Ultimate Option to Living - Inter-middle

Hi there! Welcome to Ultimate Option to Living!

This training course was created by Ultimate Option team. It is the successor to the well-known option trader spent years developing and perfecting this new, innovative and pioneering option trading system.

This course will be guide new trading to understand how the option work, solid training module help trader to achieve the better option trading result.

Inter-middle module will cover module 4-5:

Good luck with the course!

 

Module 4. Cash-flow or Break-even

About this course

Ultimate Option course is innovative and interactive. It clearly instructs trader on what they need to do and when. Click the "i" icon for more details to be learn on this course

Module 4: Content

Module 4: Content

1.intro to option Spread

2.type of option spread

3.market behavior: range or trend market

4.range market: calendar spread

5.trend market: debit spread

option spread

What is a spread trade?

1. A trade using more than one option instrument on the same underlying equity or fund either at a different strike price,different expiration month, or both, to create a trade with a primary instrument and hedge instrument. The “Spread” can indicate the difference between strike prices or expiration months or both.

2. Combination trades using a call and put option on the same equity at the same time are sometimes also considered types of spread trades.

option spread

Most Common Spread Trades

1. Debit Spread – The money spent on the long option is greater than the credit taken in on the short option resulting in a net debit. You buy to open a debit spread and sell to close it.

2. Credit Spread – The credit taken in on the short option is greater than what is spent on the long option resulting in a net credit.You sell to open a credit spread and buy to close it.

3. Combination Trades – Long calls used in conjunction with long puts either in the same or different expiration months and at the same or different strike prices. These are most commonly referred to as straddles or strangles and are always debit trades.

option spread

option spread

get your tool ready

before we proceed, please register with broker and download the trading software

open demo account and get your login id:

https://www.tdameritrade.com.sg/tdaa/index.html#!/openAccount

download trading software

https://www.tdameritrade.com.sg/tdaa/index.html#!/tradingtech/tosdesktop/

other brokers can be tastywork or interactive broker.

we prefer you using TDameritrade thinkorswim as on going course we will using this tool.

Knowledge check: understand on option spread

  • credit spread mean you receive money to initial/open the position
  • debit spread mean you receive money to initial/open the position
  • you can buy a call & put at the same time?

Type of Option Spread

Some Debit Spreads Include:

1. Bull Call Spread

2. Bear Put Spread

3. Straddle

4. Strangle

5. Collar Spread

6. Covered Call

7. Calendar Spreads

Type of Option Spread

Some Credit Spreads Include:

1. Bear Call Spread

2. Bull Put Spread

3. Iron Condor

4. Ratio Back Spreads

Type of Option Spread

Some Other Helpful Terms:

1. Calendar – Any debit spread trade including straddles and strangles can be a calendar trade when the options are placed in different months of expiration.

2. Ratio – Debit or credit spreads in which the number of contracts of one of the options is different than the number of contracts of any of the other options.

3. Vertical Spread – Another name for a spread trade with both options in the same month of expiration.4. 

4.Horizontal Spread – Another name for a calendar spread with both options at the same strike price but in different months of expiration.

5. Diagonal Spread – A calendar spread that uses different strike prices and different expiration months for the two options.

Type of Option Spread

Type of Option Spread

Why Do We Spread Trade?

1. We Hedge Risk

2. We Control Fear

3. We Control Greed

4. We Can Adjust

5. We Can Hedge with time decay, theta

Type of Option Spread - buy option vs long vertical

Knowledge Check: debit spread/long vertical mean we speed money to position, debit spread including:

  • bear put spread
  • iron condor
  • ratio back spread
  • bull call spread

Type of Option Spread - Vertical Spread

Vertical Spread

we will buy the option strike ( long option) and sell the option strike(short option) in the same month, but different strike


Example:

sell JAN option - put 70, buy JAN option - put 50, in this case you will receive money (credit vertical spread)


Type of Option Spread - Horizontal Spread

Horizontal Spread

we will buy the option strike ( long option) and sell the option strike(short option) in the different month, but same strike


Example:

sell JAN option - put 70, buy MAY option - put 70, in this case you need to pay money (debit vertical spread)


Type of Option Spread - Calendar Spread

Calendar Spread

we will buy the longer term option strike ( long option) and sell the near/current month option strike(short option)


you may buy and sell the same strike:

sell JAN option - put 70, buy MAY option - put 70

you also can buy and sell the slight upper/down strike:

sell JAN option - put 65, buy MAY option - put 70

sell JAN option - put 75, buy MAY option - put 70

Type of Option Spread - iron condor

Type of Option Spread - ratio spread

Ratio Spread

we will buy the same month option strike ( long option) and sell the same month option strike(short option)

the buy option need to be x2 or more then short strike, this will receive credit to initial position


example:

sell Feb option - call 70 x1 , buy Feb option - call 80 x3


Knowledge Check: which following statement is TRUE?

