{"id":49683,"date":"2020-02-27T10:55:00","date_gmt":"2020-02-27T15:55:00","guid":{"rendered":"https:\/\/www.smbtraining.com\/blog\/?p=49683"},"modified":"2020-02-27T10:55:00","modified_gmt":"2020-02-27T15:55:00","slug":"huge-options-trading-blunders-why-should-i-waste-my-money-buying-long-options-to-protect-my-short-options-episode-7","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/huge-options-trading-blunders-why-should-i-waste-my-money-buying-long-options-to-protect-my-short-options-episode-7","title":{"rendered":"Huge Options Trading Blunders: Why should I waste my money buying long options to protect my short options (episode 7)"},"content":{"rendered":"

We continue our series on Options Blunders today, discussing the huge opportunity that options traders miss because they are reluctant to buy long options to protect their short options positions. This video provides a vivid example of how much opportunity is lost by refusing to protect your options positions.<\/p>\nView Video Transcript<\/strong><\/span>

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okay so today’s video is the seventh in<\/div>\n<\/div>\n<\/div>\n
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our series that we’ve entitled huge<\/div>\n<\/div>\n<\/div>\n
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options trading blunders<\/div>\n<\/div>\n<\/div>\n
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we’ve decided to produce this series for<\/div>\n<\/div>\n<\/div>\n
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traders who are serious about trading<\/div>\n<\/div>\n<\/div>\n
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options for a living and badly want to<\/div>\n<\/div>\n<\/div>\n
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succeed but they keep getting<\/div>\n<\/div>\n<\/div>\n
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sidetracked by pursuing strategies with<\/div>\n<\/div>\n<\/div>\n
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huge flaws in them instead of taking the<\/div>\n<\/div>\n<\/div>\n
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proper steps to excel and improve as an<\/div>\n<\/div>\n<\/div>\n
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options trader<\/div>\n<\/div>\n<\/div>\n
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I’m the head trader of SMB capitals<\/div>\n<\/div>\n<\/div>\n
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options trading desk and I can tell you<\/div>\n<\/div>\n<\/div>\n
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for many years of experience that I’ve<\/div>\n<\/div>\n<\/div>\n
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seen every one of the mistakes that were<\/div>\n<\/div>\n<\/div>\n
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describing in these videos and some of<\/div>\n<\/div>\n<\/div>\n
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them I fell for myself when I first<\/div>\n<\/div>\n<\/div>\n
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started trading they’re real and if<\/div>\n<\/div>\n<\/div>\n
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you’re serious about trading for a<\/div>\n<\/div>\n<\/div>\n
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living you really need to pay close<\/div>\n<\/div>\n<\/div>\n
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attention to these videos so that you<\/div>\n<\/div>\n<\/div>\n
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can avoid serious problems and<\/div>\n<\/div>\n<\/div>\n
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unnecessary detours in your trading<\/div>\n<\/div>\n<\/div>\n
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journey so if you’re committed to<\/div>\n<\/div>\n<\/div>\n
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trading full-time as an option trader<\/div>\n<\/div>\n<\/div>\n
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then I urge you to watch this video and<\/div>\n<\/div>\n<\/div>\n
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the rest of the videos in this series so<\/div>\n<\/div>\n<\/div>\n
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that you don’t fall by the wayside like<\/div>\n<\/div>\n<\/div>\n
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so many aspiring traders who don’t want<\/div>\n<\/div>\n<\/div>\n
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to spend the time to learn the actual<\/div>\n<\/div>\n<\/div>\n
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truth about the rewards and challenges<\/div>\n<\/div>\n<\/div>\n
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of options trading and the skills you’ll<\/div>\n<\/div>\n<\/div>\n
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need to develop to succeed we want you<\/div>\n<\/div>\n<\/div>\n
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to take a realistic path to your trading<\/div>\n<\/div>\n<\/div>\n
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goals which are attainable if you’re<\/div>\n<\/div>\n<\/div>\n
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serious and willing to put in the work<\/div>\n<\/div>\n<\/div>\n
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to succeed<\/div>\n<\/div>\n<\/div>\n
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[Music]<\/div>\n<\/div>\n<\/div>\n
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hi I’m Seth Freudberg\u00a0 and I’m the head<\/div>\n<\/div>\n<\/div>\n
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trader of SMB capitals options trading<\/div>\n<\/div>\n<\/div>\n
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desk SMB capital is a proprietary<\/div>\n<\/div>\n<\/div>\n
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trading firm located in midtown<\/div>\n<\/div>\n<\/div>\n
