Quick Lessons On Option Trade Order Spreading

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Option trade: In tonight's video, I want to go over all the trades that we made for October 14th, which is Wednesday.

I think tonight's going to be a really good case study on why you have to just stick with a trade, continue to make adjustments to that position and continue to add premium the entire way with these short premium strategies and these short volatility strategies, because, as we look at FXI tonight, this thing didn't go our way right off the bat, but we didn't plow into this trade with a big position, kind of throw all of our chips on the table. 

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We were systematic in how we approach this and adding small positions along the way, continuing to make adjustments the entire time, and I'll show you everything so you can see I have a lot of trades, but at the end of the day, we ended up closing out just kind of our remaining positions today, our 37 calls and put straddle right over the market, we bought that back for a $1.60.

And then some lingering options that we had are 34 calls and two of our 38 puts for a 489 dollar debit overall. That left us when everything is said and done with 136 dollars of overall profit, and for all the trading that we did, it wasn't a lot, but it really proves the point that you can trade, you know, effectively and well if you just keep, you know, making adjustments to the positions to make sure that they're winners.

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So, here's a chart of FXI first before we go to the Trade Top, really the main thing that worked in our favor here is this massive, massive crush and implied volatility. Now we had a trade around all of the market volatility, all of the stock movement and volatility. And we did that, but what helped us is that we kept adding more credit, and we kept trading that lower volatility that we knew was eventually going to come.

Now when we look at our position statement you can see again, we started with this opening trade back here on 8/20, that's the day that the market started to go lower. That's the day the stocks jumped lower, and we started to get into this position. Added a nice, big wide strangle around the market, and then we started to make adjustments.

So we started to roll down one side to the next. We started to open and close sides that were starting to make money and all the while adding to our credit. Then we just went in and added a completely new one over the market. So we sold our 37 straddles on the market for $3.37, $337 credit.

And again, after a while, we ended up making adjustments to our positions, rolling positions closer, for more and more credit along the way. And you notice, just the progression of the trades that we had, we had two trades, you know, here on 8/20, and then we waited a couple of days, we waited some more time, we waited some more time, and then we finally closed out this position today on 8/14. It wasn't like we just entered everything on one day, let it ride.

We continued to adjust, and add and monitor and you know, change the position, as the market kind of, you know, fit the scenario. So, at the end of the day, what we ended up doing again is, adding up all these credits here, and then obviously taking out and subtracting the debits left us with a nice profit.

Again, the biggest thing here with FXI is that we were diligent in sticking with our strategy, we continued to adjust all along the way and working towards that expiration date. The other position that we closed out today was our EWZ straddle.

This one worked out pretty nice, brought it back today for an $80 debit, took in an $88 profit on the 24 calls, and 24 puts for EWZ, really here, the again, the name of the game here is implied volatility dropping. I mean the stock, you know, worked in our favor, it traded sideways for the better part of the month, it didn't exactly go our way at all until expiration.

Again, just kind of adds to this case study about why we have to be diligent in holding onto these trades and sticking with them. You can see when we enter this trade back here, at the beginning of the month, the stock went immediately against us, and then it came back, but it went opposite, you know, the opposite direction, went all the way to the other extreme, trading up around 26.

And then finally coming back down and settling in that range. Now is that going to happen all the time? You know, probably not, but at the end of the day, we have to be diligent in just holding these positions if they fit in our overall portfolio. And just knowing that at some point they're going to come back around, right?

There's a good chance that these things are going to come back around and become winners. And we just got to let them work enough to see that happen. Now the other trade that we made today is our earnings trade, on Netflix. This one is a cool trade because I did have trouble like I'm seeing that a lot of people had trouble with actually entering the trade.

And so, I ended up doing, and I'll show you guys this here in a second, but what I ended up doing is splitting the Iron Condor into two orders. Okay? So I took the one Iron Condor order, which you can see I sent it out as one complete Iron Condor just for ease of getting in and out as quick as possible.

But it was split into two different orders. The first was the put side. So we sold the put spreads side back down below the market, and then we split out the call side, the call credit spread side above the market. Now the reason I did this, is because sometimes it's hard, especially around earnings and these stocks are moving fast and prices are moving fast, it's hard for the brokers and the exchanges to line up equal buyers and sellers for all four contracts.

Remember, we're trying to get all four of these contracts in at the same price between us and the other party at the same amount. So by splitting it up, you're saying okay instead of you know, making the brokerages, or the exchanges, you know, get four contracts right, let's just get two contracts right in two different orders, right?

And if you have a commission structure, like I have, where you just pay per contract, it doesn't cost you anything extra, to do this type of trade. Now in Netflix, again, the reason we're doing this, this earnings trade in Netflix is that implied volatility is insanely high in the stock, it's in the 77th percentile, the stock hasn't moved anywhere, everyone and their mother were expecting Netflix to have great earnings.

It ended up that Netflix did not have good earnings, it ended up trading lower right now, so it's trading right around 106, 107 or so, definitely trading lower, which is a huge, huge surprise, for most people on Wall Street. Now, of course, we focused on the weekly options, because they have the most implied volatility juice.

They have the most volume and activity. And with the stock closing around 110 today, the expected move was about $13. So what we did, is we went out, $15 on either end and sold options starting at that level. So we went up $15, and we went down $15. And again, started selling options at that level.

That's how we determined our prices on selling the puts at 95 and then starting to sell the calls at 125. Okay. All we did was just went a little bit outside the expected move, give ourselves a little bit more of an area to work with. And again you can see here's our Iron Condor and Netflix, a nice wide Iron Condor, took in a nice big premium, and the stock right now trading at 106, as long as everything stays in this range, which, after hours, there's a lot of activity and volume.

It should stay, you know, in this range as the market opens tomorrow. There should be a nice, big winner on our hands. Which should be nice. Now as far as the actual trades go, again, here's what we did today. So we had a bunch of different orders in here that we're working. So you can see we had all kinds of different orders in for Netflix.

So we're not alone, in the sense that, you know, we're trying to get everything in, you know, at the same time, and it's hard sometimes to get in. You can see we were adjusting prices, you know, we were trying different prices, seeing what would fit. But we ended up doing again is splitting it into two different orders, okay?

So you can see we first split out the call side and we just did the call spread side, took in our 85 cent credit. Then we took in the put side and took in our 92 cent credit which gives us our overall credit on the entire trade. But by doing that we can get filled within three minutes of splitting out this trade. So very, very quick fills.

A Little bit of market movement in position size risk, or market risk for movement, getting filled on one to the other, but like maybe $3 or so. So, this is a really good tip, if you, you know, are having trouble, try splitting out the order, doing each call or put side, credit spread by itself. And see if that helps fill. In our case, it helped fill today.

Not all the time is that going to happen, but it definitely can be, you know, something that's advantageous to work in our favor. All right, so I hope you guys enjoy this video, as always until next time, please let me know if you guys have any comments and happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.