Transcription
Hey, what's going on YouTube? Welcome back to Tech Conversations.
Firstly, if you haven't already, make sure to check out LuxAlgo. LuxAlgo is an AI platform that lets you build and deploy your own trading indicators powered by some legendary tools and used by over 15,000 traders, including myself. And I've covered many of their own premium indicators in the past on my channel. Go ahead and check out those videos.
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Now, let's get right into today's video. So, today I want to talk about an advanced options trading strategy that not a lot of people know about and that could make you some very large returns if implemented properly.
Now, to use this strategy, you should have a neutral outlook on the stock. Meaning, you don't believe the stock is going to make a massive move up or down. Instead, you believe it will trade sideways and not move a whole lot.
So, for today's demo, I'm going to use a random stock. I'm going to use AMD. Keep in mind, any trades I show you here today are just examples to show you how this strategy works.
So, the very first thing we want to do here, so you want to go into the options for the stock. So, notice here at the bottom right, you can go into the options by clicking on this trade options button. So, this will take us to the options for whatever stock it is you're looking at.
Now, here, the first thing we want to do is select an appropriate expiration date. So, where can we select the expiration date? Right here, this drop-down right here. You can scroll within it and you can see all the available expiration dates here.
Now, the expiration date you select will depend on your outlook for the stock. So, for today's demo, let's just say I have a neutral outlook on AMD until July 10th. So, I'm going to leave my expiration date then as July 10th.
Now, we are going to start here with selling some options, which means here I need to make sure that I'm on sell, not on buy. So, I'm going to switch over to sell. And today we're going to be dealing only with calls. So, we want to make sure that we're on calls here and not on puts.
Now, the first thing we're going to do here, when it comes to selecting our options, is we're going to start by determining what price we believe the stock will be at on the expiration date. So, for my example here, I would want to figure out and try to determine what price I believe AMD stock will be at on expiration on July 10th. And so again, for this demo, let's just pretend I believe that at expiration date AMD will be at $525.
Now, keep in mind, right now it's at $519. So again, that would have meant I am neutral on the stock, basically. I don't think it's going to move much up or down. I think it's going to trade sideways. That's what you need to have a neutral outlook on the stock.
So, we would have first start then by selling three calls with a face strike price equal to that price that you come up with. And I'll show you how to modify how many contracts you want for each option you select because again, we're going to have to sell three calls here. So again, let's just pretend I believe at expiration date AMD will be at $525. So I would start by selling three calls with a strike price equal to that price. So I want to find if there's a call with a strike price of 525. And as you can see, there is. So I'm going to select this and again, we're going to sell three of these. I'll show you how to modify the quantity here in a little bit.
Now, the next piece here is we are going to switch now to buying some calls. So right now we're on sell, we want to switch over to buy here. And we're going to buy a few calls here as well. So firstly, we are going to buy two calls with a higher strike price than the strike of the calls that we're selling. So, the strike of the calls that we're selling is 525. So, now we want to buy two calls with a higher strike price. How much higher? Again, this is going to depend on a couple of things, and I'll show you a tool you can use that'll really help you visualize kind of how the trade changes depending on, you know, how much higher you go here with the strike price you select. But again, for this demo, I'm just going to select the option right above the calls that we're selling. So, this option here at the 527.50 strike. I'm going to go ahead and select this. And again, we're going to buy two of these. So, I'll show you how to modify the quantity here.
Now, finally, we are going to buy one more call. Now, this call is going to have a lower strike price than the strike of both of the other call options that we've selected here so far. And we need to be very specific here. So, this is very important. So, you first want to look at the distance between the calls that you've selected so far. So, if we take a look here, the calls that we've selected so far here, notice that the distance between the strikes is $2.50.
Now, why do we care about that? We care about that because the call we buy here needs to have twice the distance from these two calls from the distance of the call that we are selling here. So, again, these have a distance of 250. So, the call we buy here next needs to have twice that distance, which would be $5 away from the calls that we're selling here. So, the calls that we're selling, they're at a $525 strike. So, this call that we buy needs to be $5 away from that. Meaning, we have to buy the call at the $520 strike price here. So, I'm going to go ahead and select that there.