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Manhattan and we provide capital for<\/div>\n<\/div>\n<\/div>\n
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options and equity traders from all over<\/div>\n<\/div>\n<\/div>\n
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the world trading both remotely and in<\/div>\n<\/div>\n<\/div>\n
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our offices here in New York City now<\/div>\n<\/div>\n<\/div>\n
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I’d like to suggest that you click on<\/div>\n<\/div>\n<\/div>\n
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our subscribe button right now so that<\/div>\n<\/div>\n<\/div>\n
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you don’t miss any of our free trading<\/div>\n<\/div>\n<\/div>\n
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videos that we produce for traders and<\/div>\n<\/div>\n<\/div>\n
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investors all over the world they’re<\/div>\n<\/div>\n<\/div>\n
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really very valuable ok so today we’re<\/div>\n<\/div>\n<\/div>\n
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going to be looking at options trading<\/div>\n<\/div>\n<\/div>\n
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blunder number seven in our series on<\/div>\n<\/div>\n<\/div>\n
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options misconceptions and huge mistakes<\/div>\n<\/div>\n<\/div>\n
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that you can make in your journey<\/div>\n<\/div>\n<\/div>\n
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towards becoming a full time options<\/div>\n<\/div>\n<\/div>\n
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trader so to understand options trading<\/div>\n<\/div>\n<\/div>\n
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blunder number seven I need to make sure<\/div>\n<\/div>\n<\/div>\n
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that you are familiar with the basics of<\/div>\n<\/div>\n<\/div>\n
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how index options work and if you know<\/div>\n<\/div>\n<\/div>\n
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something about options don’t worry this<\/div>\n<\/div>\n<\/div>\n
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is going to be quick and then we’re<\/div>\n<\/div>\n<\/div>\n
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gonna jump into the main part of a<\/div>\n<\/div>\n<\/div>\n
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lesson now almost all of you are<\/div>\n<\/div>\n<\/div>\n
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probably familiar with equity options<\/div>\n<\/div>\n<\/div>\n
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where a call buys you the right to buy<\/div>\n<\/div>\n<\/div>\n
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100 shares of a stock at the strike<\/div>\n<\/div>\n<\/div>\n
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price of that option any time before the<\/div>\n<\/div>\n<\/div>\n
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option expires and a put option entitles<\/div>\n<\/div>\n<\/div>\n
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you to sell 100 shares at the strike<\/div>\n<\/div>\n<\/div>\n
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price of the put before that option<\/div>\n<\/div>\n<\/div>\n
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expires but there are also index options<\/div>\n<\/div>\n<\/div>\n
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which work similarly to equity options<\/div>\n<\/div>\n<\/div>\n
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except there’s no such thing as 100<\/div>\n<\/div>\n<\/div>\n
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shares of an index like the S&P 500 you<\/div>\n<\/div>\n<\/div>\n
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can’t really buy or sell 100 shares of<\/div>\n<\/div>\n<\/div>\n
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an index but what you can do is to get<\/div>\n<\/div>\n<\/div>\n
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paid in cash $100 per point if the index<\/div>\n<\/div>\n<\/div>\n
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expires above the strike price of an<\/div>\n<\/div>\n<\/div>\n
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index call that you buy or alternatively<\/div>\n<\/div>\n<\/div>\n
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you’d be paid $100 per point for each<\/div>\n<\/div>\n<\/div>\n
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point the index drops below the strike<\/div>\n<\/div>\n<\/div>\n
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price of your index put so for example<\/div>\n<\/div>\n<\/div>\n
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if an index is trading at 1,400 and you<\/div>\n<\/div>\n<\/div>\n
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buy the 1410 call if the index goes to<\/div>\n<\/div>\n<\/div>\n
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1415 you were to receive $500 in your<\/div>\n<\/div>\n<\/div>\n
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account if the index closes at 1410 or<\/div>\n<\/div>\n<\/div>\n
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lower your call expires worthless on the<\/div>\n<\/div>\n<\/div>\n
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other side of the ledger if you buy an a<\/div>\n<\/div>\n<\/div>\n
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13 85-foot and the market sells off to<\/div>\n<\/div>\n<\/div>\n
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1375 you’d make $1,000 but if the market<\/div>\n<\/div>\n<\/div>\n
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just sold off to 13 85 or higher the put<\/div>\n<\/div>\n<\/div>\n
