see the VIX
was screening today. What we mean by that is you’re
going to see the VIX really went up aggressively. We pulled back to its
10-day moving average. And then we saw really
quite an explosion here on that large green
candle here today. As the market fell, the
volatility expanded. So, again, if we’re
option sellers, we’re probably going to see some
pretty high implied volatility relative to historical
over the last year. So markets, if we label them
still condition number one. Again, that means price
below the 10 and the 30. Second, we saw the
market is still trying to make a higher
low or equal low. It’s still not process. We’re probably still
in the mentality potentially of doing selling
strategies or protection strategies based upon what
we see in the markets. Now, let’s go back
just real quick. When we look at, let’s
say, sectors, in general– just, we’ll finish these
off in two minutes. When we look at the
sectors, it’s still really utilities that’s really
leading to the upside here still, which is
kind of showing you it’s dividend paying stocks,
not really growth stocks here. We also see that we see staples. They’ve gone down but not to
the extent of other areas. When we also take
a look at, let’s say, the technology space,
IXT, which many of you look at. Again, still below
both moving averages. And another one that
probably pretty popular, which is looking at
IXY, again, still below those moving averages. So as we go into
Tuesday and Wednesday, et cetera, all eyes are really
on, can the S&P or the NASDAQ hold that prior low? That’s key. If you are a bullish
investor, you’re really looking for volatility
to fall below the support level, which means probably
the index would get up above that 10-day
moving average. OK. Now, just real quick, I want to
kind of mention something here as we shift. Some of you have some
questions regarding what we call the market conditions. And we label those. And I just– this
is from last time. I put that right there. So, again, number
one is when the price is below the 10 and the
30-day moving average. That’s what we’re
talking about last week. That’s still where we are–
still condition number one. Two is when the price is above
the 10 but not above the 30, OK. And what you’re going to
see is up above right here is if you wanted those to
put on your market watch, they’re just right there. Three is that the price is above
the 10 and the 30, et cetera. So you can read those when we
talked about those last week. But that’s if you
like each one of those and put those on
the market watch. So right now if
we’re bullish, we want to see the price
shift in the number two. Now, let’s go to the
agenda item number two. OK, we’re going to talk
about covered calls, OK. Now, I’m going to
be the first one to tell you when I learned
about covered calls for about two hours, someone tried
to explain it to me. And I just didn’t get it, OK. And so I want to
kind of start here. So this implies
that we own stock. And then what we did
is we sold a call. And I would really view
this as the foundation of really learning
about pullbacks, and how do you
protect, et cetera. So the example that I’m going
to take a look at here is CDNX. So Charlie, David,
Nancy, Sarasota. And you’re going to see
that the stock is really down about $128. But we sold a call against it. And you’re going to see–
that’s right there– we know we sold,
cause it says minus 1. We have 39 days left. The price that it was
sold for was $245. And the mark is
really set at $0.77. Now, a covered call is good. But there’s only
so much premium. So if we collect
the premium of $245, it can only go down to zero. So the maximum gain
we can make is $245. And now what you’re
starting to see is that $245 premium that’s now
gone down to $0.77. So what we’re looking at
here is a covered call. Now, how many of you in the
last couple of days or weeks have practiced covered calls? OK. So that’s what these really are. Now, I’ll open up
this Disney one. And let’s just take
a look at this. Now, in these examples,
the first two, how would we really
manage the covered calls? What are some of the
considerations here? So when I take a look
at this, one idea could be, well, James, I
don’t need to do anything because we have 39 days left. There’s lots of time left. That’s one way to
view it, right? But wonder if we’re
closer to zero. How much of that $245 are
you really trying to get? Is there a certain
percentage amount? Now, I’m going to
throw out some numbers. Maybe you would like to
get half of that premium. Maybe you like to get
65% of the premium or maybe 80% of the premium. If you still hold that sold
call when you have more than 80% of the premium, that really
means you don’t really have a whole lot
of protection left in the form of the
premium that is remaining. So when we started this,
it had $2.45 in the end. But now as the stock actually
goes down, as time elapses, now, all of a sudden or goes by. Now, the value of that
call deteriorates. And it’s getting closer
and closer to zero. Now, if we take out,
you look at this. Now, if you take
actually look at this, one thing we could actually
do is we could roll. OK, we could roll. Second option is
we could say, look, I want to get more
of the premium. And the other third
option, which is I’m going to hold at the expiration. Problem is if you hold it to
expiration for the next 39 days, the only thing you
really get– the only thing– is $0.77 more. That’s it. So for the next 39 days, you can
only get $0.77 more of premium. If we chose option number one
that we were going to roll it, let’s simply just do that
