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This is what we’re going to be doing for an initial opening trade. Remember, if we do have to do adjustments, that is fairly easy to do, once we have this position on. But it’s critical to understand adjustments, because if the price gets very quickly to the upper side of our breakeven point – up to the around 150, 151 level – then we need to do some adjustments here. Or if it goes down to our 125, 126 level, we need to do some adjustments there, as well.
This is how we set up our initial position. The center line here, that you see, $138.48, is our live price. That’s the current price. You can see it here, and if you click underneath the Delta sign, you see this little wrench. If you click on that, you can also see what the current price is. $138.48.
That’s all we have to do, really. All we have to do is just right click on this. We are going to confirm and send it. We are going to send that off to the market, and see if they give us our price.
If we go back to our trade tab, they are working on it now. Let’s take a look… The current price moved away from us. This is what happens, sometimes. We put it in at $4.98, and now the market has moved a little bit against us. It’s at $4.99.
We’re a penny off the mid-price, which means that we’re probably not going to get filled on this. We’ll see what happens.
Now it’s moved again. It’s moved up to 5. We may not get the prices that we want, here, but that’s how you work these trades. We’ll give it about 5 minutes. If they don’t give it to us, we’ll go back into the market, change our price, and see what we can do to get our order in.
That is how I do an initial evaluation. I’ll take a look at the chart, and take a look at the channels. Like I said, technical analysis is not a huge part of what we really do. We’re not good at predicting the future. However, there are trends, and there are support and resistance points that you can take a look at, to help you figure out where you should be placing your double calendars.
It’s not rocket science. It’s pretty easy to do. All you have to do is take a look at a quick chart, and do a quick channel. That’s about it.
This seems to be moving away from us pretty quickly. It’s at $5.01 now. We’ll just hang in there for a while. The prices are moving around quite a bit. We’ll just see what we can do.
What we also want to do, here, is take a quick look at the volatility levels. The 130s are actually at 40.21. The implied volatility level on the May 150s are at 33.64. If we take a look at our Junes, they’re at 39.74. We’re selling a little bit higher volatility here, and we’re buying a lower volatility. That is what we want to do. We have a positive skew, they call it. At 150, we’ve got a 33.62, and we’ve got a 35.66.
We’re fine. We should have taken a look at that, but usually with the index options, you don’t get a lot of either a large positive skew, or a large negative skew, on these. They’re pretty close to each other, so you don’t have to worry about that too much.
If we were doing an individual stock, then we would definitely want to take a look at those. What I mean about a positive or negative skew is – if the front month has a higher implied volatility, then the next month, or the month that you’re buying, has a positive skew.
It’s positive because you are selling a higher volatility. If the volatility should come down, then you are in a better position to profit.
A negative skew is if you have a lower volatility in the front month, that you’re selling, and a higher volatility in the next month, that you’re buying. That is actually not a good position to be in, especially if it’s 2 points or more.
What you’re doing is selling a lower volatility. Volatility should decline, and then your position will get hurt. It will not make as much profit. You could possibly even see a loss on the position, if volatility levels should decline significantly, or the volatility levels in the second month that you have your position on, increase dramatically.
We’re in a good position here. We’re just going to wait and see if we get our order filled, and we should be fine. We’re going to be putting in some other orders on our test account, and we’ll be following those along as well, in subsequent videos.
That’s where we are right now. I know the EEMs are pretty well traded. Let’s just take a quick look at the volume on these. They’re trading a couple hundred contracts – now, obviously, someone here is making a bet that the EEM is going to be dropping. Either that, or they’re protecting their ETF position. It could be insurance on their ETF position, if they’re buying the ETF itself, the underlying.
They’ve got 2100 contracts today already, on the 135. Let’s see what the open interest is. Open interests are quite high. They’re quite liquid. We’ve got 20,000, 18,000, 44,000, 43,000 on the call side. We’ve got 17, 18, 36,000 on the put side.
There’s quite a bit of liquidity in these EEMs. I like the EEMs for index trading. The prices are quite good. They’re a little bit more expensive to buy on a double calendar, but that also means that there’s quite a bit more profit potential on these. It seems to trend quite well.
That’s it for today, for opening positions. Refer to the Using TOS CD for selection order entry help management. For more information on exactly what we did here, because we went through an analysis quickly – we also went through an entry system. I want to make sure that you understand everything that we did here. That’s explained in the Using the TOS platform.
Trade with confidence, guys, and we’ll see you on the next video.