  • Iron condor has no risk when we take credit to open position
  • Vertical spread - buy the option strike ( long option) and sell the option strike(short option) in the same month, but different strike
  • Horizontal spread - buy the option strike ( long option) and sell the option strike(short option) in the same month, but different strike
  • Calendar can be buy different strike on long & short option, but must be different month expire

Market Behavior: Range or Trend market

Market Behavior: Range or Trend market

before we enter any new position, very import to understand the current market condition

  • 80% of time, market on range bounce
  • 20% of time, market will trending, advance or decline from current price level

Market Behavior: Range or Trend market

Market Behavior: Range or Trend market

  • VALID UPTREND: Higher High --> Higher Low --> Higher High = Uptrend
  •  The moment price closes above previous high (break-out), that's the starting line of a new uptrend, even if ends up as a false break-out
  • VALID DOWNTREND: Lower Low --> Lower High --> Lower Low = Downtrend 
  • The moment price closes below previous low (break-out), that's the starting line of a new downtrend.

Market Behavior: Range or Trend market

Market Behavior: Range or Trend market

  • how to identified Range or Trend market?
  • the key is earning event
  • market will lost momentum, it will form range market after earning, but this is not 100% will range after earning.
  • after range for some time, market will trend again

Market Behavior: Range or Trend market

Market Behavior: Range or Trend market

  • our prefer strategy will be.
  • before earning 20days, if any ema crossover - enter collar spread(cover in module 5)
  • after earning 10 day, if price lost momentum - enter calendar
  • after  range market, if any ema crossover - enter directional (bear put or bull call) vertical debit spread.
  • NO trade for credit spread or iron condor, the risk and reward is not favor to us, and very hard to adjust

Market Behavior: Range or Trend market

Market Behavior: Range or Trend market

  • can you identified the range and trend market, this is Apple stock

Knowledge Check: can you identified the Range and Trend market around / after earning?

  • Range
  • Trend
  • Range
  • Trend

Range Market: Calendar Spread

Range Market: Calendar Spread

Calendar Spread

we will combine everything we learn so far, and ready to go in to battle field

below the check list before we open any trade:

1. trading plan

2. target profit

3. adjustment plan

4. risk mangement

Range Market: Calendar Spread - Trading Plan

Trading Plan

  • Debit Spread, Spend $ to open position
  • Buy to Open the Trade Long Call or Long Put is Placed Close to the Money (just in or just out) and Typically 45-90 Days or Farther to Expiration. This is our Primary or Money Making Option.
  • Short Call or Short Put is Placed in an Earlier Month of Expiration at Any Strike Price (same, higher, lower).
  • Cost Basis or Net Debit of the Trade is the Debit of the Long Option Minus the Credit of the Short Option
  • Max Risk = Cost Basis, 4% max allocation from total netliq/capital
  • Max Reward = Is Different in the Case of the Short Option Being Higher, the Same, or Lower than the Long Option.
  • Good Target ROI is 20-30%
  • Good Target Time in the Trade is Under 6 weeks.

Range Market: Calendar Spread - Setup

Setup - call calendar spread

  • after earning (15Oct2018), price start move up
  • price above ema20, rsi > 50, macd histogram make new higher high. we will go for bull call calendar (bullish)
  • our goal: we want the price stay it range, but after earning, it might go very bullish
  • we need to wait within 10 days (after earning), for price to rest

Range Market: Calendar Spread - Setup

Setup - call calendar spread

  • after earning (15Oct2018), price start move up
  • price show strong momentum until Oct 25
  • macd histogram start show swing high at bar 3
  • wait for another 2 day macd histogram confirmation( 2 consecutive down bar)
  • if green candle, enter next days for call, sell call $30 front month, buy call $27.5 further month

Range Market: Calendar Spread - Position

Position

after earning, IV(implied volatility/vega) usually will be low,

this is cheap to buy option, when we spend $$ to get the calendar spread open.

for this case, we open sell call $30- 30 days, it will expire around DEC 1st

but our longer term/further option buy call $27.5 - 60 days will expire in Jan 1st

--------------------------------------------------

although the price was go down below 27.5 during the period, but we know it in range bounce

the short call option value will melt away and our long term option still has value.