to get some practice here. I’m going to right-click
on that line right there. Sell that one. What we’re going to do is
create a rolling order. Now, remember when we say,
create a rolling order, this just means that
we’re buying back the option that we have. And then we’re going to look
to sell another one, provided that the stock is still
above the support level. Now, when I do this
if I click on that– now, I want you to
understand something. The stock, unrealized,
is down $128. Had we not sold that call,
we would have been net down. But since we sold
the call, it had to offset some of those losses
or so far all of them so far. Now, if I take
order of that, I’m going to go to where it
says, Create a rolling order. And we’re going to go look
out probably the same amount of time, because there is still
some time left on those, like, 39 days. So when I bring this
back and go 39 days, that’s the September’s. The ones we could go look to
sell is the 70 strike price. Now, when we buy the 75 back,
we’re lowering the strike. Now, is that good or bad? Well, the delta that
we have right now is 21, which means there’s
not a lot of premium left. If we sell this one, the
70, the delta now is 46. Well, what does
that really mean? Well, it means we have a greater
chance of the stock closing above that strike price, OK. So yes, higher delta,
higher premium. But again, don’t be fooled here. There is a greater likelihood
of the stock closing above that strike price. Now, if I said,
OK, let’s practice actually selling that
70, we’re selling the 70, buying back the 75. So now as the market goes
down, breaks the support, makes a lower low,
comes back up, somewhere, these calls
can be potentially rolled, provided that the stock is
really still up above support. Now, if I roll that,
there’s the net– I just want to verify something. OK, buying back to 75, ah. Yep, September,
let’s change that. Thought that credit
looked a little high. It was. We need to change that
20 September 70 check. And that is the net credit. So in the current market, was
it dropping down below support? There’s probably a
pretty good chance that we might be able to
roll some of these calls, depending upon how much of the
premium you’re trying to get. If we say, OK, that’s
what I want to do– but the thing to
remember here is when we do is we have
a transaction fee. We’re buying the call
back that we have. But then we’re
selling another one. Credit still is $1.57– check– minus that $5.90,
the transaction fee. The net credit there is $151. Now, if I say, OK,
look let’s do that– let’s practice that, we’re
going to send that order. Now, for time’s sake,
what I’m showing you– why I spent the time
to talk about that is, I believe the covered call
is the foundation stepping stone of protection. What I’ve seen is when people
don’t understand covered calls, they don’t do protective puts. When people don’t
do covered calls, they don’t do protect the puts. And they definitely
don’t do callers. Think of this as algebra,
trigonometry, calculus. OK? Step one, the foundation,
covered calls. Plus, we own the stock. Step two, we’re
selling the call. Now, what you’ll
notice is right here– we could do that exercise
of rolling, perhaps, Disney. We could also maybe look at
the example, in this case, of almost– well, that’s about 50% there. But you’re going
to see that what’s happening is these calls, this,
and that right there, those are getting pretty deep
as far as the percentages. That’s $1,000. That’s $1,000. Think if we had not have
sold those covered calls, that means we would be, in
this case, about $2,000 short on the account balance, OK. Now, let’s kind of talk about
in this case a protected put. Let’s take, now, step two. Now, I think this is
a pretty natural step. I’m not going to spend
a lot of time on this. But I’m going to go back to
the area of just real quick– Merck– of health care. The example we’re going
to bring up here is Merck. Now, when I look at,
let’s say, the example of Merck, what
I’m going to do is I’m going to imagine that
we’re going to buy the stock. And at the exact same time that
we buy the stock, so step one, we’re going to buy the stock. Step two, once we buy the stock,
then I’m going to buy the put. Now, how many of you in the
last couple of days or weeks have had protective
puts on your positions? How many of you have had those? Go ahead and type that in, OK. Well, now, you don’t have to
do it like the way I’m showing. You might have the stock first
and then later buy the put. Or you could actually say,
I’m going to buy the stock. And step two, I’m going to
buy the put at the same time. So let me kind of show you this. Now, we know that if an
investor were to have a stock, and then they were just going
to typically, let’s say, set a stop, OK. And let me just kind
of ask this question before we go to this trade. So in this example, if we
were going to buy the stock– and I want you to imagine
fictitiously, hype, in this example that we’re
going to set the stop at 83.22. When we have more
volatility in the market, do we have a higher likelihood
of getting stopped out on our positions? Do we have a higher likelihood? Have you guys noticed
if you had stops lately that there was a greater
chance as of lately that you got stomped
out on your positions? I think that’s probably
a pretty fair question. And I would say
there probably is or has been an increased
likelihood of getting stomped out. Well, one thing
that investors might consider outside
of setting stops is using puts as protection. Now, if we go in the market, I’m
