How to Completely Remove Downside Risk on a Bullish Play with Options

In volatile markets like this one, traders have serious concerns about taking long positions on stocks when one nasty headline can produce a massive sell off that can last for weeks. In this video we show you a very powerful technique to pull the downside risk out of a trade completely while maintaining the potential for very large profit.

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after a huge sell-off like the one we’ve
experienced in march of this year where
every stock gets pummeled even those
that can actually benefit from this
eventually traders start to see an
increasing number of
bullish opportunities it’s it’s tough to
go long stocks though
as the whole market is crashing even
when doing so makes a great deal of
i’m a head trader of s b capitals
options trading desk and i can tell you
that the traders on our desk are well
aware of such opportunities but of
concerned about jumping in too early on
long stock positions afraid that the
has not bottomed out as yet and getting
badly hurt in the process
that sounds like you then i’d suggest
you stick around because i’m going to
show you an options
trading technique for literally removing
the downside risk
of a bullish play on stocks that i think
you’re going to find amazing so
stick around hi i’m seth freudberg and
i’m the head trader of s b capitals
options trading desk
smb capital is a proprietary trading
firm located in midtown manhattan
and we provide capital for options and
equity traders from all over the world
trading both remotely and in our offices
here in new york city
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okay so we all watched as the market
crashed day after day as a result of the
covid19 pandemic in march of this year
and like the rest of the world the only
way that most of us were able to
shop for anything but food is online and
it would not take albert einstein to
realize that it’s possible
that amazon may actually be benefiting
from the fact that they are about the
only game in town for shopping
during a pandemic and that the stock
getting beaten down like the rest of the
may not make a whole lot of sense okay
so let’s take a look at a chart of
up through the end of february 2020 and
you’ll see
that amazon was up in the 2060 area it’s
all-time highs before
kovid19 fear started to grip the world
markets causing amazon to sell off down
below 1900
which is a 300 point drop from its peak
to its trough so
suppose you were thinking that the
market had this all wrong that amazon is
going to actually
benefit from this situation because
people will be sequestered in their
homes and
they won’t be able to go out shopping so
amazon will almost have a monopoly
on the retail space which is a pretty
big deal yet at the same time
there’s a reality and that is that the
market is really scared and so the
chance of a market sell-off
taking all stocks down regardless of
their strategic positioning in the
was a distinct possibility and so going
along a major stock like
amazon would for most traders be a
pretty high risk thing to do so
what i’d like to show you is a different
way to have handled this trade which
incredibly completely eliminates the
downside risk on a long amazon trade
even as the rest of the market
is crashing as a result of pandemic
fears now before we get into that we’ve
got to make sure that everyone listening
understands how
call options work for those of you
already familiar with call options
please hang in there as this will be
brief and then we’ll get back to the
structure of this trade
okay so most of you have probably heard
of a call which is a security that
allows a trader to buy the right
to purchase 100 shares of a stock at the
strike price of that option
before that option expires so for
example the april 29th
amazon 2100 call entitles the buyer of
that call to purchase
100 shares of amazon at 2100
per share anytime before that option
on april 17th even if amazon is trading
at a price much higher than 2100 however
if amazon closes at less
than 2100 on april 17th and that call
expires worthless and the call
seller gets to just pocket the entire
options premium which is the cash
that he sold the call for and he has no
further obligation at that point
and remember your broker will allow you
to buy calls
but your procore will also allow you to
sell calls
and receive that premium for entering
into that
obligation to deliver 100 shares of
amazon at the strike price of your call
at any time between when you sold the
call and when that call option expires
and so
naturally as a call seller you’re hoping
that the market
never reaches the level of your call
because if it
doesn’t then you can just pocket the
premium you got for selling that call
and that’s the end of the trade okay so
those are the basics
of buying and selling call options let’s
go back
to amazon on february 27th after it had
300 points and it would have been pretty
logical at that point to be in the
mindset that amazon’s going to bounce
once people realize that they can’t go
shopping anywhere else
but as we mentioned before there’s a
legitimate concern the market
may really crash further with the world
effectively shutting down so you’d be
pretty concerned about going flat out
long amazon shares at that point so what
we can do is to construct
what is known as a diagonal call spread
in options terminology so what we can do
specifically sell five amazon 2060 calls
on the april third options chain and buy
the 2100 calls
on the april 17th options chain for
now why am i saying that this trade is
risk free
to the downside well let’s break this
down as you can see from the calculation
we were paid
29.63 for those five april third calls
but remember those represent 100 shares
of amazon stock
so you multiply that by 100 and we sold
five of those so the total cash received
is actually fourteen thousand eight
hundred fifteen dollars at the same time
we bought those april 17 2100 calls
40 points higher and expiring two weeks
later for 27.64 now
when you consider that we bought five of
those you’ll see
that the cost is thirteen thousand eight
hundred twenty dollars so now
and this is the crucial point think
about what happens
if amazon closes at any price below 2060
on april 3rd then at that point those
options just expire worthless you’ve not
you’ve got no further obligation
and the april third options just die
as a result you have locked in a minimum
of 995 dollars on this trade
why well just think about it if amazon
closes below
2100 on april 17th then the five
calls that we own that were long those
will also expire