--------------------------------------------------

Call or Put?

i will using the macd histogram and overall market condition to judge

if macd histogram above 0, and price strong move up after earning, confirmation date will go for call calendar

if macd histogram below 0, and price strong move down after earning, confirmation date will go for put calendar


Range Market: Calendar Spread - Position

Position - how to open position

1. open the BAC stock option chain

2. select for front month option(this case 21days), click sell on 31 strike call

3. select for front month option(this case 49days), click buy on 30 strike call

4. total net debit we spend to open this position=0.75 or $75 for 1 option lot [below total account 4% then ok]

5. good target profit would be ROI 30% = ($75x30%) =$22.5 

6. set the limit order after open this position = $75+$22.5=$97.5 or 0.975


Knowledge Check: Calendar spread, which following statement is true?

  • calendar spread benefit if price stay in range
  • calendar spread benefit if price strong move up or down

Knowledge Check: which chart would you enter for calendar spread? check price spike after earning, macd histogram

Range Market: Calendar Spread - Payoff Diagram

Range Market: Calendar Spread - Payoff Diagram

Calendar pay off

1. calendar good for neutral/non-directional price movement

2. if price was jump up and down in a range, we still make money when short option expire and long option still has some value

3. we will lose money if price move out of the range very far, either up or down

example

for our case, we make most of money if price jump up & down, if price end up stand around the middle (27.5), green zone will be making money zone

if price move very strong in 1 direction(up or down), outside of the green zone, we will lose all the money when option expire.

Range Market: Calendar Spread - When to AVOID!

Calendar Setup

1. calendar setup only work when we see strong move up after earning, fulfill with rules :

a. price move higher

b. macd histogram move higher

2. with this combination, price will highly move up...rest [our signal] ... move up again, we strongly rely on MACD converging [the price go up, macd also go up]

example - good setup

for this case, JNJ make a new higher high in term of price & macd histogram

this is pre-define condition we believe the market was get into JNJ after good earning

we will wait for good pull back and re-enter within 10 days with green candle

Range Market: Calendar Spread - When to AVOID!

Example - Bad Setup

1. oracle has earning make new low price, but from our learning, we need to has convergence which is :

a. price make new low

b. macd histogram make new low

2. for this case, the price and macd was not align to move down.

3. high chance this setup will fail, that price will not pull back but straight go up strongly 

Example - Bad Setup

for this case, DIS make a new higher high in term of price But macd histogram not make new high


Range Market: Calendar Spread - Summary for Call/Bullish

Earning gap

price gap up/ strong move up after earning

market might continue chase the price

wait for price to be 'REST' in next 10 days (spike & range)

Macd histogram

the entire move up form a Higher high MACD histogram then previous histogram hike

wait for 2 histogram bar turn weak

if got green candle, enter next days after confirmation

calendar setup

we slightly adjust the calendar to bull call calendar:

help our delta move if price go up

utilize the theta & vega

Range Market: Calendar Spread - Summary for Put/Bearish

Earning gap

price gap down/ strong move down after earning

market might continue chase the price

wait for price to be 'REST' in next 10 days (spike & range)

Macd histogram

the entire move down form a Lower Low MACD histogram then previous histogram low

wait for 2 histogram bar turn weak

if got red candle, enter next days after confirmation

calendar setup

we slightly adjust the calendar to Bear Put calendar:

help our delta move if price go down

utilize the theta & vega

Range Market: Calendar Spread - Summary

Summary

  • Primary Exit for Any Calendar Spread is to see the Short Option Lose Value or Expire Worthless with Little or No Change in the Long Option Price.
  • Never spend more the 4% of total capital for initial calendar spread.
  • When a stock has an expectation for a slow to stagnant move, either bullish or bearish, a calendar spread of some type can take significant advantage and is a very flexible trade.
  • The trade works best just after an earnings event has occurred and levels of support or resistance seem to be holding.
  • A good target ROI is 30% and a good expectation of time spent in the trade is 2-6 weeks.
  • Time decay in the short option can significantly help the success of the trade.
  • Trade Adjustment will cover in module 6 when price move out of range.

Trend Market: Debit Spread

Trending market

1. there is only 20% of time market will trend

2. we need to identified the "Advancing" bull market & "Declining" bear market

3. common happened after long period of range

4. in case you think market going up, we place bull call spread

5. in case you think market going down, we place bear put spread

Trend Market: Debit Spread - directional (bear put or bull call) vertical debit spread

Trend Market: Debit Spread - directional (bear put or bull call) vertical debit spread

Trend Market: Debit Spread - Trading Plan

Trading Plan

  • Debit Spread, bullish(Call) or bearish(Put)
  • Buy to Open the Trade, low IV will be better
  • Long Call is Placed At or Just Out of the Money and Typically 45-90 Days to Expiration. This is our Primary or Money Making Option.
  • Short Call is Placed One or Two Strike Prices Higher and in the Same Month of Expiration. This is our Secondary or Hedging Option.
  • Cost Basis or Net Debit of the Trade is the Debit of the Long Call Minus the Credit of the Short Call
  • Max Risk = Cost Basis, 4% max allocation from total netliq/capital
  • Max Reward = The Difference Between the Strike Prices Minus the Cost Basis
  • Good Target ROI is 30-40%
  • Good Target Time in the Trade is Under 6 weeks (2-3 weeks is preferable).