going to go to the trade page. What I’m going to do is I’m
going to left-click, just like we are normally. What I’m going to
do in this case is I’m going to buy the
stock in this example. So step one, you’ve
already done this. We’re just going
to buy the shares. The last traded price in
this example is 85.73– going to type that in– 85.73. Step two. Now, number one, we’re
going to buy the asset. Step two, we’re going
to buy the protection. The protection is the right to
sell the stock at the strike price. Now, if we take a
look at this, we get to now pick
what expiration– what strike. So think about
where you set stops. You typically when you get in,
you set your stop, or you do. You set your stop below where
you get it, OK, same idea here. If we’re getting
in at 85.73, we’re going to look to buy a put
strike below that price. Well, below would be 85. Below might be 82 and 1/2. Below might be, et cetera. Let’s go take a look
and see– and I’m going to look at the monthlies
here just real quick. Now, what you’re going to see
is we can look to buy the 85s. Now, what’s the
advantage of the 85s? I mean, if we buy those
85s, they’re more expensive. But we have a right to sell
closer to where we are. OK. Well, what if I don’t want
to pay that much more? What if I actually want to
buy the strike the right to sell the stock from
now until expiration? Remember these are American
style options, not European, OK, not Bermudan. These are American style. We have the right from
now until expiration where we can sell the
stock at the strike price. OK, well if I looked
at the 82 and a 1/2, it’s going to really the price,
the premium of those is $1.31. Now, if I just go
down to where it says, single order, what do
I need to click on? Well, if I go down to single
order and say, OK, step one, I want to buy the stock. Step two, I’m just going
to go where it says, first triggers SEQ. All it means is before you
buy the put, buy the stock. Oh, OK, only two steps. Step one, buying the stock. Step two, we’re buying
that put example. Now, you’re going to see that
right here, let’s kind of talk about this. So in this example, now,
what you’re going to see, OK, is we are buying
the stock at 85.73. OK. We have a right to sell
those shares at 82 and 1/2. So the difference between
those points is about $3 and about $3.23. But member, that right to
sell the stock at 82 and 1/2 is not free. We’re really paying $1.31. So let me kind of
write that right there. So from 85.73 down
to 82 and 1/2, that is going to be about $3.23. That’s the stock risk. Now, the option value– that is in this case
going to be $1.31. So if we just add those numbers
together, we define the risk. So from now until expiration,
we’re not going to lose 1,000. We’re not going to lose 1,500. We’re not going lose 2,000,
because we have a right to sell at the strike price. Now, for every 100
shares of stock we have, we’re going to accompany
that with a put. OK, now, are there
any questions on that? OK. Now, here’s the deal. One of the things
that’s interesting is when the stock goes down,
the delta of this strike should be getting higher,
stay the same, or lower. So if the stock is
actually going down, should the delta stay the same? Should it actually get bigger? Or is that delta
going to get smaller if the stock is
declining in value? So if the stock
actually goes down in value, what that really
means is the put delta is going to
increase, which means you have more protection on
the stock, which is good, because you’re
wanting to make sure that there is a defined risk. So if we sit on a trade
that we could risk $500, we would really be
doing one contract, OK, or in this case, 100 shares
of stock and buying a put. Now, if we take a
look at this, I’m going to go Confirm and Send. Now, member, this is
just like anything– buying an asset, OK, which is
the stock in this case, a paper asset. Step two, we’re
just buying a put to protect that paper asset,
the stock called Merck. Now, let’s make an assumption. Two things happen here. Either we close up
on that strike price, or the stock closes
below the strike price. So what happens? Well, if the stock closes
above that 82 and 1/2, at the end of this expiration
what’s going to happen is we’re going to add $1.31
to what we paid for the stock. So in this case, we’ll
probably right around– check my math if I’m wrong. But if nothing happens,
if the stock were to close above that
strike, we add the value of that put to what
we paid for the stock, meaning that premium
went to zero, OK. So our new average price
on the stock has risen. There is no ceiling on this. There’s a floor on this. Now, what happens
if the stock were to close below the 82 and 1/2? Well, if the stock
closed below 82 and 1/2, we have a right to sell that
stock at the strike price. And we know the maximum
loss here would really, in this case, be 4.54. So all at main, two
things could happen. If we close above the strike,
the put becomes worthless. If we close below the
strike, we don’t do anything prior to expiration. The put has intrinsic value. The stock is sold at
the strike price, OK. Two main scenarios. Close above, you close below. Now, you might throw some
management things in. You might roll it. I’m just talking
about simplicity. What happens? We either close above it– the option expires
worthless, adds to the price we pay for the stock. Option number two– price
close below that strike. We have a right to sell the
stock at the strike price. It’s a pretty
simplistic strategy, OK. Only main two things happen. You close above. You close it below if