worthless but then we are still left
with the two dead options
but the original 995 dollars that we
received at the beginning of the trade
we just keep that original cash and the
trade’s over we win so if you think
about it
if right after we sold the diagonal
went down to a thousand and stayed there
until expiration
we would not even have broken a sweat
because we had that original 995 dollars
so there literally is no downside risk
to this trade
if both options expire worthless we win
and that’s the beauty of a call diagonal
in a market situation like this
now before we get into that exactly how
this trade worked out
which i think you’re going to find
intriguing i wanted to let you know that
there really are
sound viable long-term techniques for
trading options for income and in fact
we’re currently running
a two-hour free intensive workshop at
the moment where we’ll be teaching you
three of those strategies that real
professional options traders use
a really simple but incredibly effective
that some of the greatest investors in
the world like warren buffett use
all the time plus an options trading
strategy that has a
statistical 80 probability of profit
month in and month out
plus an option strategy that you can
employ with a stock that you like where
you’ll make your target profit
whether the stock goes up goes nowhere
or even goes down a small percentage so
if those strategies would be of interest
to you then you should check out
the free options class that we’re
currently running just go ahead and
click the link that should be appearing
at the top right corner of your screen
that will open the free registration
page in a new window
so don’t worry you won’t lose this video
or you can just head on over to
to register for this free intensive
workshop it’s a rare opportunity
for retail traders and investors to
learn directly from wall street traders
but that’s exactly what you’ll be
through this free online workshop so
click the link to sign up now and don’t
miss it now let’s move forward
from february 27th the day that we put
this trade on and we’ll move to april
3rd and you can see that amazon closed
at 1906 so as we mentioned earlier
if that happened then we now know we
can’t lose money on this trade period
we have a minimum profit of 9.95 why
well as we explained before
we received 995 at the beginning of the
and the short calls have expired so even
if the long calls expire
worthless two weeks later we’ll make at
least 995 dollars no matter
what the market does and that is the
beauty of this trade
so you can now think of the long calls
as lottery tickets you can decide
to sell them at this point if you want
to get some value from them
or you can hold them to see if your
thesis that amazon will be the business
winner from the pandemic is true and
make a lot more than if you had decided
to sell them
today and so you could have easily done
that on april 3rd and
sold the april 17 long calls at 2100 and
whatever you receive to those
as we just mentioned would be an
additional profit on top of what you
pocketed from the original cash flow
just for the fun of it let’s move
forward to april 17th and you can see
that amazon has closed at 23.70 on the
day that the long
call options expire now think about it
if you allow those options to expire
what would happen mechanically is that
you could have bought
500 shares of amazon for 2100
and then flip them immediately to a gain
of 271 dollars per share because the
stock is trading
271 higher than you had the right to buy
them for
or you could simply sell the 2100 call
for about 270 as you can see which might
be a safer choice because then
you don’t have the risk of amazon
gapping down the next morning
after you get assigned so selling the
call is what
most professional options traders would
do at this point so let’s do
the math on the entire trade so remember
originally we’ve see
we received fourteen thousand eight
hundred fifteen dollars for those
short 2060 calls that expired on april
third and you remember
we also paid thirteen thousand eight
twenty for the long 2100
calls expiring on april 17th and right
the close on april 17th we sold those
calls for 270
and 38 cents so we received a total of
135 000 for all the five calls
and when you combine that with the
original cash flow we received
from the original diagonal strategy the
profit on the trade would have actually
been over
136 thousand dollars so
the important takeaway from this video
is that if you’re concerned about the
downside risk on a trade
if you structure your call diagonal
trade correctly
you can guarantee at the outset of the
trade that there will be
zero problems to the downside on the
trade and if you place your short calls
far enough above the market as we did in
this case by placing them
160 points above the market
if they expire worthless then you’re
really in the driver’s seat because
now no matter what happens on the trade
you make money
at that point then you’re going to have
to use your judgment to decide whether
you want to then
hold the long calls to see if your
thesis which was that amazon will bounce
as the pandemic proceeds
works out as you expected and it did in
this case to obviously
spectacular results which you cashed in
on because your thesis was right
the options traders here at smb because
they’re professionals
and experienced understand these kinds
of structures and
how to take advantage of market
opportunities like these when they arise
if you have the proper theoretical
background these kinds of opportunities
exist throughout the market
if you understand how to trade options
to your
advantage now just to remind you as i
said earlier if you enjoyed this video
and learned something valuable from it
would like to learn the details of three
real world option strategies that
professional options traders
use all the time then you should check
out the free options class
that we’re currently running just go
ahead and click the link that should be
appearing now
at the top right corner of your screen
that will open the free registration
page in a new window so you won’t lose
this video
don’t worry or you can just head on over
to register for this free intensive
workshop it really is a rare opportunity
for retail traders and investors to
learn directly from wall street traders
but that’s exactly what you’ll be
through this free online workshop so
click the link to sign up now
and don’t miss it and please don’t
forget to click on the subscribe button
right now so you won’t miss
free trading videos that we’re posting
constantly on our channel to help you to
improve your game
as an options trader

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