Trading P.I.T. Session 6

The final online session of the Trading P.I.T. with Bill Keevan began with a review of the previous Options strategies we've learned. Although I thought the material was presented in an easy-to-grasp manner, there were a number of questions from the students on each of the strategies. Most of the questions were worthwhile and demonstrated understanding from the student that asked it. It seems natural to be a little confused on the finer points, and Bill did a nice job of answering each question as it arose. Because the review covered the specific entry and exit criteria, I can't simply spell it all out, but I'll include the list of strategies learned along with a brief description of their general applicability:

• Bull Call Spread & Bear Put Spread (Trading P.I.T. Sessions 1 & 2):
  Buy ATM & Sell equal number of OTM
  This is a debit trade used when expecting a strong directional move. This spread trade reduces our downside risk and limits our upside potential.
  
• Bull Put Spread & Bear Call Spread (Trading P.I.T. Sessions 1 & 2):
  Buy OTM & Sell equal number of ITM
  This is the credit trade equivalent of the Bull Call Spread (Bear Put Spread) but it has some advantages. It's ideal to hold to expiration and it tends works on less movement (which doesn't necessarily match our market outlook for a bullish move). For these reasons Bill Keevan doesn't like this trade.
  
• Straddle/Strangle ( Trading P.I.T. Session 3):
  Buy ATM/OTM Bulls & Puts
  This is a debit trade where we stand to make money if the stock moves in either direction, especially on increased volatility.
• Call/Put Ratio Backspread ( Trading P.I.T. Session 4):
  Buy more OTM options than the number of ITM Options sold (2:1,3:1,3:2,etc...)
  This is a credit trade where we make money as long as the stock moves. You have unlimited upside potential if the underlying moves in your direction or the possibility to keep the credit if it moves against you.
• Calendar Spreads (Trading P.I.T. Session 5):
  Buy long-term option and sell short term at the same strike price (unless it's desirable to diagonalize the trade).
  Calendar spreads are a way to take advantage of stagnation in an underlying security. If the stock trades within a certain range, you can be profitable. The strategy is similar to a covered call, except that it is pure options without owning the underlying.

After reviewing the above Option strategies, Bill Keevan talked briefly about Covered Calls which lead him to the Collar Trade. A Collar trade is a very low risk (<1% possibly) trade where we own the underlying security, sell a long-term Call (similar to a covered call, but with a longer time frame) and use the proceeds to purchase an OTM put for the same time frame. This trade has a limited gain and ties up much more capital than other options strategies, but the stock can be purchased on margin since we're protected by the Put we own. This is a very low-maintenance trade that can make 20%-50% annual. The Collar trade works in a Bullish market and can be an excellent, safe way to get a nice ROI. This resembles more of an investment strategy than a trading strategy.

There is considerably more to know about the above trades that the definition of what they are. Teach Me To Trade's entry and exit guidelines are pretty easy to follow, but do require considerable analysis of the options to put the odds in your favor and limit your downside risk. In most trades you make decisions based on the cost of the option and the delta, but if you want to know the specifics you'll need to take the class for yourself ;-). Seriously, mention my name... I don't gain anything from you doing so, but shouldn't you give credit where credit is due?

Following the review of the options strategies and the introduction of the Collar trade, Bill looked through some of our suggested trades and put them into OPUS. Bill took my suggestion which happened to be the last one of the night. I had suggested a Call Calendar Spread on COF (Capitol One Financial). The initial parameters of my trade made sense according to the entry guidelines but when we used OPUS to analyze the risk graphs of other combinations of options for a Calendar Spread, a Put Calendar Spread may make more sense. Bill suggested that it may be good to reevaluate this trade in a couple weeks and use the September expiration on the sale of the short term option to see if it works for me then. It was much easier to "see" the trade (risk graphs) using OPUS. I will be reevaluating what makes sense for this trade nearer to the August expiration.

I do plan to get OPUS or an equivalent option analysis software package to really unlock the potential of options in all market conditions. I'll be keeping all of these trades in mind and have already put in a Put Ratio Backspread and am watching it develop. The world of Options & Spread trading is very exciting and I see a ton of potential that I'll tap into soon. Stay tuned!