you’re not touching it prior to expiration. Now, if we take a look at this– now, one thing I’m going to do– I’m going to go ahead
and say Confirm and Send. And if we go Confirm and Send– now, step one,
we’re buying, OK– we’re buying the stock. OK, so we’ve got the capital. We pay the transaction fee. Step two– we’re actually,
also, in this case, we’re buying output, OK. We have a debit for that
and the transaction fee. If we include
those two together, that’s what you’ll see there. If that’s what we
want to do, I’m going to go ahead and say, OK,
that’s what we’re going to do. Let’s send the order. Now, we actually look at this. One thing I want to kind of
keep in mind is, how many of us, even though we actually
saw the market, let’s go back to
the market here, OK. I think if you ask
most people, hey, where did you think the
market was really going to go? Most people probably said,
look, the market’s going down. Now, if they knew what
you could do with options, did they buy puts? Did they do covered calls? What did they do? Right? So when that breakup
support happens– when it does, not if– what do you do? What are your options? What are your go-to strategies? Now, a covered call, remember,
that’s an income strategy. Number two– the
protective put– that is where you
define the risk. Now, we’re getting somewhere. But if we now combine
these two, OK, this is where we’re showing example. And what I’m going
to do here is I’m going to bring up an
example of what we really mean by a caller. OK. Now, what I’m going to do
is I’m going to come back. And I’m going to
look at the example. And we’ve done some of callers,
because we talked about them. Now, the example that
I’m going to look at here is I’m going to look
at what is a caller? James, you talk about
these building blocks– algebra, trigonometry, calculus. Well, if we take
a look at this, we own 200 shares of
stock of Home Depot. Step two, you’re going
to see that in this case, we sold the calls. OK? And number three what
we did with that income that we received from
those sold calls– we used the sold
call to buy the put. All right. And so that’s why
there’s three lines. Now, this is typically
viewed as a leg-in strategy. Now, there’s something I
really want you to consider. So when you look at
this, if both of these– the put and that sold
call are making money– what does it tell us about
the direction of the stock? So if the put is making
money, if the sold call is making money, what
does it tell us about the direction
of the stock? Well, if doesn’t
want to making money, it tells us the
stock has gone down. OK. If both of them
are losing money, it tells us the stock went up. And if they’re
both offsetting it, it tells you the stock
has really gone sideways. Now, what I’d like
to do with you. And I’d like to talk to
you really about kind of the timing of the entry. And I think we
have a good example that we could pull from. Let’s take a look at really XEL. And so I want you to
imagine that someone knocks on your door. And they’ve said, hey, I heard
you’re in the stock market. My stocks are going down. And they ask you, well, what are
some of the strategies that you could use if the
market were to go down and, provided that you had
some experience, right? Well, we might say, well,
you could do a covered call. You could set a stop. You could buy a
protected put or caller. You need to just understand
that a call or strategy is just blending that sold call
and the bought put. We’re just putting
them together. Now, if I were to
ask you the question, well, what would be
an interesting time to get in to a caller? Like, what would be
an interesting time? Do you wait for the
stock to break support? Do you want the stock
up at maybe resistance? Where would you try
to apply protection? OK. Now, let’s kind of talk
about this in two ways. So when we take a
look at this, you’re going to see that we have
a support level here. And I’ll wait for those answers. I like to kind of
see your thoughts. So number one is I want
you to kind of think you could a vote here. Would you consider putting
on a protective strategy up near resistance? And if so, why? That’s for you that are A’s. For those of you that are B’s,
you might say, well, James, I don’t want to
put on protection, unless we break support. OK. Now, I’m going to just
kind of talk to the B group just real quick. If you said that’s
you, the B’s– what that really means is
you are waiting for the stock to drop about $3. Now, what happens there? So let’s say you have $5 worth
of unrealized stock gain. And you said, I’m not going
to apply the protection until we go down below 58. Well, if you had $5 of
unrealized gains, and you said, I’m not going to do
anything until we drop down below that 58, you’ve
given up $1 back. You give $2 back. You give $3 back. And now, you’re now
protecting when you only have $2 of profit
unrealized remaining. So that’s kind of
a little tougher because you give back
and allow the profits. You’re protecting
when there’s been more of a confirmation of
the technical analysis. And you’re protecting now when
you have less unrealized gains. If you said, James,
I’m kind of more A. I’m looking for
stocks where they might be up near a
resistance, whether it’s horizontal or diagonal. OK. So let’s kind of take a look at
the position that we have, OK. Now, I want you to
imagine that you might be in the same kind of boat. I want you to imagine
this position shows that we have 100 shares. So in other words, we
own the asset already. For every 100 shares
of stock we own, we’re going to sell a call. When we talk about
selling calls, we talk about selling calls
