Hey everyone.
Iím Education Coach Michael Kealy, and today, Iím going to show you how to trade long
calls and long put options on thinkorswimÆ Web.
thinkorswim Web is the browser-based version of thinkorswim.
Thereís no download required; just go to trade.thinkorswim.com and log in.
thinkorswim Web takes essential tools from thinkorswim Desktop and makes them easier
to access and even easier to learn.
Though the web version is a little different than using the desktop, it has a lot of the
powerful options-trading functionality thinkorswim is known for.
As we go, Iím going to give you some strategy pointers on long calls and puts, but this
video assumes you already know the basics.
If youíre new to options, Iíd recommend checking out our other videos to get your
bearings on options basics.
Keep in mind that options trading involves unique risks and is not appropriate for everyone.
So, letís start with some background on long calls.
Remember, a long call is a speculative bullish trade where you buy a call option, expecting
the underlying price to go up a lot and to do it quickly.
Some people try to win big by trading long calls around high-volatility events like earnings
or by choosing far out-of-the-money, or short-dated, contracts with a low probability of success.
Iím going to show you a potentially smarter approach meant to lessen the negative impact
of time decay and potentially increase the probability of success.
It boils down to choosing at-the-money options a few months from expiration on uptrending
stocks that you believe are ready to pop.
Itís still a pretty speculative trade, but these factors are all meant to help increase
the likelihood that the trade could be profitable.
Letís jump in to thinkorswim Web and get into it.
First up, youíve got to choose an underlying.
Weíre in our paperMoneyÆ Positions page, but Iím going to look at dollar tree DLTR.
Iíll click here to close the side bar.
As you can see, itís highly liquid, with the average volume at 4.7 million shares traded
daily.
On this six month daily chart you can also see its 30-day moving average is already in
an uptrend.
Of course, thereís no guarantee that upward trend is going to continue, but it could increase
your probability of success.
But for a long call, we need more than just an uptrend we need significant upward movement
in a short amount of time, typically five to 15 days.
You can see that today itís on track to close above the high of a recent low day.
This could be a signal that the stock is bouncing off support and potentially ready to make
an upward move.
This can serve as a potential entry signal for timing the trade.
Once youíve chosen an underlying, youíve got to select a contract.
To do that, Iíll pull up the option chain by scrolling up and clicking the arrow where
it says Option Chain.
In short, weíre looking for highly liquid options with plenty of time to expiration
and without inflated implied volatility.
The first part of that decision is choosing your expiration.
Even though you may only plan to be in the trade a few days to a few weeks, consider
going much further out for your expiration think around 50 to 100 days.
We donít plan on holding the option all the way to expiration; weíre just trying
to take advantage of a projected price move and get out.
Choosing an expiration thatís further out helps avoid the worst of time decay that really
kicks in as a contract gets closer to expiration.
For this example, weíre going to go with this January contract which has 46 days to
expiration.
This expiration is on the short end of our time frame, but liquidity is higher.
There arenít any earnings for Dollar Tree coming up in the next few weeks which would
impact implied volatility.
Next, letís take a look at the strikes, which I can see by expanding the January expiration.
There are lots of ways to customize the chain I can change the number of visible strikes or
change where the chain centers.
If I want to see different info like greeks, I can click the gear button to change my columns.
For this example, Iíve got all the info I need, so Iím going to leave the defaults.
So, for my long call, Iím going to look for something at the money weíre looking
to balance moderate costs with moderate probability of the option expiring in the money.
For this example, with dollar tree, weíre looking at the 140 strike and the premium
is 6.95 which means that Iíd pay 695 dollars per contract, not including contract fees.
And remember, weíre looking for high liquidity.
You can see that the difference between my bid and ask price is no more than 10%.
A tighter spread means youíre more likely to get your order filled at your desired price.
So, now that weíve selected a contract, weíre ready to actually buy the call.
To do that, Iíll click the Ask price, which brings up the order ticket at the bottom of
the window.
Letís walk through it.
So, you can see it says Iím buying the January 21st 140 call.
By default, itís showing 10 contracts default you can customize up here in the Order
Defaults menu.
Under options Iím going to take that down to one contract which will go in effect for
future orders.
But, for this trade, we still need to choose how many contracts to actually buy.