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would expire worthless so those are the<\/div>\n<\/div>\n<\/div>\n
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basics of index options and<\/div>\n<\/div>\n<\/div>\n
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or you can buy options but your broker<\/div>\n<\/div>\n<\/div>\n
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will also allow you to sell options and<\/div>\n<\/div>\n<\/div>\n
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your broker will allow you to put<\/div>\n<\/div>\n<\/div>\n
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together combinations of options in<\/div>\n<\/div>\n<\/div>\n
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other words options strategies that<\/div>\n<\/div>\n<\/div>\n
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involve both short and long options<\/div>\n<\/div>\n<\/div>\n
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purchased in a way that is advantageous<\/div>\n<\/div>\n<\/div>\n
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to you as a trader okay so now armed<\/div>\n<\/div>\n<\/div>\n
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with that knowledge let’s dig into<\/div>\n<\/div>\n<\/div>\n
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options blunder number seven so one of<\/div>\n<\/div>\n<\/div>\n
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the core strategies for options traders<\/div>\n<\/div>\n<\/div>\n
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is known as the strangle yes I know<\/div>\n<\/div>\n<\/div>\n
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that’s a gruesome name and lots of<\/div>\n<\/div>\n<\/div>\n
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options trading strategies have these<\/div>\n<\/div>\n<\/div>\n
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strange names but suffice it to say that<\/div>\n<\/div>\n<\/div>\n
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the strangle is at the core of many of<\/div>\n<\/div>\n<\/div>\n
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the top strategies for professional<\/div>\n<\/div>\n<\/div>\n
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options traders so a strangle is<\/div>\n<\/div>\n<\/div>\n
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actually a very simple trade on its<\/div>\n<\/div>\n<\/div>\n
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surface for example let’s say that<\/div>\n<\/div>\n<\/div>\n
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someone was interested in trading a<\/div>\n<\/div>\n<\/div>\n
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strangle on the NDX<\/div>\n<\/div>\n<\/div>\n
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index so on this particular day in<\/div>\n<\/div>\n<\/div>\n
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August of 2019 suppose that you decided<\/div>\n<\/div>\n<\/div>\n
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you wanted to make a straddle trade on<\/div>\n<\/div>\n<\/div>\n
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the NDX<\/div>\n<\/div>\n<\/div>\n
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which is the Nasdaq 100 index by the way<\/div>\n<\/div>\n<\/div>\n
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companies like Apple Amazon Google<\/div>\n<\/div>\n<\/div>\n
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Microsoft and other top tech names of<\/div>\n<\/div>\n<\/div>\n
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the major components of the Nasdaq 100<\/div>\n<\/div>\n<\/div>\n
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index and it’s a very popular trading<\/div>\n<\/div>\n<\/div>\n
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vehicle for options income traders now<\/div>\n<\/div>\n<\/div>\n
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on this particular day the ndx index was<\/div>\n<\/div>\n<\/div>\n
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trading at 79 66 as you can see so what<\/div>\n<\/div>\n<\/div>\n
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some traders like to do is sell a call<\/div>\n<\/div>\n<\/div>\n
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way above the price that the index is<\/div>\n<\/div>\n<\/div>\n
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selling at and at the same time sell a<\/div>\n<\/div>\n<\/div>\n
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put way below the money we can discuss<\/div>\n<\/div>\n<\/div>\n
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another time how you would make the<\/div>\n<\/div>\n<\/div>\n
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decision as to which short call and<\/div>\n<\/div>\n<\/div>\n
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short put to place but for now let’s<\/div>\n<\/div>\n<\/div>\n
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just say that this trader decided to<\/div>\n<\/div>\n<\/div>\n
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sell the call for options expiring in 29<\/div>\n<\/div>\n<\/div>\n
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days at about 350 points above the index<\/div>\n<\/div>\n<\/div>\n
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price up at 83 25 for $14.80 and at the<\/div>\n<\/div>\n<\/div>\n
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same time sell a put 600 points below<\/div>\n<\/div>\n<\/div>\n
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the market price of index down at 70 350<\/div>\n<\/div>\n<\/div>\n
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for price of twenty three dollars and<\/div>\n<\/div>\n<\/div>\n
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sixty cents now I’d also like you to<\/div>\n<\/div>\n<\/div>\n