above or at resistance. What that means
is the stock is– well, we’ll look at it. Let’s go look at it. If we look at where
the resistance is, the resistance is about 61.60. If we go look at this, I’m
going to go look and see, well, what strike– so the strike that we sell,
that is typically going to be, in this case– so
we looked at 61.60. And in this example,
what you’re seeing is we don’t really have the out of
the money strike in this case. They’re only going
to give us $0.25. Now, is that enough for you? Or you thinking in this
case, that’s not enough? Now, you might be thinking
that’s not enough. Now, I want to kind of talk
to you about this example. If you were a little bit
more bearish on the stock, you might think, hey, I think
the stock could pull back some. And I’m going to
show this example. We normally wouldn’t sell
a delta that is so high. But we don’t have
another example where we have a strike at,
let’s say, the 62 and 1/2. But I’m going to
show this example. I’m going to left-click
right on that bid. Now, when we left-click
right on that bid, look at the bid-ask spread. It is the after hours. 240 bid, 285 ask. Now, notice all we
did there is we just clicked on that bid price, 240. And what I’m going
to do is I’m going to move to the mid price
of, let’s say, 260. Now, what I’m going to
do in this case is– so if we had 100
shares of stock, OK– so we have 100 shares of stock. That’s 100 delta. If we sell a call
that’s 64 delta, that’s now going to
get us down to what? What does it get us down to? Well, if we have
100 shares of stock, and we sell a call
that has a 64 delta, this now gets us down to 36. So if you take a look at this,
now, if the stock drops $1, we’re losing, not 100– we’re losing approximately
$36, meaning we’re losing less. Now, how many of you are
thinking in the last week or so, I would have
liked to lose less? OK. All right, I hear you. Now, in this case, when we
talk about a typical caller, we’re not talking about
protecting all the 100 delta. So what I’m going
to do is here is I’m going to go to
the out of the money. That delta is abnormally low. So what I’m going
to show in this case is I’m going to buy the put. And when we buy that put, that
put is just for about $0.30, $0.35 or so. We’re going to buy the
put where we have a right to sell those shares at 55. Now, if I did this,
100 shares or delta, the negative 64 is
for the so-called. The negative 10 is
for that long port. And if you just kind
of subtract those, it’s going to get us
to a grand total of 26. What is this really doing? Well, if the stock goes now
down $1, we’re not losing $1. We’re losing $0.26 or $26. OK. So it means that we’ve
cut the position by 3/4. We’ve decelerated. We’ve said, look,
we think there’s a greater risk that the stock,
in this case, could pull back. Now, how do we do that? Well, if we want to
just this all together, what we can do is we could just
right-click right on the bid price– right-click. We’re now going to go where
it says sell, because we are going to sell the call. And we’re just going
to go over here to where it says
caller synthetic. Now, if we do that right there,
now, what you’re going to see is, we sold the 60. And then in this
case, what we’re doing is we’re buying the 55. Now, in this case, what
you’re going to see is we still have a credit here. It means we’re agreeing
to sell our shares for 60, OK, from now until expiration. But we really get
$2.35 on top of that. That really means
if you look at 60 and add $2.35, that really means
we can make up $2,000 total– just add those together– 62.35. So when we actually do
a strategy like this where we sell where the delta
is so high on the call side, we’re really saying,
look, we think there could be a greater risk
of the stock pulling back. Who is paying for the put? The so-called premium is
helping us pay for the put here. Now, what I’m going
to do for every 100 shares of stock we have,
we’re going to do a contract. We have a transaction
fee to sell the call, the transaction
fee to buy the put. Now, the idea behind this is– and you’ve probably
seen this before– when volatility hits,
it’s when you typically get stomped out your positions. And when volatility
spikes and then comes back down, what
happens is you typically don’t have that many positions. Does that make sense? And then when the
market bounces back up, you don’t have any positions. And now you’re gun shy to
maybe looking to get in. OK, you might know
someone like that. Now, what I’m
going to do here is I’m going to sell
that call and the put. There it is right
there, the break even. We talked about that. The max loss assumes the
stock goes down to zero. It’s not infinite
because we have a right to sell the stock at 55. There’s the credit minus
the transaction fee. And if that’s what
we want to do, we’re going to send the order. Now, if this was a
better example, normally, we’d probably see a
62 and 1/2 strike. And normally, we would probably
see like a 57 and 1/2 put. So let’s kind of mark on the
chart here what we just did. So when we sell a call, we’re
really selling the call. What we do is we actually
sold the call at 60. And then we actually
bought the put at 55. So we’re really thinking
that that stock could really pull back inside that area,
OK, between 60 and about 55. We’re thinking it
could pull back. And when it pulls back,
what we’re trying to do is hold the bulk
majority of our gains. That is why we’re
doing a strategy where there is more protection
by selling a call and buying a put. Now, let’s look at the
example here of McDonald’s. I know we’ve talked about
