Lesson Overview

3 Spread Entry Examples

This week with higher volatility we were able to add some great credit call spreads in VIX and QQQ as well a bearish put debit spread in JCP. Comparing these side by side in this video might help you understand why we choose to place either credit spreads or debit spreads and how we set up each. Moreover, high volatility markets present a great opportunity to outlay premium.

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Today I'm going to go over all the trades that we made both Thursday and Friday of this week. I'm doing this video on Sunday the 28th of September, just because there were only three alerts, so didn't want to send out one video for one alert and one for two.

I just wanted to kind of recap those here quickly in a video for those couple days that we had at the end of the week. They were all opening orders, and we're going to start off tonight with the Vix and then go through the Qs and JC Penney.

As always, if you guys have any comments or questions about these trades, please ask them right below in, the comment box. I'll make sure I get back to all of those tonight or tomorrow before the open.

The first trade that we entered, and this was actually on Thursday this week, is the Vix. Now, the Vix had a nice little spike up as the market started to fall towards the latter part of last week.

This gave us a really good opportunity to enter these Vix October options, and they're not the October for, sorry, that's just a typo in this. They are the October monthly options.

We sold the 17-18 call spread in the Vix. The reason that we did that is not that implied volatility is high, I mean it is, but for the Vix, you can't have implied volatility on the actual index that tracks implied volatility.

Right? In this case, we know that the Vix is always pulled downward, so lower volatility is going to pull the price of the Vix down. We've had success this year trading the Vix.

I do this continuously and have done it for years. As soon as the Vix jumps up I start adding these positions; this call spreads above the market or debit put spreads, however you want to play this, but some downward pull to the Vix.

In this case, we sold the 17-18 call spread for a $0.21 credit. You can see we did a fairly large position in this one. We started to increase our size in this, and we can continue to increase our size in this Vix position if the Vix does happen to move back up higher.

You'll notice here; I'll kind of chop off just this kind of section. We entered this trade here when the Vix on this green day that I'm circling, when the Vix was higher around 16, sold the call spread above the market.

We're anticipating that sometime between now and October it's going to drop, and that's just going to give us an opportunity to make some money.

You'll see that usually when the Vix is up here, it doesn't stay up here for more than a couple days, and then it drops a little bit. We're going to take advantage of that little drop in the market.

All right, so the other position that we got into on Thursday was the Qs. Again, same thing, trying to get some bearish positions in our portfolio, try to even out things. We've got some bullish positions, which is great.

Now with implied volatility higher, this gave us an opportunity to sell some premium and get some of these credit spread positions on. With the Qs, we went out to November, sold the $102-104, so $2 wide call spread on the Qs and collected about $0.38 in premiums.

That puts our break even around $102.38 on the Qs. Higher than where the market is. It rallied back a little bit on Friday, but you see, if I kind of chop off here a little bit of the chart you can see that $102 is all the way up here.

This is where the Qs would have to rally back up to, at least up to $102 and then beyond that for us to lose money on this trade. We had a great opportunity on this big red down day because implied volatility for the Qs was up over the 50th percentile.

That means that option premiums on both sides, on calls and puts, had swollen a little bit, and so that gave us an opportunity to sell some better premium. If I go into the actual trade tabs, you guys can take a look at this real quick, too.

You can see our position in the Qs. For November you can see where our strikes are. Our first strike on the Qs is right at the 25% probability level. What that means is that this is the likelihood since its probability of ITM, this is the likelihood that the Qs are to go in the money between now and expiration.

The likelihood that the Qs, which are at $97, I'm sorry, $98.78 go up to and above $102 is a 25% chance. When we made this trade, it was a little over 22% chance.

We were trading with better than 75% odds of success, and that's really what you want to do is the takeaway here, is you just realize that there's a 25% chance or so that you lose money and there's about a 75% chance that you're going to make money on this trade.

Very, very high probability trade. Like this trade a lot. If we need to, we can add to this position. The last trade I want to cover is our vertical put spread in JC Penney. This was a debit put spread.

Again, starting to add just a couple bearish positions to our portfolio, just to kind of even things out. With JC Penney it was nothing more than the fact that we're not bullish on this stock.

I think that it's had a nice run up the last couple of months, but I think it definitely could see some downside exposure here as we get closer towards October, November, et cetera. The move 11-10 on the put side for JC Penney, so we bought the 11 strikes, sold the 10 strikes against that, paid a little bit over the mid-price at $0.60.

But we got a really good break even around $10.60 on this trade. If we go to the chart here of JC Penney, you guys can see what we're looking at as well. You can see, chart here of JC Penney had a huge move lower on Friday, continues to make this swooping and rounding top.

It's not at its recent high, so all we need is we need this thing to close anywhere between around $10.40 and below. That's kind of the line in the sand, and you can see that even entering this trade we got really good and favorable pricing for our break even.

Because that allows JC Penney to rally up to $10.40 and we still make some money on this trade. We're giving ourselves a lot of room between ourselves and the market. JC Penney can trade sideways, and obviously, we would like it to trade lower just a little bit to also help out with this profitable trade.

If we go to the technicals here, you'll also notice that we did get a couple of bearish signals on CCI and [MacD 00:06:24], just about a week and a half ago on each. We have some pretty strong bearish signals, and JC Penney tends to be on these trends for quite a long time.

Once we get a nice buy signal or sell signal, it tends to stay in there for a little bit. We did go out in time on this trade just to go a little bit further, give ourselves a little bit more time by going all the way out to November.

We've got plenty of time to see if this thing dips below that level and start to see a profit materialize. That's it for today. As always, if you guys have any comments or questions on these trades, please enter them right below here.

I'll get back to all of those tonight or tomorrow before the open and happy trading.

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