Stock Option Strike Price – How To Trade Options Video 41 part 2


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Let’s take a look at another option. One of the popular ideas for adjustments is to buy a calendar, which is a current, at the money calendar. That’s the way that we’re talking about doing adjustments, in the earlier part of the course, and talking about just raising the graph, in case this does start to move up. Put a calendar right at where the price might tend to go, like at the $47 strike price.

Let’s go over here and do a calendar at the $47 strike price. We’ll go ahead and analyze that. I think we’re probably going to need more than one. That does help lengthen the top of the curve. It’s the green line that we’re interested in. That’s the maximum amount of money that we can actually make. This really does restrict the amount of money that we can actually make in this trade, right up to expiration, with adjustments of a calendar. We would really have to do extraordinary amounts of calendars in order to get back to any type of level that we previously had.

Previously, we had this. Let’s do a September-October. There we go. Let’s see what that does. That’s a little bit better, but we still have to do quite a few calendars, don’t we? Look what happens. Once we put this calendar on, it does help us adjust. That is one way of doing it. You can do calendars. I think they’re a little bit better than buying the actual options themselves.

Let’s do one other thing, just in contrast. It does add to your actual graph, but only at the center. If we do the 48, what it does is extend it out. There’s plenty of room here to do calendars. You can add calendars. But look at how many we have to do. We have to do 16 calendars in order to get to $3300 in maximum profit. If we take that off again – let me just remind you that we had a $3400 profit, without the calendar. Yes, we can add the calendar and extend our breakeven to the upside, but look at what happens to our profit. We lose money. We lose a couple of hundred dollars on our maximum profit.

In addition, look at the transaction costs. The transaction costs for buying 16 calendars – let’s say we wanted to keep the exact same amount of money that we had in the previous trade. Our maximum profit was $34.40. If we add the calendar, we’re at $33.51, right at the peak. That’s our maximum profit, at that peak. In order to get back up to $34.40, we would have to be at this particular peak. We would have to add 27 calendars, at a cost of $1.57 per calendar. That is multiplied by – we have 27 of the Octobers. We have 27 of the Septembers. We have 54 contracts. That’s $81 in commissions, just to put on that calendar.

This is what Theta Scalping is all about – it’s about extending our breakeven and bringing us back to Delta-neutral. It did help our Delta, didn’t it? But it didn’t put us back to Delta-neutral. Even though we added 27 calendars, it did help our Delta, but it didn’t bring us back to Delta-neutral. And it reduced our profit potential on the trade.

This is the way we’ve been learning how to do it – by adjusting using calendars. How many calendars would we have to do, to get to approximately Delta-neutral? We would have to do 45 calendars to get to Delta-neutral. That’s one of the reasons why I told you guys to trade small. When you’re doing 1 or 2 contracts – when you put a position on for the very first time, and you do 1 or 2 contracts, it’s easy to adjust. You can adjust by putting on 3 or 4 contracts. You don’t lose too much. You actually make a little bit more money when you add calendars. You can adjust using calendars.

I just showed you that you can adjust using calendars, but we would have to add 45 contracts to get to Delta-neutral. That’s a lot of contracts. The reason we had to add 45 contracts to this position in order to get close to Delta-neutral – we didn’t get Delta-neutral, but also, if you noticed, it restricted the amount of money that we could make on this position.

The reason we had to have 45 contracts is because I already have a lot of contracts on. I have 5 of these. I have 10 of these. I have 5 of this. I’m short 10 of those, and those. I have a lot of contracts here. I have 60 contracts on already. We needed 45 contracts just to get to Delta-neutral, and to raise our tent, so that we wouldn’t get hurt if the price moved against us too much.

There is another way. What I do is I call it Theta Scalping. I don’t know what other people call it. I’m not really sure what other people call it. I think it’s the best form of adjustment, if you’re doing large numbers.

In other words, I didn’t add these vertical spreads onto this position at the very beginning. I added them over a couple of different days. We’re still 43 days from the September expiration. If you take a look at my positions, you can see that I’m short these two, the 44 and 45 puts. I’m long the 37 and 38s. These are extremely wide. This is not what I taught, in the beginning of the module.

I’m short the 46 calls. I’m short the 48 calls. I’m long the 53 and 54s. These are extremely wide, unlike the ones that you learned about in the beginning of the module. These types of positions require that you have, one – a little additional capital. Number two is that they are all iron condors, or they are vertical spreads for credits.

If you want to stay in your position, the only way to stay in your position is to do Theta scalping. Just like Gamma scalping, we purchased a straddle. In order to adjust that straddle, we bought and sold the stock, in order to remain Delta-neutral. The closer we get to expiration, the larger the Gamma. If we were to do this on the QQQs, and we wanted to buy the current straddle… Let’s say we wanted to do a 10-contract straddle.

We immediately start out with – we’re short 106 Deltas. In order to get Delta-neutral, we’re going to have to buy 100 shares of the stock. That brings us right back into Delta-neutral, or approximately. It’s close enough, at 6.42.

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