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notice that your broker would require<\/div>\n<\/div>\n<\/div>\n
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you to put up 83,000 dollars in capital<\/div>\n<\/div>\n<\/div>\n
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to make this trade please make note of<\/div>\n<\/div>\n<\/div>\n
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that because that’s gonna be a very<\/div>\n<\/div>\n<\/div>\n
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important fact shortly now putting this<\/div>\n<\/div>\n<\/div>\n
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into perspective as you can see on that<\/div>\n<\/div>\n<\/div>\n
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day<\/div>\n<\/div>\n<\/div>\n
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the 83 25 strike prices well above the<\/div>\n<\/div>\n<\/div>\n
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all times highs of the nd accent<\/div>\n<\/div>\n<\/div>\n
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furthermore the index had not been as<\/div>\n<\/div>\n<\/div>\n
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low as 73 50 strike for several months<\/div>\n<\/div>\n<\/div>\n
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so the trader might be thinking hey<\/div>\n<\/div>\n<\/div>\n
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there’s a pretty good chance the index<\/div>\n<\/div>\n<\/div>\n
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will not rally more than 350 points<\/div>\n<\/div>\n<\/div>\n
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above its all-time highs nor is it<\/div>\n<\/div>\n<\/div>\n
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likely to drop 600 points from here to a<\/div>\n<\/div>\n<\/div>\n
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price that it hasn’t been to in a few<\/div>\n<\/div>\n<\/div>\n
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months over the next 25 days so if the<\/div>\n<\/div>\n<\/div>\n
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trader believes that the nd ndx will<\/div>\n<\/div>\n<\/div>\n
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stay somewhere inside that range between<\/div>\n<\/div>\n<\/div>\n
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the short put at 70 350 and the short<\/div>\n<\/div>\n<\/div>\n
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call at 80 325 then this triangle would<\/div>\n<\/div>\n<\/div>\n
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be a very logical trade for him to make<\/div>\n<\/div>\n<\/div>\n
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now we’re about to move forward to the<\/div>\n<\/div>\n<\/div>\n
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day that these options expire on August<\/div>\n<\/div>\n<\/div>\n
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30th but before we get into that which<\/div>\n<\/div>\n<\/div>\n
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will explain how this trade worked out<\/div>\n<\/div>\n<\/div>\n
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and more importantly why this trader<\/div>\n<\/div>\n<\/div>\n
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completely missed the opportunity to<\/div>\n<\/div>\n<\/div>\n
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make a much better trade I wanted to let<\/div>\n<\/div>\n<\/div>\n
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you know that there really are sound<\/div>\n<\/div>\n<\/div>\n
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viable long-term techniques for trading<\/div>\n<\/div>\n<\/div>\n
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options for income and in fact we’re<\/div>\n<\/div>\n<\/div>\n
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currently running a to our free<\/div>\n<\/div>\n<\/div>\n
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intensive workshop at the moment where<\/div>\n<\/div>\n<\/div>\n
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we’ll be teaching you three of those<\/div>\n<\/div>\n<\/div>\n
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strategies that real professional<\/div>\n<\/div>\n<\/div>\n
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options traders use including a really<\/div>\n<\/div>\n<\/div>\n
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simple but incredibly effective strategy<\/div>\n<\/div>\n<\/div>\n
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that some of the greatest investors in<\/div>\n<\/div>\n<\/div>\n
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the world like Warren Buffett use all<\/div>\n<\/div>\n<\/div>\n
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the time plus an options trading<\/div>\n<\/div>\n<\/div>\n
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strategy that has a statistical 80<\/div>\n<\/div>\n<\/div>\n
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percent probability of profit month in<\/div>\n<\/div>\n<\/div>\n
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and month out plus an option strategy<\/div>\n<\/div>\n<\/div>\n
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that you can employ with a stock that<\/div>\n<\/div>\n<\/div>\n
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you like where you’ll make your target<\/div>\n<\/div>\n<\/div>\n
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profit whether the stock goes up goes<\/div>\n<\/div>\n<\/div>\n
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nowhere or even goes down a small<\/div>\n<\/div>\n<\/div>\n
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percentage so if those strategies would<\/div>\n<\/div>\n<\/div>\n
