How To Win On A Bearish Trade Even When The Market Rallies

Options traders get opportunities that few other trading styles afford, which is the ability to make money on a trade even if the trader’s directional bias turns out to be wrong. In this video, we’ll show you how options trades can be constructed to provide that opportunity.

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if you’re like every other trader in
this wild market of the last three
months are aware that their key
inflection points were certain stocks or
the market as a whole is likely to
reverse but this market is so dangerous
that if you’re wrong it can be very
I’m the head trader of SMB capitals
options trading desk here in Manhattan
and the traders on our desk have
solutions to these kinds of dilemmas
because of the unique properties of
options in this video we’re gonna be
showing you a technique for making a
bearish play on a stock which can still
be very profitable if you’re wrong but
you’ve got to understand how to set the
trade up properly so stick around and
you’ll learn a lot of actionable
information in this video if you stay
with it hi I’m Seth Freudburg and I’m the
head trader of SMB 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 now
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really very valuable ok so we all
watched as the market crashed
day after day as a result of the Cova
Denine teen pandemic in March of this
year and like the rest of this world the
only way that most of us were able to
shop for anything but food over the last
few months is online and so while Amazon
initially crashed as much as 560 points
off of its all-time highs eventually
everyone started to realize that hey
wait a second if no one you go out and
shop then they’ve got to stay in and
shop so the online retailers like Amazon
may actually benefit from all this so as
the market often does it reverses itself
and buyers pour it in to gobble up over
sold Amazon shares ok so now let’s move
on to Amazon’s chart on April 13th and
as you can see Amazon has made quite a
recovery off of its mid-march lows and
it’s very close to its all-time highs at
a little below $2,200 on that day and so
at this point it would be natural to
think hey we’re in the middle of a
pandemic here thousands are dying each
day in America the whole world economy
shut down maybe even stocks like Amazon
will be affected ultimately if the
consumer just doesn’t have the money to
spend because there’s such a spike in
maybe this stock is a little overboard
here and this might be the time to make
actually a bearish play on Amazon that
perhaps traders will see this as an
overbought situation running into
resistance at its all-time highs so it’s
time to try a bearish but play that
would be a very logical thought at that
point at the same time there is of
course some chance that Amazon has just
broken out and that it will blast
through its all-time highs and so it’s a
little bit dangerous to just short
Amazon shares here so at this point you
could save yourself well I’d like to
take a shot at a bearish play on Amazon
but I’d like to have a way to profit
from a rally on Amazon if I’m wrong and
it breaks out well believe it or not
there is an options trade that can set
you up for just such a purpose purpose
and that’s what I’m about to show you
okay so before we present the bearish
option strategy that has a bullish
component to it I need to make sure that
everyone watching this video has a
handle on how call options work for
those of you who are clear on how call
options work please just hang in there
for a minute and we’ll get back into the
options strategy now 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 his
stock at the strike price of that option
before that option expires so for
example the May 8th Amazon 2320 call
entitles the buyer of that call to
purchase 100 shares of Amazon at two
thousand three hundred twenty dollars
per share any time before that option
expires on May 8th even if Amazon is
trading at a price much higher than 23
if Amazon closes at less than 23 20 on
May 8th and that call expires worthless
and the call seller gets to just pocket
the options premium which is the cash
that he sold the call for and he has no
further obligation and remember your
broker will allow you to buy calls but
your broker 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
you’re hoping that the market never
the level of your call because if it
doesn’t then you can just pocket the
premium you get for selling that call
and that’s the end of the trade okay so
those are the basics of call options now
back to the Amazon chart here we are in
April 13th back to its all-time highs
and we’re trying to set up a trade that
absolutely wins in a sell-off but has
the potential for gain if we’re wrong in
our bearish prediction and in fact
Amazon keeps running to the upside and
so what we can do is to enter what is
known as a diagonal call spread in
options terminology so what what we do
specifically is we sell six Amazon 2320
calls on May 8th on the May 8 options
chain and we buy six of the 2380 calls
on the May 22nd options change for
Amazon now the first thing that I’d like
to do is to break down why this is
essentially a bearish play because that
might not be immediately clear so as you
can see from the calculation we were
paid $40 and six cents for those six May
8th calls but remember those represent
100 shares of Amazon stock so you
multiply that by 100 and we sold six of
those so the total cash received is
24,000 and $36 at the same time we
bought those May 22nd 2380 calls 60
points higher and expiring two weeks
later for $36.63 now when you consider
that we bought six of those you’ll see
the total cost is 20 1978 dollars so the
complete transaction of selling six of
the May 8th options and buying 6 of the
May 22nd options gave us a cash inflow
of 2058 dollars into our account so now
and this is important think about what
happens if Amazon closes at any price
below 23 20 on May 8th well at that
point those six short options at 23 20
will they expire worthless you have no
further obligation and the May 8th
options they just die as a result you’ve
locked in a minimum profit of 2058
dollars on this trade now why exactly do
I say that well just think about it even
if two weeks later Amazon closes below
2380 on May 22nd when the
options expire then the six calls we own
will also expire worthless so we then
end up with two dead options but we did
get that original 2015 $1 and we just
keep that cash and the trades over so we
win so if you think about it if right