this as of lately, OK. Now, McDonald’s has been one
of those stocks that has just really been quite a horse. It’s just gone up. But then today when
the market fell, it too got pulled back down. Now, here’s the thing. I want to kind of
make sure I talk to another group of investors,
which is, you might say, well, James, I don’t really
want to apply protection until the stock really
breaks a support level– understand. So if we let that
stock drop down below– let’s say that
support level was 213. What that means is we’re willing
to give some of those gains back. What you’re saying
is, look, I want to just own the stock as
long as that stock is still in the upward trend. So let’s do this. Let’s practice. And this was part of
a learning outcome. Number one of practicing– putting on protective puts,
whether we’re manually putting them on. Or we’re having them
automatically set. Let’s take about three
or four minutes here. So we’re going to look and see
where the support level is. And I’m going to
write this down– want to go nice and slow. Let me ask myself– where’s the support level? Well, the support
level that I can see is probably right
around about $213. So this might become
the trip point where you say, if we go
down below that level, I want to make sure the
protection is on, OK. Or that protection is tripped
to protect the shares. Well, how far would
you let the stock drop before you put
the protection on? How far? Well, let’s kind of
take a look at this. In this example, let’s say,
you said, James, $0.50, $1.00, $2.00. I’m going to take kind of
maybe the middle number. And I’m going to say,
minus, in this case, $1. So I’m going to say, look, if
we go in this case to $212, I want the protection on. Now, when we sell a call– OK, so when we
sell a call, we’re looking to sell a
call above that price. So what is above 212? Well, let’s go take a look. Well, if I go take a
look at the trade page, and this could be a
mistake that investors don’t do that we might be
thinking that we always think the stocks can go up. But the stocks are correlated
back to the market. And if the market goes
out or the tide goes out, it can drag the stocks down too. Now, I think here’s where we can
kind of show the maturity here. If we have pending
protection that says we’ve thought ahead
of time and said, look, these stocks might not always
hold the support level. And we’re acknowledging that. Now, if we go here and say,
OK, what strikes can we pick? When we look at the
monthlies, same thing we kind of saw on XEL. It’s a gap between 210 and 220. One of the things that makes
the weekly options interesting is you get more strikes. Now, member, we’re saying, look,
let the stock come down 212. Then sell a call that
is above or higher. Well, the one that would
be higher at that point if the stock were to
drop would be 212.50. It would also be 215. We’re talking about the
stock dropped down 212. What strikes would
be above that? That’s what we’re saying. All right? Now, if we take a look at
this, I’m going to look to, let’s say sell, the 215. That would be the strike
above that 212 price. Now, if the stock were
to drop down to 212, what strike would be below
that for the long put? Well, let’s take a look at that. Well, if below 212,
it would be 210. It would be 207.50. So step one– how
many of you think you can identify the support? I think you can. I absolutely think you can. Step two– how many
of you can identify how far you would let
it drop before you put the protection on? Maybe for you, it’s a
$1 amount or percent. You specify. When we’re selling
the call, we’re thinking about above that price. When we’re thinking
about buying the put, we’re thinking about
below that price. Think about the put
as the right to sell– the safety net. Now, when we come into
this, what I’m going to do is I’m going to right-click
right on the bid of the 215. I’m going to go to sell and
to go right here to where it says, in this case,
right to where it says, caller synthetic. OK. Now, what I want to do
is I want to make sure we’re getting the right one. Now, the 215 call– that’s correct. But we need to change that
right there to the 210 now. So we’re selling the 215. And we’re actually buying– not the 200. Let’s double check. It’s 210. Let’s double check that. Well, we could do the
210 or the 207.50. If I did actually
the 210, that just means the protection
is closer to where that current price could be. Now, I want you to
really watch this, OK. We’re saying, put
this protection on if the stock were to drop. So that’s the conditional order. We’re going to change
the limit to a market. We’re going to change
the day to the GTC. So market GTC. Now, over here to the right,
what you’re now going to see is we’re going to move– OK, I’m going to just kind
of put my cursor right there. So when I move my cursor
just to where that arrow is, you’re going to see
there is a gear. And when I click on
that, you’re going to see that if I put my cursor
right there, there’s the gear. If I click on that gear,
now, right below in this box, it’ll say symbol. I’m just going to click right
below where it says symbol– symbol– automatically populates
McDonald’s– method, mark. OK. This is at below. And let’s type in a
threshold price here of 212. Now, what we’re saying is
don’t put on the protection until the stock goes to 212. Now, here’s what’s so
important about this is when we type in
that 212 number, we want to make
sure that down here that it is also showing the
mark price of the security is less or equal to 212. Now, here’s the thing. How many of you if you could