Trend Market: Debit Spread - Setup

Setup

1. Before moving to indicator, let focus 2 thing first: earning, range market

2. after earning, market will go up or down --> range ---> up or down again

3. we need to wait at least 10 days after earning, let the range form first

4. after range market, market will trend again

5. we will need to aware when is next earning, because earning is uncertain

Trend Market: Debit Spread - Setup indicator study

Setup

1. we look for 3 indicator signal as we teach in module 1

2. rsi >50, ema crossover, macd crossover

3. please take note, after earning there is 1st ema cross signal, but it was high chance still in range market.

4. we go for 2nd signal, as this is trend continuous 

5. aware when was the next earning, make sure your position not close to next earning.

Trend Market: Debit Spread - Position

Position

1. after signal day, we will enter next day market open

2. we going to open Jan buy call $27.5(45 days), Jan sell call $30 (45 days)

3. please take note, the buy call try to close to ema 20

4. the delta difference between buy call & sell call need to be > 0.2, the larger will be better [when stock move up $1, your entire position will gain for $0.2]

5. aware when was the next earning, make sure your position not close to next earning.

6. overall position will take profit when ROI is 40%. if you buy the call debit spread for $1, when price reach to $1.40, good to take profit.

Trend Market: Debit Spread - Position

Position - how to open position

1. open the BAC stock option chain

2. select for same month option(this case 49days), click buy on 30 strike call

3. select for same month option(this case 49days), click sell on 32 strike call, choose delta at lease 0.2 away from buy strike.

4. total net debit we spend to open this position=0.75 or $75 for 1 option lot

5. good target profit would be ROI 40% = ($75x40%) =$30 

6. set the limit order after open this position = $75+$22.5=$105 or 1.05


Trend Market: Debit Spread - Payoff Diagram

Debit Spread pay off

1. we spend $$ to buy closer call and sell further call - 45 days away

2. because we spend money to buy, our break-even price will be buy call strike + debit we pay

3. we only will make money if price more up and beyond our break-even price

4. we will lose money if price below our break-even price

5. time decay will help us when price if above our break-even price, melt off the sell option value

example

for our case, we spend money to buy call debit spread, the break-even will be front buy call strike $27.5 + $1=$28.5

if price end up stand above break-even (28.5), green zone will be making money zone

if price move below break-even, outside of the green zone, we will lose all the money when option expire.

Knowledge Check: what you know about debit spread, choose any answer you feel is true.

  • debit spread need to deploy during low IV(cheap)
  • debit spread is earning event friendly strategy
  • place the long call and short call in same expired month
  • debit spread position only initial after earning + range market.

Trend Market: Debit Spread - Summary

Earning event

price gap up/ strong or stay flat after earning

no hold over debit spread position on earning event

wait for price to be 'REST' in next 10 days (spike & range)

Signal align

after range market for sometime, if there is crossover ema, rsi > 50, macd crossover, high chance market will trending.

Debit Spread setup

enter the long call near ema20, sell call with difference of delta 0.2, 

45-90 days DTE

take profit when ROI was 40%

Trend Market: Debit Spread - Summary

Summary

  • When a stock has an expectation for a bullish move the bull call spread can be used to take advantage of the move with less risk than simply buying long calls or buying the stock.
  • The bull call spread works best when there is not a significant event (like earnings) that takes place between the time the trade is open and the expiration date of the options.
  • A good target ROI is 40% and a good expectation of time spent in the trade is 2-3 weeks. Both of these are due to the time decay of the options.
  • Adjustment will cover in module 6, when price go against our original direction.

Closing

Closing

from here we will end the module 4, take 5min to re-call what you learn in module 4.

