Options Spreads – Option Trading Strategies Video 34 part 2

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Let’s take a look at the slices. I’m going to go up a dollar. I’m going to go up $2, and I’m going to go up $3.

We are currently long 405 Deltas, so we need to sell 400 shares, as soon as we open this position. Let’s go in here, and we’re going to sell 400 shares. We’ll bring that over to the Analyze tab. That brings us to a Delta-neutral position. Now, if it goes up a dollar, we will be long 178 Deltas. If it goes down a dollar, we will be short 194 Deltas. If it goes down, then we can sell some of the shares that we purchased on the open, to be Delta-neutral here.

Let’s see what the current stock price is. It’s at $36.74. We are buying the $35 straddle. That’s how we are going to enter our order. We’re going to buy the straddle, and we’re buying 10 contracts. We are selling 400 shares of stock.

The last thing we want to do is take a look at the chart again, and see exactly where the stock is, and where it has been. It’s very interesting. We had a pretty good run up here, in the morning. It looks like there were ample opportunities, over the last 20 days, to trade this stock. Hopefully, this will be a winner for us. It looks like the shares are easy to borrow. That’s what we’re looking for.

Let’s give it a shot. We’ll make sure that we are Delta neutral here, with the current stock prices. It looks like we are. The only thing we need to do, then, is just to make sure that we can get the straddle. We are going to try the straddle first, and then the sequence. In the sequence, we are going to sell 400 shares short of the stock. It says “Easy to borrow,” so hopefully, we’ll be able to get this position on.

In our worksheet, all I did was make a notation that the Netflix was hard to borrow, and the AVP was easy to borrow. That’s the one that we have selected to do our trade. Now, we’re just waiting for this to be entered. Hopefully, we’ll be able to get our straddle at the mid-price.

Let’s keep an eye on the chart, and see where we are. It looks like the price is just hanging around, right around $36.73. Hopefully we’ll be able to get our price. If not, we’ll wait a couple more minutes, and we will go ahead and replace that order. We’ll cancel that order, and replace it with another order.

We just got filled. Now they are working on our short order. Unfortunately, the price has moved. Now, we need to do 375 shares. We have the straddle. Let’s get rid of that. Let’s see what we need in order to get Delta-neutral here. We’re going to be slightly long Delta here. If we take a look at the chart, the price has come up a little bit.

Let’s go ahead, and go to our Analyze tab. In order to be pretty Delta-neutral, we need to sell 390 shares here, instead of 400, at the current price of $33.65. We’ll just go ahead and do that, and enter that order.

We sold it. We now have a Delta-neutral position. We are short 390 shares. We are Delta-neutral. We are long the 35 calls, and we are long the 35 puts. We are in a Delta-neutral position. Now, if the stock price should move up by a dollar, we will be long 178 Deltas. We’ll need to sell another 178 shares of stock. If it moves down a dollar, to $35.66, we will need to purchase 200 shares of stock.

Because we have 390 short, we will purchase those 230 shares out of our existing inventory, and basically cover that short stock position, in order to get Delta-neutral. As I mentioned, you can do this as a semi-automated trading system. In other words, what we can do is enter our order, to sell another 170 shares, once the stock gets to $35.65.

I kind of like to do it around 200 shares. I like to be 200 Deltas long, or 200 Deltas short, before I actually go ahead and enter those positions. You can enter the orders… For example, if the stock price goes up a dollar, you can short another 200 Deltas, at 200 shares, at $37.69.

The way that you would do that is go to your Sell tab, go to your Trade tab, and say that you want to short another 200 shares. We can do that at the current price. We can set the limit. We want to do it at $37.69. We’re going to raise the price at which we want to sell an additional 200 shares, at $37.69. Our Analysis tab is telling us that is where we will be long, at 200 Deltas.

$37.69 is where we want to go short. It’s approximately 180 Deltas. We’ll just bring that down to 180. At $37.69, we want to place that as a limit order. We want to do it as “Good until canceled.” We want to keep that order open. If we go over to our Analyze tab now, we want to buy 200 shares, at $35.67. In other words, if it drops $1, we want to buy back some of the shares that we shorted here. We want to sell 200 shares, at$ 35.66.

In other words, what’s happening is – you can simply put these orders in, and let them run. People are like, “Well, you’re putting your orders in, and you don’t even know where the stock is going to go.” That’s correct. We don’t know where the stock is going to go. If it goes up, we’re short another 200 shares.

How does this actually work, in reality? In reality, if we’re up a dollar, we short some more shares. We are covered by our 10 long positions, for the 35 calls. We’re really back into a Delta-neutral position, her

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