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be of interest to you then you should<\/div>\n<\/div>\n<\/div>\n
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check out the free options class that<\/div>\n<\/div>\n<\/div>\n
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we’re currently running right now just<\/div>\n<\/div>\n<\/div>\n
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go ahead and click the link that should<\/div>\n<\/div>\n<\/div>\n
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be appearing now at the top right corner<\/div>\n<\/div>\n<\/div>\n
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of your screen that will open the free<\/div>\n<\/div>\n<\/div>\n
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registration page in a new window so<\/div>\n<\/div>\n<\/div>\n
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don’t worry you won’t lose this video or<\/div>\n<\/div>\n<\/div>\n
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you can just go ahead on over to options<\/div>\n<\/div>\n<\/div>\n
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class com to register for this free<\/div>\n<\/div>\n<\/div>\n
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intensive workshop it’s a rare<\/div>\n<\/div>\n<\/div>\n
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opportunity for retail traders and<\/div>\n<\/div>\n<\/div>\n
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investors to learn directly from Wall<\/div>\n<\/div>\n<\/div>\n
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Street traders but that’s exactly what<\/div>\n<\/div>\n<\/div>\n
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you’ll be getting through this free<\/div>\n<\/div>\n<\/div>\n
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online workshop so click the link to<\/div>\n<\/div>\n<\/div>\n
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sign up now and don’t miss it okay so<\/div>\n<\/div>\n<\/div>\n
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now<\/div>\n<\/div>\n<\/div>\n
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moving forward to expiration day on<\/div>\n<\/div>\n<\/div>\n
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August 30th as you can see the India ndx<\/div>\n<\/div>\n<\/div>\n
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index closed its 7677 now being 2:00 in<\/div>\n<\/div>\n<\/div>\n
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the afternoon on this day in just a few<\/div>\n<\/div>\n<\/div>\n
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hours from the when the options expire<\/div>\n<\/div>\n<\/div>\n
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the call option has dropped from $14.80<\/div>\n<\/div>\n<\/div>\n
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down to 25 cents because now the market<\/div>\n<\/div>\n<\/div>\n
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is close to 600 points from that call<\/div>\n<\/div>\n<\/div>\n
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and there’s only a few hours left for it<\/div>\n<\/div>\n<\/div>\n
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to get there so that obviously has very<\/div>\n<\/div>\n<\/div>\n
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little value and the put has actually<\/div>\n<\/div>\n<\/div>\n
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dropped to 17 cents because the market<\/div>\n<\/div>\n<\/div>\n
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again in less than two hours has to drop<\/div>\n<\/div>\n<\/div>\n
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more than 300 points for that put to<\/div>\n<\/div>\n<\/div>\n
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have any value at all now what that<\/div>\n<\/div>\n<\/div>\n
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means is that if you wanted to close the<\/div>\n<\/div>\n<\/div>\n
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trade at that moment and pocket your<\/div>\n<\/div>\n<\/div>\n
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profits those profits would have come in<\/div>\n<\/div>\n<\/div>\n
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at 39 48 so let’s analyze why that’s the<\/div>\n<\/div>\n<\/div>\n
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case well when we first enter the trade<\/div>\n<\/div>\n<\/div>\n
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we received cash into our account for<\/div>\n<\/div>\n<\/div>\n
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selling the call and the put as you can<\/div>\n<\/div>\n<\/div>\n
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see so for the call we received 14<\/div>\n<\/div>\n<\/div>\n
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dollars and 80 cents but that represents<\/div>\n<\/div>\n<\/div>\n
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100 dollars per point so you multiply<\/div>\n<\/div>\n<\/div>\n
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that by a hundred and you see that we<\/div>\n<\/div>\n<\/div>\n
\n
\n
receive 1480 for the call and for the<\/div>\n<\/div>\n<\/div>\n
\n
\n
put the same calculation you multiplied<\/div>\n<\/div>\n<\/div>\n
\n
\n
the 25 30 we received by a hundred and<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’ll see that we receive 2530 dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
for that call now to close the trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
we’re gonna need to buy back the call<\/div>\n<\/div>\n<\/div>\n
\n
\n
and the put that we sold to close out<\/div>\n<\/div>\n<\/div>\n
\n
\n
the trade so that’s not going to cost<\/div>\n<\/div>\n<\/div>\n
\n
\n
this much because the calls dropped to<\/div>\n<\/div>\n<\/div>\n
\n
\n
25 cents so that would cost us only 25<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars in the put has dropped to 70<\/div>\n<\/div>\n<\/div>\n
