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You can sell an in the money put, and you can buy out of the money puts in a distant month. Same thing. It’s the same way that you did the calls. You can do it with puts as well.
If you’re bearish on stocks, you can do the exact same thing here, and just trade these so that it’s very favorable. If you’re wrong, they go up and make money, and if they go down, you can make unlimited money.
There are lots of ways that you can play this. Let me put that back together in a portfolio view for you. You can see that if the market goes down, I make money, and if the market goes up, I make money. If it stays the same, I lose a little bit of money. But I have so many different trades going on at this one time, that if I lose $50 or $60 on one, but I make $300 or $400 on another, that’s not too bad.
If we take a look at the price slices here, you can see that I’m actually making money today, about $60. If it goes up, I make a lot of money. If it goes down, I make money. It doesn’t matter. Either way, I make money.
Let me talk about the risks, before we leave here, and we close this out for the day. The risk is that I’ve sold this Yahoo 17.50 call. If I get assigned on that, what I’ll do is take those 100 shares that they’re going to assign me – I will have to buy, or I will be short 100 shares of Yahoo stock, because I sold that call. I have those three October calls to protect me from any upside potential. In fact, I have unlimited upside potential on this trade.
What I will do, is I will go ahead and buy those back, into the market. I will go ahead and roll that trade up into the August 17.50, or maybe even the $20 calls. I will sell another call into August, and keep my October calls.
That’s my exit plan. Let’s say nothing happens between now and the 16 days left in the July option. If nothing happens as we get closer to this July expiration, if I don’t really want to be assigned on that short call that I have, I’ll simply roll it up into the August 17.50s.
It’s going to cost me another 30 cents, but you know what? That’s not a big deal. I’ve eliminated some of my risk. Maybe I’ll actually make a little bit of money on that, and roll it up for even money, to the August 17.50. I still have my Octobers out here, waiting to be profitable, if somebody makes an offer for Yahoo at $30 or higher. I still have my limited downside risk, because I have shorted that one in the money call against the three that I bought out in October.
So, that’s the plan. That’s the exit plan. The plan is to hold these out. I will sell the near-term in the money call, if I’m looking for an upside pop on a stock. If it doesn’t happen within the next week – I would say 7 to 10 days before expiration, when that number goes down to 7, when there are 7 days left until the July expiration, I will want to roll those up to the August 17.50s and sell one of those.
I will hold it in there until the 3rd week of August. If nothing happens by the 3rd week of August, I could potentially roll it up again into the October 17.50 calls, if I still think there’s some potential in this trade. If not, I’ll just close the whole thing out, probably for even money. I could even make a little bit of money.
It’s such a low-risk trade that it doesn’t matter. You can just let these things go, and keep an eye on them. Just make sure that a few days before expiration, that you roll them up to the next month. I would do that a couple of times. I would roll it up maybe once to August. Maybe, since they don’t have the Septembers up, you could roll it from the August to the Septembers, once they put the Septembers up there too.
You could roll these out a few months. Maybe even make a little of money on the income that you’re generating by selling these calls in July, August, and September. That’s the plan. I think it’s a dynamic way to trade, especially when you put together a portfolio of these different kinds of trades.
It doesn’t cost you a lot of money. There’s very limited downside risk. There’s very little risk if the stock just stays the same. My maximum risk on all of these trades is about $100. I still have unlimited upside potential on these. If I get a couple to pop up really nicely and make a few thousand bucks, that’s not a bad payday.
Like I said, I’m only trading one to three contracts here. If you have a lot of capital, and you have a big budget, these are the kinds of trades where, if they pop on you, you can make a lot of money.
I wish you guys all the best. If you have any questions at all on this trade, feel free to review this video as many times as you want. Go through all the details that I just established for you, especially the entrance criteria, setting it up to determine what kind of profit and loss scenario you’re looking at – and also, how to exit these trades. You want to put a time limit on these trades. If you’re getting close to the July expiration, get out, and roll it up to August.
If you want to give it a little more time after August, roll it up to September. I wouldn’t recommend rolling it more than two or three months. At that point, probably, the trade is diminished. The event is not going to happen. Yahoo is not going to get bought out. Just exit the trade, at what little tiny loss – $10, or $20, or maybe even you’re making a little bit of money, like $30 or $40 in the trade.
But you haven’t really lost anything. You have a position, in case the stock does pop up.
Finally, before I leave you today, I want to go through what I would do. I had this one planned out. I had Yahoo planned out already. Let’s say you don’t have any idea what kind of stock that you really want to do this on. You want to be able to do this strategy, but you have absolutely no idea what stock people are talking about, or anything else.
What you can do in the Think or Swim platform, at least – and you can probably do this online, too – is go to… This is very good for earnings, as well. Think about it. These are stocks in the news, right? Any time you feel like you’ve been hearing about a stock over and over again, and it looks like they’re going to be coming out with some earnings – this is a very good strategy to use for an earnings play.
If you just take a look through here, you can see that Ebay is actually going to come out with earnings on July 16, after the market closes. We know Ebay. Ebay is a big stock. It trades a lot of shares. It’s very liquid. It has options on it.
Let’s take a look at Ebay options, and see if we can find something favorable. We can’t always find something favorable. Many times, you take a look at some of the options, and even though most of the time, you can find something fairly favorable to do this kind of trade with, you can’t always find them.
Let’s take a look here. Let’s go to the July, October. Let’s keep an eye on the volatilities. The volatility is 51% here in July, which is good, because that’s the one that we’re selling. If it’s a little bit higher volatility, you’re going to get a little bit better price for those calls that you’re selling in July, right?
That’s favorable in one way already. The October calls are down around 42% volatility. The January 09’s are down to 40%. I think October is probably long-dated enough. Because it’s an earnings announcement, we could probably even go to the August.
Let’s take a look at a couple of different scenarios. I would start by taking a look at the August. I would go out to the $30, which is just a little bit higher than the current price of the stock.
I don’t want to sell those. I want to buy those. I always start out with three. Let’s make sure we have our “Trigger sequence,” or our “Advanced order” tab here. Then, we’re going to sell one of the calls in the front month, which is July. Let’s take a look at the option expiration here.