Position sizing is one of the main ways to manage your risk, which is crucial to trading
long calls.
So, for simplicity, letís say Iím trading with a $100,000 portfolio, and Iím willing
to risk no more than 1%.
This means my portfolio risk would be $1,000 per trade.
For a long call, the trade risk, or max loss, is the premium you pay to buy the
contract, plus any commissions and fees.
For our example, the premium is 695.
So, our portfolio risk of a $1,000 divided by the premium of 695 equals 1 contract.
Iíll update that in the order ticket.
Iíll keep my order type as Limit and the time in force as Day.
Before I place the trade, letís review the potential outcomes by looking at the risk
profile, which I can see by scrolling down here.
The green and red shading represent outcomes at expiration.
Because this is a long call, the max gain at expiration is unlimited.
Due to the effects of time decay, if the contract was held until expiration the break-even share
price would be about 147 not accounting for transaction costs.
So now, Iíll click review.
Like we said, our max loss is the full premium, which is 695, plus the options contract fee
of 65 cents per contract for a total cost and max loss of 695.65.
If weíre okay with this, letís go ahead and hit Send.
And there we go.
Weíve just bought a long call.
Now, Iíll show you how to buy a long put.
Remember, a long put is a speculative bearish trade where you buy a put option, expecting
the price of the underlying to go down a lot and to do it quickly.
With long puts, weíre looking for an underlying that we expect to drop in price soon.
And again, weíre not looking to speculate on a big event like earnings.
Instead, weíre trying to increase our probability of success by looking for downtrending securities
that we think are likely to make a big, quick drop.
Here, Iíve pulled up Verizon, vz.
It has an average daily volume of a little over 20 million.
As you can see on this six month daily chart, Verizonís 30 day moving average is trending
down.
But remember, weíre looking for a major move down, so in addition to a general downtrend
you can see today that Verizonís share price has bounced down off the moving average.
This will serve as our entry signal.
Iím ready to choose a contract, so Iíll open the Option Chain.
Like with the long call, Iím looking for plenty of time to expiration.
So weíll do the January expiration here, which has 46 days remaining.
Hopefully, that will let us take advantage the projected price move and get out, while
avoiding the worst of time decay.
Now, letís look at the strikes.
This time, weíre working on the right side of the panel.
Again, weíre looking for something at the money to balance costs with probability.
For this example, weíll do the fifty strike.
You can see that the difference between my bid and ask price is no more than 10% of the
ask price, which is a good indicator of liquidity.
Weíve selected a contract, and weíre ready to buy the put.
To do that, Iíll click the Ask price, which brings up the order ticket at the bottom.
So, Iím buying the January 21st 50 strike put.
To determine how many contracts to buy, Iím going to use the same portfolio risk
of $1,000 per trade.
To figure out the max loss on a single contract, Iíll hit review.
The max loss is $115.65 including fees.
So, our portfolio risk of $1,000 divided by that amount equals 8 contracts.
Iíll update that in the order ticket.
Iíll keep my order type as Limit and the time in force as Day.
So, to confirm, Iím buying 8 contracts of Verizon for a total of $925.20 including fees.
This looks good, so letís go ahead and hit Send.
And there we go.
Weíve just bought a long put.
OK, so youíve seen how to enter trades.
Now, let me show you how to close them.
For that Iíll use an example trade I entered a few weeks ago.
Here under Positions, you can see that I bought ten calls on apple expiring in January.
A key to success with long calls or puts is to follow your rules consistently.
For this example, letís say we had a profit target of 50% on the trade.
Which, you can see weíve reached. So, letís exit.
To do that Iíll click Close Selected.
You can see on the order ticket that weíre selling our 10 contracts to close the position.
Iím using a limit order and leaving the time in force as Day.
Iíll click Review.
You can see my total proceeds are $10,243.50, which accounts for fees.
Everything looks good, so weíll send the order.
Remember that we used a limit order, so thereís no guarantee it will fill.
And if it doesnít get filled by the market close, your order will be canceled.
And thatís how you trade long calls and long puts using thinkorswim Web.
Remember, even though the approach we discussed may be higher probability and less risky than
others out there, itís still risky.
Make sure you practice paper trading to get a feel for how these trades can move.