\n
\n
cents so that will only cost this 17<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars and so when you do the math the<\/div>\n<\/div>\n<\/div>\n
\n
\n
total profit comes to three thousand<\/div>\n<\/div>\n<\/div>\n
\n
\n
nine hundred sixty-eight dollars on the<\/div>\n<\/div>\n<\/div>\n
\n
\n
transaction okay so you’re probably<\/div>\n<\/div>\n<\/div>\n
\n
\n
thinking how is that exactly an options<\/div>\n<\/div>\n<\/div>\n
\n
\n
trading blunder if you’ve made more than<\/div>\n<\/div>\n<\/div>\n
\n
\n
39 hundred dollars and the answer is<\/div>\n<\/div>\n<\/div>\n
\n
\n
it’s a blunder because you could have<\/div>\n<\/div>\n<\/div>\n
\n
\n
made so much more money out of the trade<\/div>\n<\/div>\n<\/div>\n
\n
\n
with half the capital and half the risk<\/div>\n<\/div>\n<\/div>\n
\n
\n
if you were willing to buy long options<\/div>\n<\/div>\n<\/div>\n
\n
\n
to protect your short options you see<\/div>\n<\/div>\n<\/div>\n
\n
\n
that formation that we just discussed<\/div>\n<\/div>\n<\/div>\n
\n
\n
selling the strangle well you’ll recall<\/div>\n<\/div>\n<\/div>\n
\n
\n
that I told you that we’ll need over<\/div>\n<\/div>\n<\/div>\n
\n
\n
83,000 dollars for that trade and you<\/div>\n<\/div>\n<\/div>\n
\n
\n
may have been wondering hey<\/div>\n<\/div>\n<\/div>\n
\n
\n
if we just sell one call and one put why<\/div>\n<\/div>\n<\/div>\n
\n
\n
do we need eighty-three thousand dollars<\/div>\n<\/div>\n<\/div>\n
\n
\n
in capital for that trade and the answer<\/div>\n<\/div>\n<\/div>\n
\n
\n
is that even though we sold just a one<\/div>\n<\/div>\n<\/div>\n
\n
\n
lot strangle the risk once the market<\/div>\n<\/div>\n<\/div>\n
\n
\n
gets past those options if that were to<\/div>\n<\/div>\n<\/div>\n
\n
\n
happen is substantial why because of the<\/div>\n<\/div>\n<\/div>\n
\n
\n
market were to really sell off very hard<\/div>\n<\/div>\n<\/div>\n
\n
\n
or if it were to really rally very hard<\/div>\n<\/div>\n<\/div>\n
\n
\n
then the risk is enormous because you<\/div>\n<\/div>\n<\/div>\n
\n
\n
have to keep paying $100 more per point<\/div>\n<\/div>\n<\/div>\n
\n
\n
of the index as we discussed before<\/div>\n<\/div>\n<\/div>\n
\n
\n
regardless of how high that index goes<\/div>\n<\/div>\n<\/div>\n
\n
\n
and so your broker recognizes that<\/div>\n<\/div>\n<\/div>\n
\n
\n
you’re basically taking unlimited risk<\/div>\n<\/div>\n<\/div>\n
\n
\n
and they’re going to require you to put<\/div>\n<\/div>\n<\/div>\n
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\n
up a huge amount of capital make sure<\/div>\n<\/div>\n<\/div>\n
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\n
that you’ve got enough money in your<\/div>\n<\/div>\n<\/div>\n
\n
\n
account to pay off on that option in an<\/div>\n<\/div>\n<\/div>\n
\n
\n
extreme market move well as it turns out<\/div>\n<\/div>\n<\/div>\n
\n
\n
given that you made about thirty nine<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred dollars on that trade and your<\/div>\n<\/div>\n<\/div>\n
\n
\n
broker margin you about eighty-three<\/div>\n<\/div>\n<\/div>\n
\n
\n
thousand dollars on the trade your<\/div>\n<\/div>\n<\/div>\n
\n
\n
return on the trade was actually four<\/div>\n<\/div>\n<\/div>\n
\n
\n
point seven percent well you’re probably<\/div>\n<\/div>\n<\/div>\n
\n
\n
saying that’s not bad at all for a month<\/div>\n<\/div>\n<\/div>\n
\n
\n
but you’re missing when you say that<\/div>\n<\/div>\n<\/div>\n
\n
\n
that there was a much safer way to<\/div>\n<\/div>\n<\/div>\n
\n
\n
construct the trade where your potential<\/div>\n<\/div>\n<\/div>\n
\n
\n
for return is much greater but it<\/div>\n<\/div>\n<\/div>\n
\n
\n
involves you buying a long haul above<\/div>\n<\/div>\n<\/div>\n
\n
\n
your short call and a long put below<\/div>\n<\/div>\n<\/div>\n
\n
\n
your short put into what is known in the<\/div>\n<\/div>\n<\/div>\n
\n
\n
options world as an iron condor okay so<\/div>\n<\/div>\n<\/div>\n
\n
\n
let’s take a look at what it would have<\/div>\n<\/div>\n<\/div>\n
\n
\n
meant to our position if we had bought<\/div>\n<\/div>\n<\/div>\n
\n
\n
the long call directly above the short<\/div>\n<\/div>\n<\/div>\n
\n
\n
call and a long put directly below the<\/div>\n<\/div>\n<\/div>\n
\n
\n
short put okay so now let’s carefully<\/div>\n<\/div>\n<\/div>\n
\n
\n
break down what’s going on here you see<\/div>\n<\/div>\n<\/div>\n
\n
\n
just like before we’re selling that<\/div>\n<\/div>\n<\/div>\n
\n
\n
eighty-three twenty-five call and the<\/div>\n<\/div>\n<\/div>\n
\n
\n
seventy three fifty puts like we showed<\/div>\n<\/div>\n<\/div>\n
\n
\n
you before but this time we’re buying<\/div>\n<\/div>\n<\/div>\n
\n
\n
the 38 50 call and also buying the<\/div>\n<\/div>\n<\/div>\n
\n
\n
seventy three twenty-five puts now let’s<\/div>\n<\/div>\n<\/div>\n
\n
\n
break down what that means well just<\/div>\n<\/div>\n<\/div>\n
\n
\n
like before we’re gonna receive 14 84<\/div>\n<\/div>\n<\/div>\n
\n
\n
selling the call and 25 34 selling the<\/div>\n<\/div>\n<\/div>\n
\n
\n
put but this time we’re spending eleven<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred seventy-five dollars to buy the<\/div>\n<\/div>\n<\/div>\n
\n
\n
call right above the short call the 8350<\/div>\n<\/div>\n<\/div>\n
\n
\n
call and we’re also spending twenty<\/div>\n<\/div>\n<\/div>\n
\n
\n
three sixty on that long put at seventy<\/div>\n<\/div>\n<\/div>\n
\n
\n
three twenty five and if you net it all<\/div>\n<\/div>\n<\/div>\n
\n
\n
down you get a credit<\/div>\n<\/div>\n<\/div>\n
\n
\n
of $475 so you’re probably saying<\/div>\n<\/div>\n<\/div>\n
\n
\n
yourself how dumb is that<\/div>\n<\/div>\n<\/div>\n
\n
\n
why would you spend so much money and<\/div>\n<\/div>\n<\/div>\n
\n
\n
end up with a little more than 10% of<\/div>\n<\/div>\n<\/div>\n
\n
\n
the clash flow you were getting if you<\/div>\n<\/div>\n<\/div>\n
\n
\n
didn’t buy the long call and the long<\/div>\n<\/div>\n<\/div>\n
\n
\n