after we sold this diagonal spread
Amazon went down to say 1500 and stayed
there until expiration we would have had
a very comfortable trade because we
collected that original 2058 dollars so
there’s literally no downside risk to
this trade and that’s the beauty of a
call diagonal spread in a market
situation like this 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 to our free intensive workshop
at the moment we’re will be teaching you
three of those strategies that real
professional options traders use
including a really simple but incredibly
effective technique 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 percent probability of
profit month in and month out plus an
option strategy that you can employ with
the 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 now 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 options class com to register for
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investors to learn directly from Wall
Street traders but that’s exactly what
you’ll be getting through this free
online workshop so click the link to
sign up now and don’t miss it okay so
now back to our diagonal trade let’s
move forward to May 5th and so at this
point we’ve been in the trade 22 days
and lo and behold we were wrong really
wrong and in fact not only did Amazon
not roll over at its all-time highs it
broke out and rallied about 300 points
past its all-time highs
we ran out of steam and pulled back into
the 2400 area and then channeled there
for a few weeks but now on May 5th as
you can see Amazon which was trading
almost eight hundred points above its
March lows had a strong pull back down
to 23 17 now remember when we started
this trade Amazon was trading near its
all-time highs which were around twenty
one sixty eight and we’re now almost 150
points higher on this trade
despite the pullback and remember this
was supposed to be a bearish trade yet
we find ourselves with a profit of over
ten thousand dollars on this trade so
now what’s crucial is to break down
exactly why we are up so much money on
the trade even though the stock went in
the opposite direction of our trade
thesis after all this was supposed to be
a bearish trade right well first off as
you can see even though the stock is
rallied almost 150 points from our
energy entry point on what was supposed
to be essentially a bearish trade the
value of the 2320 call has actually
substantially dropped why is that well
that is one of the major qualities of
options that people don’t really
understand and focus on which is that as
options get closer and closer to their
expiration if the stock is not trading
above the strike price of that option
particularly three days from expiration
as we are here on May 5th when the
option is expiring on May 8th then the
value of the option will drop
significantly and the reason for that is
that the market is beginning to lose
faith that the option will have any
value on expiration after all it’s
dropped from over 2,500 to now under the
2320 strike price over the last week and
so whereas before when we sold that
option for over $40 back in mid-april
people could imagine Amazon easily being
well above 23 20 by May 8th but now that
we’re only two days away and we’re in
the middle of a pandemic for God’s sakes
we’re not willing to make a large bet
that Amazon will be above twenty three
twenty and three days and so the most
the market was willing to pay for that
option is slightly over $24 and so since
we’re short that option that’s a good
for us now on the other side of the
equation those long calls on the May
22nd options chain those still have a
full 17 days of life left in them and
Amazon is only 63 points below that 23
80 call straight price and so with the
stock this erratic there’s still plenty
of risk that in those next 17 days
Amazon can get back up to its all-time
highs of 24 74 which if that were to
take place the value of that right to
buy those shares almost 100 points
cheaper which is what those 23 80 calls
are well that value that right will be
incredibly high at that point and so
those options have gone up a bit because
since we first bought them Amazon is up
about a hundred 50 points and there’s
still plenty of time for the market to
rally past that 23 80 strike price that
gives those calls value so now let’s
exactly analyze why this trade made over
ten thousand dollars well you remember
that the trade initially paid us a
credit for selling those 23 20 calls for
more than we paid for the 23 80 calls so
that cash that we took in that starts
our profit picture at 2058 dollars now
we had to close those six 23 20 calls
expiring on May 8th for a debit of
14,000 466 so that was the cash outflow
but then we cashed in those 20 380 calls
that we owned for the May 22nd
expiration and those brought in twenty
three thousand and eighty two dollars so
if you net it all out you’ll see that we
made a profit of over ten thousand
dollars on this trade so the important
takeaway from this video is that you if
you’re concerned about the downside risk
on a trade if you structure your call
diagonal trade correctly you can
literally guarantee at the outset of the
trade that there will be a profit if
there’s a sell off and so if you’re
bearish on a stock that’s a solid trade
to consider on the other hand if you
place your short calls a comfortable
distance above the market as we did in
this case by placing them 150 points
above the market while they may not
expire worthless they have a good chance
of at least losing a lot of value as
they did in this case
even if the market rallies because with
options as more time goes by options
that are not in the money tend to lose
more and more value as those 2320 calls
did in this case so we’re able to buy
them back a lot cheaper than we paid for
them even though the stock rallied
substantially and of course with that
rally the later date adoptions late the
23 ATS
those will hold their value longer
because they expire much later and so
that’s why diagonal trades are so
powerful when you have a bias yet want
to make a profit if your bias proves
wrong to some extent professional
options traders understand these
relationships and it becomes easy for
them to structure trades which harness
the power of options to their advantage
once they have gotten a good solid
education and backed it with experience
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 options class
com 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
getting through this free online
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