Closing -Summary

Learn about Type Of Option Spread

we focus on type of different option spread, mainly: credit, debit, calendar, iron condor, straddle

market condition + IV will be the key to determine which option spread to choose

each trade only spend 4% max, and total option margin 25%, dont overtrade

Calendar Spread

our main income/cash flow generator 

working well after earning not before( NON Earning Friendly)

expect (our goal) price to range bounce in next few week, time decay our friend


Direction Debit Spread

our main income/cash flow generator 

NON Earning Friendly, don't hold over earning, always take profit or close the position before earning.

expect price to travel to 1 direction(up / down) strongly. time decay our enemy 

Module 5. portfolio grow

Module 5: Content

You will learn in module 5

1. Definition Collar 

2. when to place

3. The Collar Spread

4. Exploding Collar

5. put/call ratio back-spread


The Definition of Collar Spread

The Definition of Collar Spread

  • Long Stock[buy 100 share of stock]
  • Long Put At of Near The Money at Least Out in Expiration Past the Next Earnings (or other set) Event
  • Short Call One or More Months Farther Out in Expiration Than Our Long Put and At Least One Strike Price Higher (we always want our short call credit to be at least as much as what we spend on our long put)

The Definition of Collar Spread

when to place

when to place

  • collar can be useful when you stock is going to facing the uncertain, example earning
  • you buy insurances for your stock, and ask someone to paid for it
  • long at put and short a call will limit upside (max profit) potential [we can adjust it if go up]
  • if stock tank/go down, you will cover buy put and call lose value
  • if stock side way, call and put lose value, but your stock remain same

when to place

Earning

we know earning ahead, but we dont know the stock will up or down

Blue Box

draw a blue box, ahead of earning 20 days

Signal

ema5/20 crossover, will be our time to buy stock, buy put, sell call - this is collar trade

we must buy the collar will cover next earning

when to place

Review When to Use a Collar Trade

  1. 1-2 Weeks Ahead of Earnings
  2. Anytime You Own a Stock for the Very First Time
  3. Anytime You Get Technical Crossovers to the Bearish Side
  4. When Levels of Support or Resistance are Broken
  5. max allocation for stock margin: 45%, dont over trade. 
  6. start with 1-2 small stock first

Knowledge Check: Collar trade mean...

  • buy stock
  • sell put
  • buy put
  • sell call

Knowledge check: when would you place the collar trade? True or False

  • there is earning ahead
  • after the earning

The Collar Spread

The Collar Spread

The Collar Spread

  1. today stock [ABC] close price $50. earning ahead next 15 days, we have signal today [ema crossover]
  2. we buy 100 stock of [ABC] = $50 x 100 = $5000
  3. we buy put cover until next earning, example 90 days, put $50(this put need to closer to buy stock price) - option price -$3
  4. we sell call option plus 1 month of put option, 120days, call $60(this call must above buy stock price) - option price +$3
  5. summary: we only buy stock $5000 with insurance that pay by someone

The Collar Spread

The Collar Spread

The Collar Spread

  1. today stock [BAC] close price $30.15. earning ahead next 15 days, we have signal today [ema crossover]
  2. we buy 100 stock of [BAC] = $30.15 x 100 = $3015
  3. we buy put cover until next earning, example 84 days, put $30(this put need to closer to buy stock price) 
  4. we sell call option plus 1 month of put option, 112 days, call $31(this call must above buy stock price) 
  5. summary: we only buy stock $3015 with insurance that pay by someone, the risk was $15 over value of $3015

The Collar Spread - case study

case 1 - CAT

1. today cat close was 83.56

2. you buy 100 stock

3. buy a put[far to cover next earning], there is no put strike with 83.56, buy the next one closer -82.5

4. sell a call[next 30days of put option], call strike must above our buy stock price 83.56.

5. calculate the net cost/break even, buy stock $83.56, receive credit 0.2 = $83.26

The Collar Spread - case study

Case 2 - CROX

in this case, step was same. except we buy the ITM put and we sell call next 60 days to receive more credit

so this case we have 0 risk.

The Collar Spread - case study

Case 3 - AAPL

1. stock price 502.97.

2. put price has 500 or 505 only, we go for cheaper premium, but your risk here will 502.97 - 500=2.97

3. take extra 2 month call to get the better premium and further call strike, 515 for $27.35, this extra credit help us to reduce our overall cost, the net risk back to $2.17

The Collar Spread - case study: Quiz

Quiz

Lets fill in the price at the blank space, and calculate your net cost basis.


Knowledge check: what is your net cost basis for BA stock?

  • 104.98
  • 105.14

Knowledge Check: Collar trade is combination of purchase stock + ... & ....?

  • Long Call & short Put
  • Long Put & short Call

The Collar Spread - Bullish Worst Case

Bullish - then how?

after earning what would be the possible scenario if price go very bullish?

The Collar Spread - Bullish Worst Case

Bullish - then how?

Case study

The Collar Spread - Bearish Worst Case

Bearish- then how?

after earning what would be the possible scenario if price go very bearish?

The Collar Spread - Bearish Worst Case

Bearish- then how?