put and the answer is that you’re asking<\/div>\n<\/div>\n<\/div>\n
\n
\n
that question because you have fallen<\/div>\n<\/div>\n<\/div>\n
\n
\n
into options trading blunder number<\/div>\n<\/div>\n<\/div>\n
\n
\n
seven I’m not gonna waste my money<\/div>\n<\/div>\n<\/div>\n
\n
\n
buying long options to protect my short<\/div>\n<\/div>\n<\/div>\n
\n
\n
options now why am I saying that<\/div>\n<\/div>\n<\/div>\n
\n
\n
receiving less cash is an option trading<\/div>\n<\/div>\n<\/div>\n
\n
\n
blunder the most important reason is<\/div>\n<\/div>\n<\/div>\n
\n
\n
that with a short strangle you’ve got<\/div>\n<\/div>\n<\/div>\n
\n
\n
unlimited risk as we discussed but with<\/div>\n<\/div>\n<\/div>\n
\n
\n
an iron condor there’s an absolute limit<\/div>\n<\/div>\n<\/div>\n
\n
\n
to how much you can lose and in fact<\/div>\n<\/div>\n<\/div>\n
\n
\n
your broker knows that and that’s why<\/div>\n<\/div>\n<\/div>\n
\n
\n
the broker margins you so much less in<\/div>\n<\/div>\n<\/div>\n
\n
\n
fact in these two examples as you can<\/div>\n<\/div>\n<\/div>\n
\n
\n
see your broker would have margined you<\/div>\n<\/div>\n<\/div>\n
\n
\n
your account eighty-three six for the<\/div>\n<\/div>\n<\/div>\n
\n
\n
shorts triangles as we mentioned before<\/div>\n<\/div>\n<\/div>\n
\n
\n
but for the iron condor he would have<\/div>\n<\/div>\n<\/div>\n
\n
\n
only margined you 2025 dollars and why<\/div>\n<\/div>\n<\/div>\n
\n
\n
is he margining you so much less well<\/div>\n<\/div>\n<\/div>\n
\n
\n
that’s because the long put protects the<\/div>\n<\/div>\n<\/div>\n
\n
\n
short put so if the market really tanks<\/div>\n<\/div>\n<\/div>\n
\n
\n
the long put starts having value and it<\/div>\n<\/div>\n<\/div>\n
\n
\n
is an increasing value at that point at<\/div>\n<\/div>\n<\/div>\n
\n
\n
about the same rate as the short put is<\/div>\n<\/div>\n<\/div>\n
\n
\n
costing you so the long put effectively<\/div>\n<\/div>\n<\/div>\n
\n
\n
puts a stop on your trade it stops the<\/div>\n<\/div>\n<\/div>\n
\n
\n
bleeding if the market really takes off<\/div>\n<\/div>\n<\/div>\n
\n
\n
to the downside and the same for that<\/div>\n<\/div>\n<\/div>\n
\n
\n
long call if the market blows past your<\/div>\n<\/div>\n<\/div>\n
\n
\n
short call to the upside then in 25<\/div>\n<\/div>\n<\/div>\n
\n
\n
points your long call will kick in and<\/div>\n<\/div>\n<\/div>\n
\n
\n
that will stop the bleeding on the short<\/div>\n<\/div>\n<\/div>\n
\n
\n
call and so your broker knows all this<\/div>\n<\/div>\n<\/div>\n
\n
\n
and only charges you two thousand and<\/div>\n<\/div>\n<\/div>\n
\n
\n
twenty five dollars per option because<\/div>\n<\/div>\n<\/div>\n
\n
\n
you have built in protection into your<\/div>\n<\/div>\n<\/div>\n
\n
\n
trade and the broker knows how that’s<\/div>\n<\/div>\n<\/div>\n
\n
\n
going to work well this fact is actually<\/div>\n<\/div>\n<\/div>\n
\n
\n
huge why because the return on your iron<\/div>\n<\/div>\n<\/div>\n
\n
\n
Condor is way higher than the return on<\/div>\n<\/div>\n<\/div>\n
\n
\n
your short strangle if you think about<\/div>\n<\/div>\n<\/div>\n
\n
\n
it why well let’s take a look at an<\/div>\n<\/div>\n<\/div>\n
\n
\n
example and this will become quite clear<\/div>\n<\/div>\n<\/div>\n
\n
\n
to you so let’s say that on the same day<\/div>\n<\/div>\n<\/div>\n
\n
\n
that we entered into the one lot shorts<\/div>\n<\/div>\n<\/div>\n
\n
\n
triangle trade suppose that instead we<\/div>\n<\/div>\n<\/div>\n
\n
\n
entered into 20 iron condors with the<\/div>\n<\/div>\n<\/div>\n
\n
\n
same short strikes<\/div>\n<\/div>\n<\/div>\n
\n
\n
eighty-three 25 on the calls and 73 50<\/div>\n<\/div>\n<\/div>\n
\n
\n
on the puts like last time but this time<\/div>\n<\/div>\n<\/div>\n
\n
\n
we buy the protective call and puts just<\/div>\n<\/div>\n<\/div>\n
\n
\n
like we showed you on that one lot<\/div>\n<\/div>\n<\/div>\n
\n
\n
example except this time we execute 20<\/div>\n<\/div>\n<\/div>\n
\n
\n
of them now let’s break down what<\/div>\n<\/div>\n<\/div>\n
\n
\n
happens in this case well as you can see<\/div>\n<\/div>\n<\/div>\n
\n
\n
from the calculation if you get $475 for<\/div>\n<\/div>\n<\/div>\n
\n
\n
just one of those condors you get $9,500<\/div>\n<\/div>\n<\/div>\n
\n
\n
for 20 of them you get 20 times the cash<\/div>\n<\/div>\n<\/div>\n
\n
\n
from the options you sold although you<\/div>\n<\/div>\n<\/div>\n
\n
\n
paid 20 times that amount for the<\/div>\n<\/div>\n<\/div>\n
\n
\n
options you buy incidentally yet and<\/div>\n<\/div>\n<\/div>\n
\n
\n
here’s the great part you’re using less<\/div>\n<\/div>\n<\/div>\n
\n
\n
than half of the capital and so if we<\/div>\n<\/div>\n<\/div>\n
\n
\n
move forward to the day they expire you<\/div>\n<\/div>\n<\/div>\n
\n
\n
can see that the short calls and the<\/div>\n<\/div>\n<\/div>\n
\n
\n
short puts have shrunk to almost no<\/div>\n<\/div>\n<\/div>\n
\n
\n
value because again the MDX is trading<\/div>\n<\/div>\n<\/div>\n
\n
\n
at 76 77 and those short calls and those<\/div>\n<\/div>\n<\/div>\n
\n
\n
short puts are just too far away from<\/div>\n<\/div>\n<\/div>\n
\n
\n
the market for them to be in any real<\/div>\n<\/div>\n<\/div>\n
\n
\n
danger with two hours left before they<\/div>\n<\/div>\n<\/div>\n
\n
\n
expire and the same is true for the<\/div>\n<\/div>\n<\/div>\n
\n
\n
protective long call above the short<\/div>\n<\/div>\n<\/div>\n
\n
\n
call and the protective long put below<\/div>\n<\/div>\n<\/div>\n
\n
\n
that they’re even farther from the<\/div>\n<\/div>\n<\/div>\n
\n
\n
market and so obviously they’re going to<\/div>\n<\/div>\n<\/div>\n
\n
\n
have even less value so if we just go<\/div>\n<\/div>\n<\/div>\n
\n
\n
ahead and close the iron Condor at that<\/div>\n<\/div>\n<\/div>\n
\n
\n
point by the time you actually get it<\/div>\n<\/div>\n<\/div>\n
\n
\n
executed it will look like this you’ll<\/div>\n<\/div>\n<\/div>\n
\n
\n
have to pay to close the short the two<\/div>\n<\/div>\n<\/div>\n
\n
\n