So, now, like I said, we need to make sure that we're selling three calls, and then for the highest strike price, we want to buy two calls here. So, how do we modify the quantity? So, here at the top right, you can click on this little icon, and you can click on custom here. So, now, as you can see, you can modify the quantity here. So, first, for the calls that we're selling, we want three. And then for the calls that we're buying with the highest strike, we want to buy two of these here. And so, as you can see, for this particular strategy, you should be entering for a debit. And for this particular example, according to Robinhood, it would be about $5. And you can actually see your P&L chart down here, right? Max profit $495, max loss $5. And then we can see our break-even points here.
So, what I want to do here next is I want to head on over to OptionStrat to visually see what this trade would look like, what our profit or loss would be depending on the share price, depending on the date, the plan depending on implied volatility, things like that. So, let's head on over to Option Strat. I'll put a link to Option Strat in the description below. This is a really great options visualization tool. Again, free to use. And this will allow us to visualize this options trade and any options trade you want.
So, I'm going to go to build and I'm just going to go to a regular call. So, first we want to go to the the stock that we're looking at the trade for. So, this is going to be AMD. And then you want to make sure you select the appropriate expiration. So, we just went with July 10th. It's already selected there. So, again, we first started by saying we need to sell three calls and we want to determine what price we believe the stock will be at on expiration date. That's going to be the strike of the calls that we sell. So, again, for this example, we said let's just pretend we think AMD will be at 525 at expiration date. So, then we started by selling three calls at that strike. So, right there, we have three calls we're selling at the $525 strike.
Then we said we want to buy two calls with a higher strike than the strike of the calls we're selling. So, we're going to add buy call. And let's go ahead and Again, we only want to buy two here, not three. So, we're going to go two here. And then finally, we said we want to buy one more call. And the distance between that call we buy and the calls we're selling needs to be two times the distance between these two calls we have here. So, again, the distance between these two calls is 250. Twice that is $5. So, that That we need to buy the call at the $520 strike because then these two have twice the distance as these two right here.
And so again, for this particular strategy, we're entering for a debit. For this particular example, it would be about a $5 debit. Max loss is going to be equal to the debit you enter for. So for this example, $5. Max profit $495 for this example. And then we have our break-evens here. So at expiration, we would want the stock to be between these two prices here.
Now couple more things that we need to talk about here. Your max profit, which again for this example is $495, you're going to realize your max profit at expiration if the share price is at the strike price of the calls you sold. So if at expiration AMD's at 525, you can see this is where we would make our max profit. So as you can see, this is a neutral strategy. We want the stock to move sideways. We don't want it to move up or down too much.
Now keep in mind, just like with any other strategy, you can close out of this trade at any time on Robinhood. So you don't have to wait until expiration date to close out. You can close out at any point in time. And also, let's take a look here what happens with changes in implied volatility. So this is why this tool is very useful. We see IV here. So if IV goes down, you can kind of see how the trade starts to change. If IV instead it goes up, again, you can kind of see how the trade starts to change here.
Now one more thing here, like I mentioned earlier, if you want to take a look and mess around with different strike prices here, this is a really great tool for doing that. So, let's say for the call that we're buying, we didn't want to do the one right above it. Let's say you wanted to go instead to the 530 strike. So, then these two have to have twice the distance as these two. So, these two would have a $10 difference. So, this would have to be at the 515 strike. So, here's basically the exact strategy here, just correcting the strike prices. And so, now you can kind of see how that trade got a little different. So, now as you can see, we would enter for a higher debit, and our max profit is bigger. Now, you can see our break-evens, what the new break-evens would be. You can see the P&L chart here reflect. So, this is why this is very helpful, because you can very quickly just kind of start changing the strike prices here and seeing how things change here. Right?
Um, so here's another example. And so, this is why I think this is a very useful tool to use. I always use it before I ever enter any options trade. So, anyways, if you have any questions, feel free to leave them in the comments section below. Check out the Discord, link to that in the description below. Hope you enjoyed the video. Let me know what you guys think, and I will see you guys next time.