Case study

The Collar Spread - Summary

The Collar Spread - Summary

  • The Collar Trade is Used to Protect Stock Through Periods of Uncertainty (like earnings)
  • Collar Trades can be Structured With Zero Risk for a Period of Time
  • Understanding Your Cost Basis, Your Max Risk, and Your Max Reward (without adjusting) is Crucial to Structuring Collar Trades
  • our goal is to accumulate the number of stock[Portfolio Growth] from Collar trade. short term gain is not our priority 
  • this is price, time decay, earning event friendly strategy.
  • but this strategy require bigger capital to initial, prefer 300 stock to setup

Exploding Collar

Exploding Collar

you have learn all about Collar Trade.

next, we will move on to next level of Collar Trade - Exploding Collar

Why Do we use a collar trade?

  • Protection
  • Leverage
  • easy to adjust
  • stress free
  • profitable

Exploding Collar

Exploding Collar

buy stock

long ATM put x 2 - that cover next earning, eg 90days DTE

long OTM call x1 - that cover next earning, eg 90days DTE

short ATM call x1 - around 1-2 year DTE [leaps option], eg 500 days DTE

Exploding Collar - setup

Collar 

what we doing here, is combine collar and straddle. by selling leaps call allow us to funding for 2 put + 1 call in 90 days.


Straddle

buy call and put for 90 days, and this price was paid by someone.

by doing this, you no need to adjust unless the stock not move in 90days (sideway for 3 month)

Exploding Collar - Position

Exploding Collar Trade - Position

  1. buy stock (debit) - $59.75
  2. long put at $57.5 strike (debit) - $6.6
  3. long call at $62.5 strike (debit) - $3.2
  4. short call at $60 strike (credit) - $9.8
  5. total cost - $59.75, only stock price, option are offset each other
  6. max risk (until expiration of long puts) - $2.25 
  7. max profit (if called out on short call) - $0.25
  8. small amount of risk traded for profit to downside and to upside

Exploding Collar - Position

Exploding Collar Trade - Position

  1. buy stock (debit) - $59.75
  2. long put at $57.5 strike (debit) - $6.6
  3. long call at $62.5 strike (debit) - $3.2
  4. short call at $60 strike (credit) - $9.8
  5. total cost - $59.75, only stock price, option are offset each other
  6. max risk (until expiration of long puts) - $2.25 
  7. max profit (if called out on short call) - $0.25
  8. small amount of risk traded for profit to downside and to upside

Knowledge Check: Drag and drop the action to form a exploding collar trade

  • buy Stock
  • buy 3 month/cover next earning 2put & 1 call
  • sell 1-2 year leaps call

Knowledge Check: when is best to setup exploding collar trade

  • before earning
  • ema 5/20 crossover ahead of earning 20 days
  • buy stock regardless the price i can afford or not
  • buy stock only using 45% max of my total portfolio

Exploding Collar - vs normal Collar Trade

Exploding Collar - vs normal Collar Trade

both collar was design for hedge earning.

exploding collar suitable for small capped/size stock $10-$20, for small account to grow their portfolio fast

exploding collar prefer for past earning high volatility stock, and can start with 100 stock


collar would be preferred for a larger portfolio capable of holding 300 plus share of 3-5 mid capped stocks

prefer to buy 300 stock to setup

Exploding Collar - Summary

Summary

  • Exploding Collar trades can be set and left alone for as long as your put options have to expiration.
  • exploding collar trades are all about money in - money out
  • exploding collar trade often do not have to be adjusted
  • adjusting the exploding collar trade is as simple as bringing money back in on your long option, and rolling in our short call. this will cover more in module 6

put/call ratio back-spread - Breakout Trading

Breakout Trading

in this module you will learn about the break-out trading using ratio back - spread

we will introduce the charting, price structure, break-out.

lastly, entry point will be using call/put ratio back - spread

put/call ratio back-spread - chart pattern

Chart Pattern

let review this video again if you already forgot the basic chart pattern.

read more https://optionalpha.com/13-stock-chart-patterns-that-you-cant-afford-to-forget-10585.html

put/call ratio back-spread - type of chart pattern

We will focus on 4 basic chart pattern 

  • Head & shoulder 
  • Rectangle 
  • Triangle
  • Cup & handle

put/call ratio back-spread - type of chart pattern - hns

Head & shoulder 

price been move up and momentum die off at right shoulder

we will wait for the break on neckline and enter

Inverse Head & shoulder 

price in oversold area, and there is no more seller left, buyer kick in at right shoulder form a higher low

we will wait for the break on neckline and enter

put/call ratio back-spread - type of chart pattern -hns

H&S Break

this is classic chart pattern, we have very long up-trend market 

the price start lost momentum at right shoulder

neckline is 108.7, once it break with clear signal(will cover later), that will be our entry point 