short options and you’ll receive cash<\/div>\n<\/div>\n<\/div>\n
\n
\n
back from selling the long options and<\/div>\n<\/div>\n<\/div>\n
\n
\n
the result is that you’ll end up with<\/div>\n<\/div>\n<\/div>\n
\n
\n
9,000 $360 profit from the whole<\/div>\n<\/div>\n<\/div>\n
\n
\n
transaction now just to drive this point<\/div>\n<\/div>\n<\/div>\n
\n
\n
home let’s take a look at the comparison<\/div>\n<\/div>\n<\/div>\n
\n
\n
between these two approaches using the<\/div>\n<\/div>\n<\/div>\n
\n
\n
single short strangle we make a little<\/div>\n<\/div>\n<\/div>\n
\n
\n
less than $4,000 on more than 83,000<\/div>\n<\/div>\n<\/div>\n
\n
\n
dollars in capital but with the 20 lot<\/div>\n<\/div>\n<\/div>\n
\n
\n
iron Condor with around 40,000 of<\/div>\n<\/div>\n<\/div>\n
\n
\n
capital less than half of the amount<\/div>\n<\/div>\n<\/div>\n
\n
\n
your broker will require for the one<\/div>\n<\/div>\n<\/div>\n
\n
\n
short strangle you’d make ninety three<\/div>\n<\/div>\n<\/div>\n
\n
\n
hundred dollars that’s a return of<\/div>\n<\/div>\n<\/div>\n
\n
\n
twenty three percent versus about five<\/div>\n<\/div>\n<\/div>\n
\n
\n
percent with half the risk if that isn’t<\/div>\n<\/div>\n<\/div>\n
\n
\n
enough reason to convince you that this<\/div>\n<\/div>\n<\/div>\n
\n
\n
is a blunder then you should consider<\/div>\n<\/div>\n<\/div>\n
\n
\n
one more thing and that is the short<\/div>\n<\/div>\n<\/div>\n
\n
\n
strangle has unlimited risk<\/div>\n<\/div>\n<\/div>\n
\n
\n
unlimited that’s a lot infinities a lot<\/div>\n<\/div>\n<\/div>\n
\n
\n
okay and so even though your broker will<\/div>\n<\/div>\n<\/div>\n
\n
\n
margin you a finite amount eighty-three<\/div>\n<\/div>\n<\/div>\n
\n
\n
thousand dollars it could theoretically<\/div>\n<\/div>\n<\/div>\n
\n
\n
get worse than that yes you will spend<\/div>\n<\/div>\n<\/div>\n
\n
\n
money on the long call and money on the<\/div>\n<\/div>\n<\/div>\n
\n
\n
long put but the results of using these<\/div>\n<\/div>\n<\/div>\n
\n
\n
Long’s<\/div>\n<\/div>\n<\/div>\n
\n
\n
is so dramatic on your capital<\/div>\n<\/div>\n<\/div>\n
\n
\n
utilization that it’s not even close as<\/div>\n<\/div>\n<\/div>\n
\n
\n
I hope this example made clear so please<\/div>\n<\/div>\n<\/div>\n
\n
\n
don’t fall for options blunder number<\/div>\n<\/div>\n<\/div>\n
\n
\n
seven you obviously get a much higher<\/div>\n<\/div>\n<\/div>\n
\n
\n
return with protected positions like<\/div>\n<\/div>\n<\/div>\n
\n
\n
iron condors as opposed to what are<\/div>\n<\/div>\n<\/div>\n
\n
\n
known as naked positions like strangles<\/div>\n<\/div>\n<\/div>\n
\n
\n
with unlimited risk and massive capital<\/div>\n<\/div>\n<\/div>\n
\n
\n
requirements now just to remind you as I<\/div>\n<\/div>\n<\/div>\n
\n
\n
said earlier if you enjoyed this video<\/div>\n<\/div>\n<\/div>\n
\n
\n
and learned something valuable from it<\/div>\n<\/div>\n<\/div>\n
\n
\n
would like to learn the details of three<\/div>\n<\/div>\n<\/div>\n
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\n
real-world option strategies that<\/div>\n<\/div>\n<\/div>\n
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\n
professional options traders use all the<\/div>\n<\/div>\n<\/div>\n
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\n
time then you should check out the free<\/div>\n<\/div>\n<\/div>\n
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\n
options class that we’re currently<\/div>\n<\/div>\n<\/div>\n
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\n
running just go ahead and click the link<\/div>\n<\/div>\n<\/div>\n
\n
\n
that should be appearing now at the top<\/div>\n<\/div>\n<\/div>\n
\n
\n
right corner of your screen that will<\/div>\n<\/div>\n<\/div>\n
\n
\n
open the free registration page in a new<\/div>\n<\/div>\n<\/div>\n
\n
\n
window so you won’t lose this video<\/div>\n<\/div>\n<\/div>\n
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\n
don’t worry<\/div>\n<\/div>\n<\/div>\n
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\n
or you can just head on over to options<\/div>\n<\/div>\n<\/div>\n
\n
\n
class com to register for this free<\/div>\n<\/div>\n<\/div>\n
\n
\n
intensive workshop it really is a rare<\/div>\n<\/div>\n<\/div>\n
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\n
opportunity for retail traders investors<\/div>\n<\/div>\n<\/div>\n
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\n
to learn directly from Wall Street<\/div>\n<\/div>\n<\/div>\n
\n
\n
traders but that’s exactly what you’ll<\/div>\n<\/div>\n<\/div>\n
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\n
be getting through this trio online<\/div>\n<\/div>\n<\/div>\n
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\n
workshops so click the link to sign up<\/div>\n<\/div>\n<\/div>\n
\n
\n
now and don’t miss it and please don’t<\/div>\n<\/div>\n<\/div>\n
\n
\n
forget to click on the subscribe button<\/div>\n<\/div>\n<\/div>\n
\n
\n
right now so you won’t miss the next<\/div>\n<\/div>\n<\/div>\n
\n
\n
episode of huge options trading blunders<\/div>\n<\/div>\n<\/div>\n
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\n
and all the other free trading videos<\/div>\n<\/div>\n<\/div>\n
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\n
that were posting constantly on our<\/div>\n<\/div>\n<\/div>\n
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\n
channel to help you to improve your game<\/div>\n<\/div>\n<\/div>\n
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\n
as an options trader<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n
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<\/div><\/div>\n<\/div>\n<\/div>\n

\"\"<\/a><\/p>\n

* no relevant positions<\/p>\n","protected":false},"excerpt":{"rendered":"

We continue our series on Options Blunders today, discussing the huge opportunity that options traders miss because they are reluctant to buy long options to protect their short options positions. 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