go back in the last week or so wish you would of practiced
just that that if your stocks would’ve broken support that
you had protection pending? So think of this like
a regular stop order. But this is not a stop, OK. This is trying to protect
the shares of the stock and then slow down the
give back of those profits or making sure that you’re
protecting the capital. Does that make sense? Now, Steve actually
says, how far do you typically
go out with options regarding these strategies–
one month– three month? So Steve, in our examples,
we typically show one month. If you thought that
there might be further– let’s say if you thought
there was a market or a stock condition where for
the foreseeable future, there might be more
volatility in the market– could you go three
months out in time? The answer– sure. Historically, have we
shown examples of that? Absolutely we have. OK. So Steve, we talk about usually
going out about 30 to 40 days. Think of that is
maybe shorter term. And then the other side would
be going out 70 to 100 days. Think of that as
maybe longer term. So Steve, if you
thought the market might have more volatility, you
might sell those calls out 70 to 100 days and buy the
puts out 70 to 100 days, OK. You absolutely can
pick the expiration that matches your posture. Yes, good question. Now, what I’m going
to do in this case– I’m going to say, save that
order and go Confirm and Send. Now, remember, we own
the shares already. What happens if McDonald’s
keeps going up, up, up, up, up? Wonder if it does? Well, what happens in this
case is the protection does not get triggered. So the stock stays
above that [INAUDIBLE].. Stays above, stays
above, stays above. The order to sell the call– the order to buy the
put doesn’t trigger. You’re still long the shares. There’s no harm or foul. Now, over time as
far as your routine, could you raise up
that conditional order and adjust the strikes? Sure. Just like you
would think of this about a potential
exit, or in this case, deciding at what point
you want to protect. If that support level
over time becomes higher, you could adjust that trigger
price and the strikes. Yes. Now, I’m going to go
back to this real quick and let’s send that. Now, let’s kind of take
about just real quick– when we look at this, I’m
going to bring up the monitor. And what I’m going to do is
I’m going to kind of talk about some of these. And I want to kind of just take
a look about the management of the strategy. So first off, when we take
a look at this, we own– now, I’m going to
ask you a question. When you look at
Home Depot, do you think there’s still a risk
of Home Depot dropping? Would you say that
there’s a risk of maybe this stock further going down? If you take a look at
that, we kind of recently got down below the 210. We made a lower
low, came back up, [KISS] kissed that
10-day moving average. And then we dropped down again. OK, so, I mean, at
least right now, we’re not breaking up through the
resistance not right now. So if we take a look at this, we
want to go back to those pieces and say, OK, the stock
is still under pressure. Any time you’re looking up
at that 10-day moving average or the 30, that’s not momentum. OK, now, not bullish momentum. Now, when we take
a look at this, let’s look at the
so-called first. When we look at the
so-called member, the most amount of money that
we could make is the premium. Now, how much of a
premium do we have? Well, so far, we
sold this for 345. It’s currently at 209. We have right now 39%
of the premium, which means we have 60% left to go. Now, do we really need
to do anything with that? Do we really need
to do anything? I mean, if your goal was,
I’d like to make 50%, 65%, 80% before
I roll that call, do we really need to
do anything with that? Now, Ricardo’s also
saying, Home Depot actually announces earnings next week. This is another
reason why investors consider the strategy, because
that long put defines the risk. Now, in this case,
I want you to notice that when stocks go down,
sometimes investors are just looking to take any profits
they can get their hands on. Now, right now, oh,
my gosh, that put has increased in value. It’s up 97%. Let’s just take those gains. Now, I want you to kind
of think about this is, this right there, which is
about $900, what is that doing? So if we add these two
up, it’s about $900. How many shares of
stock do we have? Well, we got 200 shares. So if you talk about a $900
gain, and you kind of just divided that, in this case,
take 900 divided by 200 shares. And it’s probably going to drop
the average price in which we own the stock by about $4. That protection has helped us. Now, we haven’t done that yet. But it’s helping us reduce
the average price so far. We haven’t capitalized on
that, but that’s the idea. So right now is in this case,
we still have 39 days left. So there’s still some time here. And if you take a
look at this, we don’t really have enough here
to really roll that call. And the put is working
for us, because we’re getting closer and closer. Stock is at 207. And that put, we’re
getting closer and closer to that put strike. So this protection
is working fine. OK. We don’t need to roll that call. If we said we want
50% or higher, we’re just not there yet, OK. Now, when we go down, I’ll bring
up the example of Merck here. After this one, I want
to get to your question. So go ahead and type in
any questions you have. Let’s answer this. So the other thing we said is
when I look at this position– 200 shares of Visa– and what you’re going
to notice right here is the stock still