left shoulder & right shoulder will have same price level around 130

target profit: from top to neckline, 200% to downside (around 65)

stop loss: ema20 during neckline break

put/call ratio back-spread - type of chart pattern -Rectangle

Rectangle with double top

rectangle can be happen on top or bottom

the price have to bounce at least 4 times at support & resistance ( like 'M' or 'W')

if the price unable to hold again, will be entry signal

Rectangle with triple bottom

the price been bounce off resistance line > 4 times

the resistance line become weaker and eventually break out, this will be our entry signal

put/call ratio back-spread - type of chart pattern -Rectangle

Rectangle break top

price been bounce around support 43 and resistance 54, at least 4 time

price was small range candle, as build up candle near 54

price finally break out 54

target profit: from range bottom to top, 161%-200%

stop loss: ema20 during resistance break

Rectangle break down

price was bounce around support 151 & resistance 157 for at least 4 time

price make lower high and build up near support

it was break down eventually.

target profit: from range top to bottom, 161%-200%

stop loss: ema20 during resistance break

put/call ratio back-spread - type of chart pattern -Triangle

Ascending Triangle

check the original trend: bullish

price make flat on resistance

price make higher low

bounce at least 4 time inside triangle

Descending Triangle

check the original trend: bear

price make flat on support

price make lower high

bounce at least 4 time inside triangle

Bullish Symmetric Triangle

check the original trend: bullish

price make lower high

price make higher low

bounce at least 4 time inside triangle

Bearish Symmetric Triangle

check the original trend: bear

price make lower high

price make higher low

bounce at least 4 time inside triangle

put/call ratio back-spread - type of chart pattern -Triangle

triangle break

price start consolidate and bounce at least 4 time inside the triangle

price was break up, entry point

target profit: from point A to B, 200%

stop loss: ema20 during resistance break/ or last swing low inside triangle


put/call ratio back-spread - type of chart pattern -Cup & Handle

Cup & Handle

price from uptrend and consolidate in round 

price come up to previous resistance area and go down

price pull back in small channel

break channel as our entry point


Cup & Handle - round bottom

price from downtrend and consolidate in round 

price come up to previous resistance area and go down

price pull back and break resistance as our entry point


put/call ratio back-spread - type of chart pattern -Cup & Handle

Cup & Handle

price create a round bottom, 

price come back up to previous resistance and get rejected

forming in pull back channel, enter when channel break + resistance level break

target profit: from point bottom to resistance, 200%

stop loss: ema20 during resistance break

put/call ratio back-spread - drawing horizontal support resistance

drawing horizontal support resistance

change the chart to weekly chart

change the candle to normal candle

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connect any point has horizontal touch at least 2 time, the 1st touch connect the red candle close(not shadow/long tail)

2nd candle can be long tail/shadow

wait from 3rd attempt break the entire support line


put/call ratio back-spread - drawing horizontal support resistance

drawing horizontal support resistance

change the chart to weekly chart

change the candle to normal candle

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connect any point has horizontal touch at least 2 time, the 1st touch connect the green candle close(not shadow/long tail)

2nd candle can be long tail/shadow

wait from 3rd attempt break the entire resistance line


put/call ratio back-spread - drawing trend-line

drawing trend-line

change the chart to weekly chart

change the candle to normal candle

------------------------------------------------------------------

connect any point has candle shadow/long tail touch at least 2 time

1st & 2nd candle can be long tail/shadow

wait from 3rd/4th attempt break the entire support trend line

trend line re-act as resistance line later on


put/call ratio back-spread - horizontal line vs trend-line

Horizontal line

strong area of support or resistance, flat base

can be line or area(small range like 100-102)

min 2 touch same area will be strong support/resistance

act as key entry signal on our trading decision when price break

Trend line

dynamic support or resistance area

price moving in 1 direction up or down

2-3 touch will be strong trend line

act as confluence to our trading decision when price break

which line you will choose? Red or Blue? reason for red? reason for blue?

Red


Blue


  • Red
  • Blue

put/call ratio back-spread - how to draw professional horizontal line

Rules:

1. the very first weekly red candle open, need to be lowest

2. if the 2nd attempt, the price was close lower then 1st red candle, this was invalid( reason, we need to 1st red close price able to support), find next red candle

3. the 3rd ...4th...5th time will be acceptable to be close below/lower then 2nd red candle that hold above red line

4. when price close below the red line, will be our signal ( valid support break min 2 time hold price, 3rd time break)

put/call ratio back-spread - breakout timing - how to get solid break not fake/false break

