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Adjustments are absolutely critical to your profitability. We have an entire video series just on adjustments, that is absolutely critical. Anybody can put on a position, but it really takes the management of your portfolio in order to realize the full potential of all of your trades. The only way you can do that is through adjustments, if necessary. Sometimes adjustments are not necessary.
What we want to do here, is take a look at how we actually put these positions on. You can see that we currently have a position in the IWM. We have the 67 strike, we have the 70 strike on the put side. We have the 70 strike, and the 74 strike, on the call side. We have these existing positions.
The positions that we have in the IWM – let me just show you what those look like. This is a double calendar. Right now, it looks like this. Since the market is moving up, you can see that we’re not quite in the center of our tent, here. But the market is moving up, so we’re not too worried about it right now.
This position actually is a little bit more complicated than the normal position, because we had to do an adjustment on this. Let me pick out our EEM position. It might be a little bit easier for you to see how this was constructed.
We currently have a double calendar. Now, a double calendar is the sale of a put, and a call, in the front month option, and the purchase of a put and a call, in the next month out option. It could be the next month, or it could actually be 2 or 3 months out.
The reason we do that is, we’re selling the short term option, the front month option, in order to collect the premium. It will expire before the next month. If we sell that month option, and those expire, we’ll be able to collect the entire premium on those, while we still have value in the next month out.
The difference between the sale of the front month option and the purchase of the next month option, is the profit that we’re going to be making on this position. The way that we enter into these positions is – in the TOS platform, it’s really pretty easy.
For example, if we wanted to do a double calendar at the 155 level, all we have to do is right click on that, “Buy,” and they have a double diagonal double calendar already set up in their platform, for you. You don’t even have to think about it. All you have to do is click on that, and it brings up a dialog box for a double calendar.
Now, a double calendar means that you are buying and selling at the same strike price, but just in different months. In this case, we’re selling the May 155 call, and we’re buying the June 155 call. The reason that we’re doing that is because the May option will expire pretty soon, within the next 3 weeks. The June option has a much longer expiration.
If we go up here to our options trade tab for a second, you can see that the May options expire in 23 days. The June options don’t expire for 58 days. The difference between those two means that, because we’re selling the May options, we can collect those premiums. They expire, and remember, the closer they get to expiration, the less valuable they become.
Well, this one has so much longer to go, that it’s not going to hurt our position. We’re actually going to collect these premiums, but we have the June options as protection. Then, of course, when we close out the position, we close out everything, all at one time.
Let’s take a look at this position. When I right-clicked on this, and I bought up the double calendar order entry box, it automatically filled in the calls that I wanted, but it didn’t fill in the puts that I wanted. I actually want to go down here to the 140 puts, because we want them just slightly out of the money. We want to select both the same strike prices on the front month put, and the back month put.
We want to do the May 140 put, and we want to do the June 140 put. Now, the way we can analyze this and see exactly what our position will look like at expiration, is to right-click in this dialog box, anywhere in this green area. Then go to “analyze duplicate trade.”
Since we already have a position on, we have to go to this box, right here, and just say “hide positions.” We’re hiding our existing positions, and we’re just taking a look at what this double calendar would look like, without our existing positions, just as a simulated trade.
As you can see, the strike prices that we selected down here, doesn’t look particularly attractive, in the center. There’s not much profit in the center of this double calendar. It’s nice at the peaks, but the chances are, the price of this ETF is not going to settle exactly at these prices. We want a much larger range of price movement than we have here.
We have to raise the middle of this profit tent here. The way that we do that is just playing with the strike prices.
The 155 call is probably the right place to do this. I just clicked off this price thing, because as soon as you start moving the strike prices around, you want to make sure that this is green, here. You want to be able to capture the current prices of these options. If you had this locked down in red, it would have stayed at 505, and it would skew your results. So, we want to keep that open, right now.
Let’s move the strike prices of the puts up a little bit, and see what it does to our profit graph. It looks a little bit better, doesn’t it? We’ve raised the center of this tent, so we have a little bit more profit in the middle. We can tell that we’re in profit, because if you take a look over to the left side of this graph, you have the zero line, which is zero profit, here. Above that, you have your profit potential of the position. Below that, on this vertical axis, you have the potential loss on this position. On the horizontal graph, you have the price of the actual ETF.
This does look a little bit better. We raised up the middle, so we have a wider range of profit potential in this position, from this peak all the way over to this peak. That represents about a 10 point move in this ETF.
The problem is, our current price level is a little bit below center. We like to try to keep it in the center, but I guess it depends on a number of different conditions.
This could actually be a fairly good trade, if you’re very bullish on the market. At this point, we have a little bit wider room to move to the upside. What we want to do, at this point, is take a look at this. This would be a fairly good calendar to put on, if you were very bullish on the stock.
However, we do not like to predict price. We don’t know the future. We don’t know if prices are going up, we don’t know if prices are going down. Normally, we like to keep our price right in the center of our little tent, and adjust later, if necessary.