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The difference is that you can just set and forget these kinds of trades, normally. You’re going to have very little downside risk. If Yahoo stock gets cut in half because the deal doesn’t go through, you’re going to lose $10. That’s the maximum risk on this trade. Remember, if we had just the outright calls here, and it goes down to $10, we’re going to lose $411 on those.
Also, if the stock stays right in the middle, right where it is right now, we lose a maximum of $49.63, as you can see over here on the expiration graph. Our downside risk, if nothing happens, we lose $49. If you just bought the call outright and nothing happens, we’re going to lose $411.
What happens if the deal does go through? If the deal does go through, all of a sudden, the stock shoots up to $30, $35. At $35, we’re making $1400 in profit. We have unlimited upside potential. Let’s say somebody is crazy enough to offer Yahoo $70. We’re up about $90,000, at that time.
We actually have unlimited upside potential on this. It does not stop. It continues to go up and up. However, the real benefit of this kind of trade is the very limited downside risk. In fact, we can make a little bit of money, if it ends up in this area right here, between $15.50 and about $18-$19.
If we trade down a little bit, we make money. If it goes up forever, we make money. If it goes down to nothing, we lose $11.
In a second, I’m going to show you some of the other trades that I have on here. I think you’re going to find it extremely interesting, when you begin to put together a portfolio of these kinds of trades, how dynamic this kind of trading can really be.
Here’s the trade. We’re buying three of the October 25 calls. We’re selling one of the in the money July 17.50 calls. Let’s go back to our Trade tab here for a second. I’m going to show you how this is actually entered in my Think or Swim platform.
What I want to do, is I don’t want to sell a naked call. That is my second trade. My first trade is to purchase three of my October 25 calls here. I just want to make sure I have the right ones.
Then, under the advanced order tab, instead of “Blast all” or “Single order,” I want to do “First trigger sequence.” In other words, when this one gets filled, then this one gets filled. That’s what I’m going to do right now. I don’t have to fool around with mid-point prices. All of the stocks I do this on are actively traded stocks. These are all actively traded stocks, so I’m not too concerned about mid-prices on these.
I’m talking about 5 cents in between the bid and the ask, which is pretty normal for almost any kind of stock that you’re going to be trading on an individual basis. This is not a spread order. This is not entered as a spread order. You are entering individual option orders. The deal is that you want to get these three long October 25 calls entered into the market first. Then, you want to sell one of the July 17.50s.
You don’t want to do it the other way around. You don’t want to sell that Yahoo call, and then buy your three October 25 calls. You want those first. You want the July, the one that you’re selling, to be placed second.
In this platform, all I have to do is hit “Confirm and send.” The total cost of this trade is going to cost me $411. This, technically, is the risk that you have on the long calls. Because it’s not technically a spread, they don’t margin in that way. They margin it based on the risk of your long call.
That’s just something that they do. I’m going to go ahead and send this in. You can see that we’ll probably get filled instantly. We got filled instantly, because we were exactly at the asking price on both of those.
Now I have those. Let’s go over to our Analyze tab again. We’ll take out our simulated trades – this green and this red line are the ones we simulated. You can see that we have our trade in. Our maximum risk is at $44, which is at expiration of the July options. Our maximum downside risk improved a little bit. The most we can lose if the stock goes down to $10 is $5.83. That’s it.
In fact, we have a little bit of profit already. We’re up $3.86. But we have not limited the upside potential of this trade. This trade can go up forever. As long as we do it before October – which is the target date, I figure if anything is going to happen, it will be by October. If not, we can always put this trade on again.
If Yahoo stock trades down a little bit, I could actually make some money. Right around $17.50, I can actually make $70-$80. Not a lot of money, but when you have very little downside risk, and you have unlimited upside potential, you can afford to put these trades on, let them go, and just see what happens.
Right now, under my positions and simulated trades, I have single symbol, which is just Yahoo here. What I want to do is show you some of my other trades, so you can understand how I built a portfolio of trades. Let’s take a look at them, and see how little risk I actually have.
I have a trade just like this on the QQQs, as you can see. I have a position on Verizon, using the same method. This is Washington Mutual Bank. The XLF ETF, and now Yahoo. These are my trades, and this is my portfolio.
Let’s take a look at the expiration risk here. It’s minimal. It really is minimal. If things trade down here, my total risk in all of these trades is about $94, maybe $100, at the most. Because of the way I have put these trades together, I actually have unlimited downside profit potential, and I have unlimited upside profit potential. I also have very little risk right in the middle.
I’m able to profit, whether the stocks that I picked go down, or go up. Let me just show you one as an example. You can find these trades, in which you make a profit if the stock goes down.
In this case, Verizon had a very interesting… I set it up very well, and it gave me some very favorable pricing. I had unlimited upside potential on this trade, as you can see. Also, my maximum risk is about $68. I also make a nice profit if the stock just tanks, and people start selling it like crazy.
It doesn’t matter where it goes. I’m going make anywhere from $130 – at the peak here, $158 – $134, $127, $125, all the way down. Even if the stock trades down to $25, and gaps open at the downside, I’m going to make $125, all the way down to 0. If it goes down to 0, I make $125.
Sometimes, you can find these trades, in which you can make money, whether the stock goes up or down, even though you’re playing it to go up. Same thing with the QQQs. I actually put this trade down where if the QQQs get tanked, I still make $15. It’s not a lot of money, but I still have this unlimited upside potential on these kinds of trades.
Who else did I have? I had Washington Mutual. Washington Mutual was a very favorable one. I couldn’t resist this one, because if the stock doesn’t move at $5.48, I make $25. I still have unlimited upside potential on Washington Mutual, and my downside risk is $22. That’s it. I have unlimited upside potential. If Washington Mutual has some great report, where they’re making money instead of losing money, and they don’t have to write down a bunch of stuff, I have unlimited upside potential on this trade.
Even if it trades down to $4, I still make money. Sometimes you can find really favorably priced trades here. The thing is that you have to keep your eyes open. Let me take a look at my XLF trade. It’s the final one that I can show you.
You have to keep your eyes open. This one, I traded to the downside. I left my upside potential intact. You can see that, even if the XLF does take off here, I can make $106. It doesn’t matter how high it goes up. I still make money. I still make money with the trade. My maximum risk on the downside with this one is about $100, but I have unlimited downside potential too. If the financials really get killed again, and it goes down to $10, I’m going to make $1000 on this trade.
That’s the only one that I’ve traded puts on. You can do the exact same thing with the puts that you did with the calls.