has some gains on it. We can see about
1,320 unrealized. Both the put and that sold
call are both making money. What does that say? That is saying
that in this case, the stock must be going down. If both of those bought put
and sold call are making money, stock must be going down. Now, how many days
we got to expiration? 18 days. Let’s take a look at this. So when we look at this and say,
well, what strike did we sell? Well, let’s take a look. We sold at 182.50. Let’s make an assumption right
now that today was expiration. Let’s imagine we’re on the
day of expiration right now. We’re looking at the 182.50s. What would happen with
those 182.50s if today was expiration? Well, if today was expiration,
and the stock was at 176, that means that that 204 value
would go all the way to zero. Well, and we would
gain all of that 204. No one’s going to want to buy
our shares typically at 182.50, especially at expiration. If the stock in the
market is at 176, those would expire worthless. Now, the put right there, if the
stock were to close below that 177.50– OK, so we’re saying stock
closes below that 177.50, and we did not do anything,
what’s going to happen? Well, in this case,
we have a right to sell those shares
at the strike price. Now, if I didn’t do
anything– my hands were tied. I can’t do anything. If I let the stock close below
that 177 and a 1/2, the long– the short call
expires worthless. The long put, we have a right
to sell the stock at the strike price. And how many shares
are they going to sell? We’re going to sell 200 shares. If they sell 200 shares,
and I had 200 shares, I now have zero shares. OK. So I like to think about
the simplicity in terms of, if we closed above
that upper strike, or if we close below it. Let’s just keep it simple. And in this case, if we let
the stock close below it, the brokers automatically
going to get involved. They’re going to sell
the shares at $177.50. That transaction fee
is going to be higher than if we just went in and
sold that stock ourselves. But I think when you’re
first getting started, make it simple. We either close above the
upper strike– someone wants our shares
at a higher price. Or B, the stock actually closes
below that lower strike– the put strike. And that means we sell
it at the lower strike. That means the
stock has gone down. Now, in this case, what
you’re going to see in this is we would capitalize on
some of that protection here. That protection is
helping us hold some of those profits right there. And that’s really what
we’re driving out here. So what is the purpose
of a covered call? The purpose of a covered
call is to take that call and help us pay for a put. If we actually had a sold
call and a protective put, we could use both of those
as a roof of protection on our shares. And when we have market
conditions or stock conditions that
are not favorable, like below both moving averages,
that really means in this case, or we could try to hold up
our profits on the position and overall in the portfolio. Now, if you said, James, I’m
kind of more at the covered call step, then start there. If you said, I got the
covered calls, go to step two, protective puts. If you said, James, I got both
of those, practice the callers. OK. So I want to kind of talk
through those here tonight. Based upon the current
market conditions, that’s really what
we’re still seeing that we talked about the
market and the sector updates. We talked about covered
calls being the foundation of learning about
how to protect, taking that knowledge to protect
the puts, the buying of it. And again, the number one
reason why people don’t buy puts is, if they know
about options, they might not want to
pay for those puts and if you just combine
those now in simplicity. Now, what you’re going
to see is we can actually use those options as a way
to protect those shares. And I want you to go out. And I’d like you
to look for stocks that are up near a resistance or
be practice the pending orders. OK. So practice those
pending order, just like we did on the Mickey D’s,
just like we did with the XEL. Get used to where would
you put that protection on? I’m out of my time here. But the biggest thing is
practice with where you are. OK. Now, the one thing I also
want to make mention of is, in order to demonstrate
the function of the platform, we use actual symbols. We looked at past
examples and new examples. Remember that TD Ameritrade
does not make recommendations or determine suitability of
any security or strategy. That is up to you to decide
what type of stock and strategy you pick. I want to thank you
for your comments and your participation. I think it’s absolutely OK that
you practice these strategies in the paper money. Hold them near to the
expiration so you really understand what actually
happens if the stock were to close above the upper
strike, on a caller, or if it were to close below
a lower strike in a caller. What happens? You learn the most when you’re
watching those positions in your paper money account. And watch it– watch what
happens how the prices move. That’s how I learned it. OK. I did just do a lot of examples. And you can too–
just simple practice. All right. So I’m going to be in
throughout the week. Yeah, thank you so much
for your comments again and your participation. Tomorrow morning, we’ll be
getting started right at 9:00 AM Eastern. Check that. I think it’s a 9:30– double-check that. Yeah, that’s correct– 9:30. And John McNichol
will be doing a class on Swing Trading Days to Weeks. Thank you so much. Take care. Bye bye.

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