How to get solid break not fake/false break

1. be frank, we dont know if the break down/up can be false break or real break

2. price will quick response/bounce back from horizontal line and trend back in to the range

put/call ratio back-spread - breakout timing - how to get solid break not fake/false break

add 2% threshold from the horizontal line - The Gold Line

when price break up the resistance (red line) - 13.8

we would like to add 2% threshold (gold line) from 13.8 = 14.07

if price able to close up 14.07, there will be 1st confirmation

Volume:

the break candle (above red line + gold line) on Sep 28

please monitor this is from strong candle by volume confirmation

volume need to be at least above 50 average(line between volume at bottom)

put/call ratio back-spread - breakout timing - how to get solid break not fake/false break

built up on support, lower swing range

when price perform the quality break, it need to has built up around the support line

swing range also another confluence, if break from small range pull back, will add strength to downside

combine 2% threshold, built up, small swing/pull back break = quality break out

gap + big/same level swing:

if we have gap down candle, even price break the 2% gold line, it was not quality break with strength

the swing level was too large, we might lose momentum if enter from the signal candle

price quickly break down, and rebounce up to close the gap 

put/call ratio back-spread - breakout timing - Key Entry for break down

Key Entry for break down

1. draw horizontal line from weekly 1st candle (price been hang there for 3month-9month), wait for min 3rd time attempt to break

2. trend line will add as additional confluence for the setup

3. key breakout candle must exceed/below 2% (Gold line) + volume above 50 average

4. check if any built up, small range swing before breakout

5. do not enter if from gap (breakout the horizontal line), we will wait for re-test

6. estimate the exit/target profit, 161% or 200% from the chart pattern

7. set mental stop loss, on built up area or swing low 

put/call ratio back-spread - breakout timing - Retest

What is re-test

1. when price breakdown, if we miss the trade, or the price was from Gap down/up

2. we dont chase the price when go far away, always wait for re-test

3. if the new down/up trend was form, it will come back to re-test the key area

4. if the previous support line been broke down, it will turn into resistance - this is Flipzone 

5. zoom into 4 hour chart when price make pull back to our horizontal line, wait for price failure

put/call ratio back-spread - breakout timing - Retest

Aapl Day Chart

after we draw the blue line from weekly chart, support on 215.8, gold line on 211.4

we want the price to break down the 2% as quality setup

but the price break down from earning gap <- this is not quality setup

as price quickly reverse next 2 days

______________________________________________________

setup : we have 2% break + volume + small swing, but the key candle was break on gap down

wait for re-test and next we zoom into 4hour chart

Aapl 4 hour chart

clearly price pull back to nearby gold line, ema20 and start turn weak

you can enter next day if price below today low.

example: yesterday low price 200, today open and below 199.9, i will enter short trade

set your stop loss(sl) on swing high, target profit 200%, price crash after that

put/call ratio back-spread - breakout - false breakout/ false retest

how to detect the false breakout?

- assume we have all the condition( close up 2% gold line + strong volume + strong candle + small swing)
- you still will get the false, failure, fake breakout

- how to know your self already in trouble and must get out?


check again this chart, need you to focus on the peak and see how the trend change

put/call ratio back-spread - breakout - false breakout/ false retest

how to detect the false breakout is confirm?

1. we using higher high, lower high structure to determine trend change

2. when price breakout, we allow price to re-test the neckline, but very careful if retrace too deep (78%)

3. if the price crash very fast breaking the gold + red line, check structure to confirm(HH, LH)

4. just cut the trade before the thing go worst.

put/call ratio back-spread - short summary

What been learned?

you learn about:

  • type of pattern - flat, triangle, head & should, cup & handle
  • target profit - from structure high to low, aim 161%~200%
  • draw a line - 4 pattern need to break horizontal line
  • validate the quality break out - gold line 2%, strong volume + candle, built up + small swing
  • gap & big swing - avoid and wait for re-test
  • detect fake break out - small pull back + 78% level hold

put/call ratio back-spread - short summary

Trade Break out

  • price break 3 touch resistance + 2% (gold line)
  • price been consolidate with build up before break out
  • price make higher low ( smaller swing) with health pull back
  • you can chase price with this kind of break out


larger chart

Dont trade Break out, wait re-test, or maybe reversal(fake break out)

  • price go down without pull back
  • price not built up around support area
  • even price was break below support + 2% gold line, it might bounce back easily
  • wait for re-test( not more then 78% pull back)
  • fake break out confirm if pull back > 78%

larger chart

Closing

Closing

from here we will end the module 5, take 5min to re-call what you learn in module 5

Closing -Summary

Learn about collar trade

collar trade definition

when to place

collar trade

earning friendly, price uncertain friendly

prefer buy 300 stock, but require have high capital to setup


exploding collar trade

earning friendly, price uncertain friendly

you can go for 100 stock, suite for small account